-----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, FAkIS3aaLrFIDxJB35OL9/Z6B43WHJz4dYF2ShivmKzi0UUc9A/1IYrOPbMKkjB0 J6a927v5IqWRk3Uy1n+Jtw== 0001047469-99-020133.txt : 19990514 0001047469-99-020133.hdr.sgml : 19990514 ACCESSION NUMBER: 0001047469-99-020133 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620868 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 March 31, 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 16,045,933 at April 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 March 31, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three- Month Periods Ended March 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Three- Month Periods Ended March 31, 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: Market Risk Sensitive Instruments 13 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K 14 Signature 15
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS March 31, December 31, 1999 1998 --------- ------------ Current assets: Cash and cash equivalents $ 9,196 $ 8,553 Short-term investments 8,490 12,806 Accounts receivable, net 18,922 21,590 Inventories 13,905 14,362 Deferred income taxes 3,332 3,126 Other current assets 3,174 3,214 ------- ------- Total current assets 57,019 63,651 Property and equipment, net 3,772 3,850 Other assets 7,943 7,645 ------- ------- Total assets $68,734 $75,146 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,274 $10,438 Accrued expenses 6,104 5,647 Income taxes payable 363 274 Current portion of capital lease obligations 91 90 Deferred revenue 4,586 6,105 ------- ------- Total current liabilities 18,418 22,554 Long-term portion of capital lease obligations 46 69 Shareholders' equity: Common stock 16 16 Capital in excess of par value 59,456 59,721 Retained earnings (accumulated deficit) (9,202) (7,214) ------- ------- Total shareholders' equity 50,270 52,523 ------- ------- Total liabilities and shareholders' equity $68,734 $75,146 ------- ------- ------- -------
See accompanying notes 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, ---------------------------- 1999 1998 ------- ------- Net revenues: Hardware products and services $22,785 $22,573 Software licenses and services 3,639 8,091 ------- ------- Total net revenues 26,424 30,664 Cost of revenues: Hardware products and services 14,064 17,344 Software licenses and services 1,110 2,466 ------- ------- Total cost of revenues 15,174 19,810 ------- ------- Gross margin 11,250 10,854 Operating expenses: Research and development 3,439 3,471 Marketing and selling 8,358 7,505 General and administrative 1,685 1,041 ------- ------- Total operating expenses 13,482 12,017 ------- ------- Operating income (loss) (2,232) (1,163) Interest income, net 244 411 ------- ------- Income (loss) before income taxes (1,988) (752) Provision for income taxes (income tax benefit) - (263) ------- ------- Net income (loss) $(1,988) $ (489) ------- ------- ------- ------- Net income (loss) per share Basic $ (0.12) $ (0.03) ------- ------- ------- ------- Diluted $ (0.12) $ (0.03) ------- ------- ------- ------- Shares used in per share computations Basic 16,054 16,612 ------- ------- ------- ------- Diluted 16,054 16,612 ------- ------- ------- -------
See accompanying notes 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Three Months Ended March 31, ---------------------------- 1999 1998 ------- ------- Cash flows from operations: Net loss $(1,988) $ (489) Reconciliation to cash provided by (used in) operations: Depreciation 831 830 Amortization of goodwill 101 - Deferred income taxes - (246) Changes in: Accounts receivable, net 2,668 1,866 Inventories 457 1,651 Other current assets 40 (335) Accounts payable (3,164) (1,370) Income taxes payable (117) (112) Accrued expenses (290) (1,086) Deferred revenue (772) (549) ------- ------- Cash provided by (used in) operations (2,234) 160 Cash flows from investing activities: Short-term investments, net 4,316 (492) Changes in other assets (399) 885 Property and equipment purchases, net (753) (269) ------- ------- Cash provided by investing activities 3,164 124 Cash flows from financing activities: Principal payments on capital lease obligations (22) (61) Repurchases of common stock (555) - Proceeds from issuance of stock, net 290 7,407 ------- ------- Cash provided by (used in) financing activities (287) 7,346 ------- ------- Increase in cash and equivalents 643 7,630 Cash and equivalents: Beginning of period 8,553 21,240 ------- ------- End of period $ 9,196 $28,870 ------- ------- ------- -------
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 1998 Annual Report on Form 10-K. The consolidated results of operations for the three-month period ended March 31, 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 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 potential common shares from stock options and warrants outstanding, when dilutive, using the treasury stock method. At March 31, 1999 and 1998 there were 4,960,457 and 3,471,402 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):
March 31, December 31, 1999 1998 ---- ---- Purchased components and sub-assemblies $10,619 $10,733 Work in process 776 1,285 Finished goods 2,510 2,344 ------- ------- $13,905 $14,362 ------- ------- ------- -------
INTEREST AND TAX PAYMENTS Interest payments, primarily related to interest on capital lease liabilities, were $4,300 and $5,300 for the first three months of 1999 and 1998, respectively. Income tax payments were $45,200 and $40,200 for the first three months of 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 ending May 31, 1999. Repurchases of 664,800 shares have been made as of March 31, 1999 under this program at prices ranging from $4.98 to $8.25 at a total aggregate price of $4.2 million. MAJOR CUSTOMERS AND OPERATING SEGMENTS International Business Machines Corporation ("IBM") accounted for approximately 9% and 24% of the Company's revenues for the first three months of 1999 and 1998, respectively. Tech Data and Adtcom accounted for approximately 18% and 14% 6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS of the Company's revenues for the first three months of 1999, respectively. Revenues from Tech Data and Adtcom were less than 10% of revenues for the first three months of 1998. The Company has one operating segment, the thin client business segment. 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, 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 delivers 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, the NCD EXPLORA thin clients and the NCD NC200 and NCD NC400 network computers, acquired in the acquisition of Tektronix Inc. Network Displays business unit ("NWD"). On the software side, the Company's products are 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. Some of the software products were part of the NCD THINSTAR software family in 1998; they have been re-named and were announced in March 1999 as part of the NCD THINPATH software family. These products are sold through distributor/VAR channels, system integrators and OEMs 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 non-exclusive IBM Agreement provides for IBM to purchase a portion of its requirements for such products from the Company through December 31, 2000, although no minimum purchase volumes are required by the contract. 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 in the fourth quarter of 1998 related to these restructuring activities. During the first quarter of 1999, the Company paid approximately $640,000 of restructuring liabilities, leaving approximately $260,000 accrued at March 31, 1999. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenues for the first three months of 1999 were $26.4 million, a decrease of 14% from 1998 first quarter net revenues of $30.7 million. Sales related to the IBM Agreement accounted for approximately 9% and 24% of revenues in the first three months of 1999 and 1998, respectively. Other major customers of the Company in the first quarter of 1999 included Tech Data and Adtcom which accounted for approximately 18% and 14% of the Company's revenues, 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 $22.8 million for the first three months of 1999, essentially 8 unchanged from revenues of $22.6 million in the first three months of 1998. The mix in revenues changed, however, as shipments of the Company's Windows-based Terminals and network computer products acquired in the NWD acquisition offset the combined impact of decreased shipments to IBM, lower average selling prices and decreased shipments of monitors. SOFTWARE REVENUES Software revenues consist primarily of revenues from the licensing of software products and related support services. Software products that are included in revenue for the periods presented are (i) NCD THINPATH, the Company's proprietary software to extend the functionality of its Windows-based Terminals and for implementing thin client computing to a variety of enterprise desktops, (ii) NCD WINCENTER, the Company's multi-user WINDOWS NT application server software and (iii) NCD PC-XWARE, the Company's thin client software for PCs. Revenues from software and related services decreased 55% to $3.6 million for the first three months of 1999 from $8.1 million for the first three months of 1998. This decrease primarily reflects decreased WINCENTER revenues related to the Company's transition from an OEM of Citrix' WinFrame for NT 3.5 products to a provider of value-add software 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 Company's OEM relationship with Citrix for Citrix' WinFrame product ended on September 30, 1998. This will result in significantly reduced sales of WINCENTER products, and, potentially, a decrease in 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 38% and 23% for the first three months of 1999 and 1998, respectively. The increase in margin for the first three months of 1999 relates to decreased sales of lower margin products including monitors and products sold to IBM on an OEM basis under the IBM Agreement. GROSS MARGIN ON SOFTWARE REVENUES The Company's gross margin percentages on software revenues were 69% and 70% for the first three months of 1999 and 1998, respectively. The slight decrease in gross margin percentages for the first three months of 1999 is primarily related to increased royalty costs associated with NCD WINCENTER products which have transitioned to MetaFrame for NT 4.0. The effect of this transition is minimal, however, as NCD WINCENTER sales decreased as a percentage of total software revenues. 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. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses of $3.4 million and $3.5 million for the first three months of 1999 and 1998, respectively, were essentially unchanged. As a percentage of net revenues, R&D expenses were 13% and 11% for the first three months of 1999 and 1998, respectively, as the Company continues to invest in development efforts in a period of lower revenues. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $8.4 million and $7.5 million for the first three months of 1999 and 1998, respectively. The increase primarily reflects increased salary costs related to additional sales personnel as a result of the acquisition of the Network Displays business unit of Tektronix. As a percentage of net revenues, marketing and selling expenses were 32% and 24% for the first three months of 1999 and 1998, respectively. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $1.7 million and $1.0 million for the first three months of 1999 and 1998, respectively. The increase in the first three months of 1999 reflects increased costs related to outside service fees and the amortization of goodwill. As a percentage of net revenues, G&A expenses were 6% and 3% for the first three months of 1999 and 1998, respectively. 9 INTEREST INCOME, NET Interest income, net of interest expense, was $244,000 and $411,000 for the first three months of 1999 and 1998, respectively. The decrease was primarily due to the combined effect of lower average balances at lower interest rates in interest-earning accounts. INCOME TAXES AND INCOME TAX BENEFIT The Company recognized no income tax benefit for the first three months of 1999 and an income tax benefit of $263,000 in the first three months of 1998. At March 31, 1999, the Company's net deferred tax assets were approximately $6.8 million. During 1998, the Company recorded a valuation allowance against a portion of its deferred tax assets because operating losses created uncertainty about the Company's ability to generate sufficient taxable income to utilize all deferred tax assets. Based on the Company's expected operating results, management believes that it is more likely than not that the Company will realize the benefit of the recognized deferred tax assets. See Future Performance and Risk Factors below. FINANCIAL CONDITION Total assets of $68.7 million at March 31, 1999 decreased from $75.1 million at December 31, 1998. The change in total assets primarily reflects decreases in cash and short-term investments and accounts receivable of $3.7 million and $2.7 million, respectively. Total liabilities as of March 31, 1999 decreased by $4.2 million, or 18%, from December 31, 1998. The decrease was primarily related to decreases in accounts payable and deferred revenue of $3.2 million and $1.5 million, respectively. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 1999 are estimated at approximately $2.8 million. At March 31, 1999, the Company had commitments for capital expenditures of approximately $660,000, primarily related to manufacturing tooling. LIQUIDITY As of March 31, 1999, the Company had combined cash and equivalents and short-term investments totaling $17.7 million, with no significant debt. Cash used in operations was $2.2 million in the first three months of 1999 compared to cash provided by operations of $0.2 million in the first three months of 1998. In the first three months of 1999, a decrease in accounts payable of $3.2 million and the net loss of $2.0 million were only partially offset by a decrease in accounts receivable of $2.7 million. In the first three months of 1998, decreases in accounts receivable and inventories of $1.9 million and $1.7 million, respectively, and depreciation of $830,000 were largely offset by decreases in accounts payable and accrued expenses of $1.4 million and $1.1 million, respectively, and a net loss of $489,000. Cash flows provided by financing activities in the first three months of 1998 primarily reflects 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 year, 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. 10 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 the total Year 2000 costs to be between $500,000 to $750,000. As of March 31, 1999, the Company has spent approximately $83,000 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. The Company believes that the most reasonable 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. 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 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 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. OTHER RISK FACTORS 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 11 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 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, including 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 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. This condition would likely lead to overall reduced gross margins 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. 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 approximately $17 million of future taxable income to realize its net deferred tax assets. If the Company is unable to realize its net deferred tax assets, it will have to establish an additional valuation allowance, which could have a material, adverse effect on future operating results. Although management believes that the Company will achieve the operating results necessary to realize these assets, there can be no assurance that future levels of taxable income will be sufficient to realize the net deferred tax assets. 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. 12 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. However, the Company now has the capability to obtain sub-assemblies from an alternative location of its single supplier, which is located in Mexico. 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 adequate supplies 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, 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, 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. MARKET RISK SENSITIVE INSTRUMENTS The Company's market risk sensitive instruments as of March 31, 1999 are primarily exposed to interest rate risks. Because of the short-term maturities of these instruments, a 100 basis point change in related interest rates would not have a material 13 effect on their fair value. Fluctuations in foreign exchange rates do not have a material effect on the Company's financial statements. 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 the following reports on Form 8-K for the three-month period ended March 31, 1999: (i) Form 8-K filed January 14, 1999 regarding the Company's reincorporation in Delaware. (ii) Form 8-K/A filed January 14, 1999 regarding the Company's amendment of its Rights Plan. 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: May 12, 1999 By: /s/ Rudolph G. Morin -------------------------- Rudolph G. Morin Executive Vice President, Operations & Finance and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) 15 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 9,196 8,490 20,175 1,253 13,905 57,019 29,764 25,992 68,734 18,418 0 0 0 59,472 (9,202) 68,734 26,424 26,424 15,174 15,174 13,482 0 4 (1,988) 0 (1,988) 0 0 0 (1,988) (0.12) (0.12) Includes revenues from licensing of software and support services. Includes costs from licensing of software and support services.
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