-----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, BhSydkIC4U5TWe5/EGQBuGsMjeaZfs8oNcD2392Mcc4pTk4tgYPckAOlbvbowz9c gXR8NEx3nCxEFB0DXun/rg== 0001047469-98-040650.txt : 19981116 0001047469-98-040650.hdr.sgml : 19981116 ACCESSION NUMBER: 0001047469-98-040650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98747474 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 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 September 30, 1998 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 15,942,049 at October 31, 1998. 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, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations for the Three-and Nine-Month Periods Ended September 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 1998 and 1997 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 6: Exhibits and Reports on Form 8-K 15 Signature 16
2 NETWORK COMPUTING DEVICES, INC. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS September 30, December 31, 1998 1997 ------------- ------------- Current assets: Cash and cash equivalents $ 16,558 $ 21,240 Short-term investments 12,157 10,240 Accounts receivable, net 18,546 25,148 Inventories 12,841 15,412 Refundable and deferred income tax assets 5,508 4,763 Other current assets 2,606 2,843 ------------- ------------- Total current assets 68,216 79,646 Property and equipment, net 3,237 4,424 Other assets 2,119 2,444 ------------- ------------- Total assets $ 73,572 $ 86,514 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,132 $ 11,211 Accrued expenses 5,581 8,955 Income taxes payable 308 597 Current portion of capital lease obligations 91 154 Deferred revenue 2,665 4,918 ------------- ------------- Total current liabilities 17,777 25,835 Long-term portion of capital lease obligations 92 160 Shareholders' equity: Undesignated preferred stock - - Common stock 57,272 58,630 Retained earnings (1,569) 1,889 ------------- ------------- Total shareholders' equity 55,703 60,519 ------------- ------------- Total liabilities and shareholders' equity $ 73,572 $ 86,514 ------------- ------------- ------------- -------------
See accompanying notes. 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net revenues: Hardware products and services $ 20,877 $ 26,532 $ 58,128 $ 76,347 Software licenses and services 5,238 8,114 21,316 23,725 ---------- ---------- ---------- ---------- Total net revenues 26,115 34,646 79,444 100,072 Cost of revenues: Hardware products and services 15,224 19,764 43,123 53,600 Software licenses and services 1,700 2,579 6,952 7,121 ---------- ---------- ---------- ---------- Total cost of revenues 16,924 22,343 50,075 60,721 ---------- ---------- ---------- ---------- Gross margin 9,191 12,303 29,369 39,351 Operating expenses: Research and development 3,236 3,703 9,998 10,674 Marketing and selling 7,405 7,379 22,986 22,749 General and administrative 1,427 1,722 3,881 5,064 Credit on litigation settlement - (147) - (147) ---------- ---------- ---------- ---------- Total operating expenses 12,068 12,657 36,865 38,340 ---------- ---------- ---------- ---------- Operating income (loss) (2,877) (354) (7,496) 1,011 Interest income, net 413 435 1,290 1,452 Other income 228 - 2,090 200 ---------- ---------- ---------- ---------- Income (loss) before income taxes (2,236) 81 (4,116) 2,663 Provision for income taxes (income tax benefit) - 30 (658) 1,063 ---------- ---------- ---------- ---------- Net income (loss) $ (2,236) $ 51 $ (3,458) $ 1,600 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) per share Basic $ (0.14) $ 0.00 $ (0.21) $ 0.09 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted $ (0.14) $ 0.00 $ (0.21) $ 0.09 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Shares used in per share computations Basic 16,228 16,355 16,522 16,852 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted 16,228 17,848 16,522 18,520 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended September 30, ------------------------------- 1998 1997 ----------- ---------- Cash flows from operations: Net income (loss) $ (3,458) $ 1,600 Reconciliation to cash provided by operations: Depreciation and amortization 2,273 2,403 Gain on sale of investment (2,090) - Changes in: Accounts receivable, net 6,602 3,537 Inventories 2,571 (4,948) Refundable and deferred income taxes (745) 3,892 Other current assets 237 817 Accounts payable (2,079) 5,029 Income taxes payable (289) (337) Accrued expenses (3,374) 471 Deferred revenue (2,253) 776 ----------- ---------- Cash provided by (used in) operations (2,605) 13,240 Cash flows from investing activities: Short-term investments, net (1,917) (785) Proceeds from sale of investment 2,402 - Changes in other assets 13 226 Property and equipment purchases (1,086) (2,112) ----------- ---------- Cash used in investing activities (588) (2,671) Cash flows from financing activities: Principal payments on capital lease obligations (131) (682) Repurchases of common stock (9,822) (10,719) Proceeds from issuance of stock, net 8,464 1,787 ----------- ---------- Cash used in financing activities (1,489) (9,614) ----------- ---------- Increase (decrease) in cash and equivalents (4,682) 955 Cash and equivalents: Beginning of period 21,240 23,832 ----------- ---------- End of period $ 16,558 $ 24,787 ----------- ---------- ----------- ----------
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 1997 Annual Report on Form 10-K. The consolidated results of operations for the three- and nine-month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 1998. COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosures of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods to be provided for comparative purposes. The Company has not determined the manner in which it will present the information required by SFAS No. 130 in its annual consolidated financial statements for the year ending December 31, 1998. The Company's total comprehensive income (loss) for all periods presented herein would not have differed from those amounts reported as net income (loss) in the consolidated statements of operations. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and common equivalent shares from stock options (1,493,098 and 1,667,469 in the third quarter and first nine months of 1997, respectively) outstanding, when dilutive, using the treasury stock method. In the third quarter of 1998 there were 3,771,087 options outstanding that could potentially dilute basic 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 that period and for the nine-month period ended September 30, 1998. 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, 1998 1997 ------------- ------------ Purchased components and sub-assemblies $ 10,511 $ 13,178 Work in process 616 545 Finished goods 1,714 1,689 ------------- ------------ $ 12,841 $ 15,412 ------------- ------------ ------------- ------------
STOCK REPURCHASE PROGRAM In April 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 April 30, 1998. Repurchases were made under the program using the Company's cash resources. Shares repurchased are available for the issuance under the Company's stock plans and for other corporate purposes. In September 1997, the repurchase program was completed with an aggregate of 1,000,000 shares repurchased at prices ranging from $8.38 to $12.00 per share for a total purchase price of $10.7 million. In November 1997, the Company's Board of Directors adopted an additional program to repurchase up to 1,000,000 shares of the Company's common stock during the 12-month period ending October 31, 1998. In July 1998, the second 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 6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. Repurchases of 404,800 shares have been made as of September 30, 1998 under the third program at prices ranging from $6.25 to $8.25 at a total aggregate price of $2.8 million. Total repurchases of 2,404,800 shares were made under all three programs at prices ranging from $6.25 to $12.00 per share for a total purchase price of $22.0 million. MAJOR CUSTOMERS AND RELATED ACCOUNTS RECEIVABLE International Business Machines Corporation ("IBM") accounted for approximately 34% and 33% of the Company's revenues for the third quarters of 1998 and 1997, respectively, and approximately 26% and 25% for the first nine months of 1998 and 1997, respectively. At September 30, 1998, related accounts receivable due from IBM were approximately $7.5 million. 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 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, 1997, CONTAINED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K. OVERVIEW The Company provides thin client hardware and software that delivers simultaneous, high-performance, easy-to-manage access to any application from thin client, UNIX and PC desktops. The Company's product lines include the NCD THINSTAR and NCD EXPLORA family of thin clients, NCD THINSTAR CONNECTIVITY SUITE, NCD WINCENTER-TM- multi-user WINDOWS NT application server software, and NCD PC-XWARE-Registered Trademark- software that delivers PC access to UNIX and multi-user WINDOWS NT PCs. These products are sold through OEMs, system integrators and distributor/VAR channels worldwide. The Company sells hardware products to International Business Machines Corporation ("IBM") pursuant to the joint development agreement dated June 27, 1996 (the "IBM Agreement") of a network application terminal for resale by IBM. The IBM Agreement provides for IBM to purchase a substantial portion of its requirements for such products from the Company through December 31, 2000. RECENT DEVELOPMENTS During the first quarter of 1998, the Company signed a non-exclusive three-year agreement with Intel Corporation under which the Company and Intel will collaborate to produce desktop devices based on guidelines for Lean Client systems outlined by Intel in December 1997. Under the terms of the agreement, the Company will develop a "reference platform design" consisting of Pentium-based lean client hardware integrated with software technology from both companies. Subject to the Company's successful completion of the development project, including the Company's demonstration of volume production, Intel has agreed to (i) reference the Company's lean client design(s) as the "preferred design" for the lean client marketplace and (ii) refrain from developing a board level product(s) substantially equivalent to the Company's lean client design(s) for a specified period of time. The agreement provides that the Company will develop new product designs based on Intel architecture and will have a limited period of exclusivity for such design(s). Thereafter, Intel shall have the option to acquire a non-exclusive license to any Company lean client design(s) developed by the Company under the auspices of the agreement. The agreement further contemplates that Intel may elect to terminate the agreement for convenience prior to the Company's completion of its development efforts upon Intel's payment to the Company of substantial specified lump sum payments. In June 1998, the Company announced that it had developed a WINDOWS-based terminal, endorsed by Microsoft, based on Microsoft's CE operating system. This new WINDOWS-based terminal, which utilizes Microsoft's RDP protocol and/or Citrix's ICA protocol, can access Microsoft's NT operating system from multiple desktops. In September 1998, the Company commenced volume shipments of the NCD THINSTAR Windows-based terminals. In addition, in October 1998, the Company announced companion software for the NCD THINSTAR product line, NCD THINSTAR PLUS and NCD THINSTAR LOAD BALANCING, which are designed to give NCD Windows-based terminal customers a cost effective, flexible choice in selecting the capabilities they need with either Microsoft RDP or Citrix ICA protocols. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenues for the third quarters of 1998 and 1997 were $26.1 million and $34.6 million, respectively, representing a decrease of 25%. Revenues for the first nine months of 1998 and 1997 were $79.4 and $100.1 million, respectively, 8 representing a decrease of 21%. Sales related to the IBM Agreement accounted for approximately 34% and 33% of revenues in the third quarters of 1998 and 1997, respectively, and approximately 26% and 25% in the first nine months of 1998 and 1997, respectively. HARDWARE REVENUES Hardware revenues consist primarily of revenues from the sale of thin client products and related hardware, and to a lesser extent, fees for related service activities. Hardware revenues were $20.9 million and $26.5 million for the third quarters of 1998 and 1997, respectively, and $58.1 million and $76.3 million for the first nine months of 1998 and 1997, respectively. The decline from the third quarter of 1997 to the third quarter of 1998 reflects decreased shipments to IBM and a change in the mix of products sold, reflecting substantially lower average selling prices. The decline in the first nine months of 1998 compared with the same period in 1997 was due to these same factors, offset partially by increased shipments of monitors in the first quarter of 1998. 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 (i) NCD WINCENTER, the Company's multi-user WINDOWS NT application server software, (ii) NCD PC-XWARE, the Company's thin client software for PCs, and (iii) NCDWARE, the Company's proprietary thin client software. Revenues from software and related services were $5.2 million and $8.1 million for the third quarters of 1998 and 1997, respectively, and $21.3 million and $23.7 million for the first nine months of 1998 and 1997, respectively. The decline in revenues in the third quarter of 1998 compared to the third quarter of 1997 reflects decreases in all software revenue product lines, the most significant of which was NCD WINCENTER, which reflects the Company's transition from an OEM of Citrix's WinFrame for NT 3.5 product to a provider of value-add to that product, and the market's move from Citrix WinFrame for NT 3.5 to MetaFrame for NT 4.0 concurrently with the availability of multi-user Windows NT 4.0 from Microsoft. The decline in revenues for the first nine months of 1998 compared to the same period in 1997 primarily reflects decreases in sales of the Company's PC-XWARE product line. Revenues for the third quarter and first nine months of 1997 included revenues from AT&T of $166,000 and $1.2 million, respectively, related to an agreement with AT&T that terminated in September 1997. The Company's OEM relationship with Citrix ended on September 30, 1998. This will result in significantly reduced sales of WINCENTER products, and, potentially, total software revenues in future periods if the Company's newly announced software products do not achieve sufficient marketplace acceptance. GROSS MARGIN ON HARDWARE REVENUES The Company's gross margin percentages on hardware revenues were 27% and 26% for the third quarters of 1998 and 1997, respectively, and 26% and 30% for the first nine months of 1998 and 1997, respectively. The slight increase in margin in the third quarter of 1998 compared to the third quarter of 1997 reflects higher margins on the Company's thin client computing products sold, offset partially by lower margins on products sold to IBM on an OEM basis. The decrease in margin for the first nine months of 1998 reflects lower margins on products sold to IBM on an OEM basis and increased sales of low margin monitors. 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 percentage of revenues generated through indirect channels. The combined impact of these changes is likely to result in continued pressure on gross margin percentages for hardware revenues in future periods. GROSS MARGIN ON SOFTWARE REVENUES The Company's gross margin percentages on software revenues were 68% for the third quarters of both 1998 and 1997, and 67% and 70% for the first nine months of 1998 and 1997, respectively. The decrease in gross margin percentages for the first nine months of 1998 is related to the combined impact of high-margin AT&T revenues recognized in 1997 which were not recognized in 1998 and the reduction of NCD PC-XWARE sales. Certain technology used in the Company's products is licensed from third parties on a royalty-bearing basis; accordingly, royalties are a significant component of total software cost of sales for 1998 and 1997. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses were $3.2 million and $3.7 million for the third quarters of 1998 and 1997, respectively, and $10.0 million and $10.7 million for the first nine months of 1998 and 1997, respectively. Although R&D expenses decreased slightly in absolute dollars, the investment in R&D as a percentage of net revenues increased as the 9 Company continued to invest in R&D in a period of lower revenues. As a percentage of net revenues, R&D expenses were 12% and 11% for the third quarters of 1998 and 1997, respectively, and 13% and 11% for the first nine months of 1998 and 1997, respectively. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $7.4 million for the third quarters of both 1998 and 1997, and $23.0 million and $22.7 million for the first nine months of 1998 and 1997, respectively. Although marketing and selling expenses remain relatively static in absolute dollars, these expenses increased as a percentage of net revenues as the Company continued to invest in its marketing and sales programs in a period of lower revenues. As a percentage of net revenues, marketing and selling expenses were 28% and 21% for the third quarters of 1998 and 1997, respectively, and 29% and 23% for the first nine months of 1998 and 1997, respectively. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $1.4 million and $1.7 million for the third quarters of 1998 and 1997, respectively, and $3.9 million and $5.1 million for the first nine months of 1998 and 1997, respectively. The decrease in the third quarter and first nine months of 1998 primarily reflects increased efficiencies and continued cost controls related to personnel costs, facilities costs and outside service fees. As a percentage of net revenues, G&A expenses were 5% for the third quarters and first nine months of both 1998 and 1997. INTEREST INCOME, NET Interest income, net of interest expense, was $413,000 and $435,000 for the third quarters of 1998 and 1997, respectively, and $1.3 million and $1.5 million for the first nine months of 1998 and 1997, respectively. The decreases were primarily due to lower average balances in interest-earning accounts. OTHER INCOME, NET Other income includes non-operating income, net of non-operating expense. Other income for the third quarter and first nine months of 1998 reflects the sale of the Company's interest in Precept Software, Inc. ("Precept") after Precept was acquired by Cisco Systems in March 1998, resulting in a net gain of approximately $228,000 and $2.1 million, respectively. The Company acquired shares of Precept in 1995 in return for providing specialized software. Other income in the first nine months of 1997 reflects the receipt of insurance proceeds for certain legal expenses incurred in association with the securities litigation costs. INCOME TAXES AND INCOME TAX BENEFIT The Company recognized no income tax benefit for the third quarter of 1998 and an income tax benefit of $658,000 in the first nine months of 1998, compared to income tax provisions of $30,000 and $1.1 million in the third quarter and first nine months of 1997, respectively. At September 30, 1998, the Company's gross deferred tax assets are approximately $5.9 million. FINANCIAL CONDITION Total assets of $73.6 million at September 30, 1998 decreased from $86.5 million at December 31, 1997. The change in total assets reflects decreases in accounts receivable, combined cash and equivalents and short-term investments, and inventories of $6.6 million, $2.8 million and $2.6 million, respectively. Combined cash and equivalents and short-term investments decreased primarily due to repurchases of common stock of $9.8 million, offset partially by accounts receivable collections of $6.6 million. Total liabilities as of September 30, 1998 decreased by $8.1 million from December 31, 1997. The decrease was primarily related to decreases in accrued expenses, deferred revenue and accounts payable of $3.4 million, $2.3 million and $2.1 million, respectively. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 1998 are estimated at approximately $360,000. At September 30, 1998, the Company had commitments for capital expenditures of approximately $260,000, primarily related to manufacturing tooling, information technology and facilities. 10 LIQUIDITY As of September 30, 1998, the Company had combined cash and equivalents and short-term investments totaling $28.7 million, with no significant debt. Cash used in operations in the first nine months of 1998 of $2.6 million primarily reflects a net loss of $3.5 million and decreases in accrued expenses, deferred revenue and accounts payable of $3.4 million, $2.3 million and $2.1 million, respectively, partially offset by decreases in accounts receivable and inventories of $6.6 and $2.6 million, respectively. This compares to cash provided by operations of $13.2 million in the first nine months of 1997. Cash used in investing activities in 1998 primarily reflects an increase in short-term investments and capital purchases of $1.9 million and $1.1 million, respectively, offset by proceeds from the sale of the Precept investment of $2.4 million. Cash used in financing activities in 1998 primarily reflects corporate common stock repurchases of $9.8 million partially offset by Intel's investment in the Company's common stock. 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. YEAR 2000 ISSUES In the next two years, most 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 to the Company's internal operations, the Task Force's general plan of action includes inventorying all essential systems, equipment and facilities, contacting suppliers to ascertain vendor readiness for Year 2000, testing all critical systems and resolving all mission critical problems by the end of the third quarter of 1999. The Company is currently on schedule to complete all mission critical Year 2000 problems by the end of the third quarter of 1999. The Company is currently in the process of completing a comprehensive inventory and evaluation 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 expects to receive all supplier responses by the end of this year. In addition, the Company plans to audit 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 is working to have contingency plans documented for mission critical areas by the end of this year. The Company estimates the total Year 2000 costs to be between $1.0 million and $1.4 million. As of September 30, 1998, the Company has spent approximately $75,000 related to Year 2000 issues. The Company has budgeted all Year 2000 costs independently of the Company's information technology budget. All costs will be paid from the Company's operating funds. 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. 11 FUTURE PERFORMANCE AND RISK FACTORS THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE SUBJECT TO VARIOUS ADDITIONAL 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 and related software. Until several years ago, the Company's thin client product offerings primarily focused on the UNIX marketplace using the Company's X protocol. The Company's introduction of its WINCENTER multi-user WINDOWS NT application server software and new, lower-priced thin client network computing devices allowed the Company to offer thin client network computing systems that provide users with access to Windows applications. The Company's expansion of its thin client computing model into the WINDOWS-based environment has been limited because of the Company's inability to offer an endorsed Microsoft solution within the WINDOWS market prior to the introduction of the WINDOWS-based terminal in June 1998 and intense competition from alternative desktop systems, particularly personal computers, whose selling prices are at historic lows for relatively high performance configurations. 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 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. RELIANCE ON OEM RELATIONSHIPS The Company has committed significant resources, including research and development, manufacturing and sales and marketing resources, to the execution of the IBM Agreement. 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 potential OEM relationships for the Company's thin client computing products, which would likely lead to overall reduced gross margins on total revenues. OTHER RISK FACTORS The Company experiences significant competition from other thin client 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. Additionally, as the Company expands the network computing model into the Windows-based environment, the Company's software products will face increased competition in this evolving market, including new product offerings from Microsoft and Citrix. 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. 12 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'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 has significant deferred tax assets and will have to generate a significant amount of future taxable income to realize its deferred tax assets. If the Company is unable to realize its deferred tax assets, it will have to establish a valuation allowance which could have a material adverse effect on future operating results. There can be no assurance that future levels of pretax earnings for financial reporting purposes will be sufficient to realize the deferred tax assets. The Company relies substantially on independent distributors and resellers, particularly in European markets, and is expanding that model in the US for the marketing and distribution of its products. 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 independent contractors for virtually all of the sub-assembly of the Company's thin client computing 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 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. 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, particularly Robert G. Gilbertson, President and Chief Executive Officer and Rudolph G. Morin, Executive Vice President of Operations & Finance and Chief Financial Officer. 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, 13 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. See Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Performance and Risk Factors contained in the Company's 1997 Annual Report on Form 10-K. 14 NETWORK COMPUTING DEVICES, INC. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 27 Financial Data Schedule. (b) The Company filed no reports on Form 8-K during the three-month period ended September 30, 1998. 15 NETWORK COMPUTING DEVICES, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Network Computing Devices, Inc. (Registrant) Date: November 12, 1998 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) 16 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 16,558 12,157 20,263 1,717 12,841 68,216 27,997 24,760 73,572 17,777 0 0 0 57,272 (1,569) 73,572 79,444 79,444 50,075 50,075 36,865 22 12 (4,116) (658) (3,458) 0 0 0 (3,458) (0.21) (0.21) Includes revenues from licensing of software and support services. Includes costs from licensing of software and support services.
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