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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____________ to ____________
COMMISSION FILE NUMBER 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (Zip Code)
(650) 694-0650
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
28, 1998, as reported on the Nasdaq National Market, was approximately
$194,268,021. Shares of Common Stock held by each officer, director and holder
of 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 28, 1998, 16,354,169 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders of
Network Computing Devices, Inc. (the "Proxy Statement") scheduled to be held on
June 3, 1998, are incorporated by reference in Part III of this Report on Form
10-K.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
FUTURE PERFORMANCE AND RISK FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF.
ITEM 1. BUSINESS.
GENERAL
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
EXPLORA and family of thin clients, NCD WINCENTER PRO-TM- multi-user WINDOWS
NT-Registered Trademark- application server software, and NCD
PC-XWARE-Registered Trademark- software that delivers PC access to UNIX and
multi-user WINDOWS NT PCs. The Company's thin client computing products
provide businesses and other enterprises with an open systems approach to thin
client computing based on the Company's Network Computing Architecture ("NCA").
The Company's thin clients offer graphical multi-window interfaces for users
in various operating system environments using industry-standard communication
protocols. They provide a cost-effective, high-performance alternative to
networked workstations and personal computers and offer significant performance
advantages over "dumb" terminals used in traditional mainframe or
minicomputer-based systems, particularly with respect to windowing and graphics
capabilities. Since introducing its first product in 1989, the Company has
shipped over 500,000 thin clients to customers worldwide. With Microsoft's
Windows Terminal Server software and new, lower-priced higher-performance thin
clients, the Company now offers thin client computing systems that provide
users access to a broad range of applications and services, including Microsoft
applications.
Network Computing Devices, Inc. was incorporated in California in February
1988. Unless the context otherwise requires, the terms "the Company" and
"NCD" refer to Network Computing Devices, Inc. and its consolidated
subsidiaries.
INDUSTRY BACKGROUND
NETWORK COMPUTING SYSTEMS
Computing environments made a pendulum-like swing from the highly centralized
mainframe and minicomputer systems of the 1970s to the fully distributed
personal computer- and workstation-based systems of the 1980s. While the
earlier approach benefited from centralized system administration and
security, users had to compete for under-powered, centralized processors on a
timesharing basis, using low-performance, character-based "dumb" terminals.
During the 1980s, microprocessor-based systems improved in price and
performance, and graphical user interfaces ("GUIs") with easy-to-use windows,
menus and icons became widely available. User groups within large
organizations began implementing their own solutions, using personal
computers and workstations on the desktop to give each individual user a
dedicated computing resource. The need to interconnect these computing
resources led to the development of local area networks ("LANs"), which
resulted in processing, data and applications being spread across many
desktops. This approach brought with it new problems: the high cost of
installing, maintaining and upgrading a computer on every desktop;
under-utilization of individual computing resources; and complex system
management requiring large MIS staffs.
As the 1990s approached, a new computing environment evolved: "thin client
computing" combines the cost-effectiveness, manageability and security of the
original centralized model with the performance, GUIs and network
accessibility of the later distributed model.
The key technology behind the original development of the thin client
computing approach was the X Window System, or X, a graphical windowing
system. X software runs over a TCP/IP (Transmission Control
Protocol/Internet Protocol) network that allows full use of thin client
computing resources. Unlike operating systems designed for stand-alone
personal computers, X is an open system, not tied to any particular hardware
or operating system, allowing the development of
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applications that can run on multi-vendor products on a common network. This
multi-vendor capability is possible because the X architecture separates
windowing into two distinct parts: the graphical display function on the
user's desk; and the computing function, which executes the applications, at
shared "compute servers" (personal computers, workstations, or larger
computers) anywhere on the network. This model, which the Company refers to
as NCA, addresses both the individual's need for an advanced GUI and the
organization's need for reduced system management overhead and better
utilization of computing resources. Users of thin client computing systems
can simultaneously access multiple applications running on separate compute
servers on the network, and view and manipulate these applications in
separate windows on their screens. Thin client computing systems also allow
the organization to keep up with advances in computing technologies while
protecting existing equipment investments. Rather than replacing every
desktop system when the industry attains new price/performance points, the
organization can simply add new computing resources to the network; the
desktop devices stay in place.
Although X-based network computing systems have been deployed in a wide range
of network environments, particularly in UNIX and other large computer-based
applications, these systems require the availability of X protocol support
from the vendors of host operating systems software and application software
developers. Until the mid-1990's, the absence of support by Microsoft
Corporation ("Microsoft"), combined with the proliferation of off-the-shelf
Windows-based application software, constituted an obstacle to the expansion
of the thin client computing model into Windows-based environments.
Over the last several years, a number of important developments occurred
which expanded the potential markets for network computing systems. First,
the availability of the powerful Pentium microprocessor enabled the
development of large Windows-based systems. Second, Microsoft NT Server
software, combined with Microsoft-authorized multi-user software, became
available to support multi-user Windows applications. Third, the rapid
growth of the Internet and Internet-based computing has popularized the
concept of remote computing and created new interest in the network computing
model.
INFORMATION ACCESS SOFTWARE
The market for enterprise information access software is large and comprised
of a number of segments, many of which are expanding rapidly. Segments of
this market include: PC-based TCP/IP software stacks and applications,
including X access software; electronic mail software; and Internet access
software.
With the continuing proliferation of increasingly powerful and low-cost PCs
in large organizations, the Company identified a demand for software products
to enable DOS-based and Windows-based PCs to emulate X terminals for use in
predominantly UNIX environments. In order to address this market, the
Company, in 1992, acquired Graphic Software Systems, a pioneer in the
development of PC X software. In 1993, the Company introduced PC-XWARE, its
initial PC-UNIX integration software product. PC-XWARE is based on the
Company's NCDWARE X terminal software and provides network connectivity using
an NCD-developed TCP/IP software stack. NCD now offers versions of PC-XWARE
for WINDOWS 3.1, WINDOWS 95-Registered Trademark- and WINDOWS NT users.
In an effort to enhance its position in the information access market, the
Company, in February 1994, acquired Z-Code Software Corp. ("Z-Code"), a
developer of electronic mail and messaging application products for multivendor
open system environments. Following the Z-Code acquisition, the Company
developed and introduced e-mail products, including Z-MAIL-Registered
Trademark- for Windows and Macintosh operating systems. However, due to
insufficient operating results, intensifying competition in this market and
other factors, the Company sold its Z-MAIL product line during June 1996.
Taking advantage of its expertise in TCP/IP-based networking software, the
Company in 1995 developed MARINER, an Internet access and navigation tool.
In light of the Company's inability to develop a long-term relationship with
AT&T, as well as other changes in the Internet market, including the
development of intense price competition among vendors of Internet access
products, the Company determined in late 1995 to sell the MARINER product
line and focus its attention on its core business of providing desktop
information access solutions for network computing environments. The MARINER
product line was sold in the first quarter of 1996. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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MARKETS AND APPLICATIONS
NETWORK COMPUTING SYSTEMS
NCD's network computing systems are used in a broad range of industries for a
wide variety of applications. Historically, the Company's X-based systems
have been sold primarily into three types of computing environments as: (1)
an upgrade to ASCII and 3270 "dumb" terminals in mainframe and minicomputer
transaction processing environments; (2) a lower cost desktop alternative to
workstations in distributed environments; and (3) an enhancement or
alternative to personal computer networks.
TERMINAL REPLACEMENT. A principal market for X-based thin clients is
replacement of the installed base of approximately 25 million ASCII and 3270
terminals. Many commercial users in transaction processing applications are
upgrading their centralized systems in order to obtain the productivity
advantages of GUIs and windowing and the flexibility of "open" systems based
on industry-standard operating systems such as UNIX. The Company's NCA
provides these users with a three-tiered X-based network computing
environment in which: (1) existing applications and corporate-wide databases
remain on the central mainframe or minicomputer; (2) departmental-level
applications are run on RISC-based UNIX compute servers; and (3) thin clients on
each user's desk provide simultaneous access to applications and data on the
mainframe, minicomputers and compute servers.
WORKSTATION ENVIRONMENTS. Many of the early buyers of X terminals were also
early users of workstation technology and viewed X-based thin clients
primarily as a low-cost alternative for expanding their workstation networks.
In these environments, X terminals can access the excess processing power of
existing workstations, supplying users with a GUI at a considerably lower
cost than a workstation with equivalent display characteristics. Thus,
organizations can provide windowing and graphics for uses that previously
could not justify the cost of a full workstation. Many users of X terminals
in UNIX and VMS workstation or minicomputer environments have developed an
optimized configuration of workstations and X terminals. In these
environments, rather than providing some users with workstations and others
with X terminals, every user is given an X terminal, and compute servers
based on high-performance workstations (without monitors) are shared among
all users. The organization thereby realizes cost advantages by centralizing
processing, memory and disk requirements into fewer, high-performance servers.
PERSONAL COMPUTER ENVIRONMENTS. Until recently, users of X terminals in
predominantly UNIX-based environments who needed access to DOS or Windows
applications could access these applications using an X terminal running on a
Windows emulation system on a compute server. Although these emulation
systems met the needs of the occasional user of these applications, a more
robust, high performance means of executing Windows applications in large
UNIX-based network environments has become an increasing market requirement
over the past several years. The recent introductions of the Company's NCD
WINCENTER Windows application server software, running on Pentium-based
server hardware, and the Company's new, lower-priced NCD EXPLORA thin
clients, were intended to address this requirement. In addition, NCD
WINCENTER software and NCD EXPLORA thin clients are now being marketed to
users of Windows who recognize the benefit of the network computing model.
INTRANET ENVIRONMENTS. With the popularization of the Internet and the
availability of low cost Internet software and authoring tools, many
companies are utilizing Internet protocols for internal electronic
communications systems. These systems are being used to facilitate employee
collaboration and distribute company information in an easy to manage, low
cost manner. NCD thin clients are being used as a means of providing low
cost, easy maintenance access to corporate intranets. Many of the software
systems used to implement corporate intranets, including Worldwide Web
("WWW") browsers, WWW servers, e-mail clients, e-mail servers and database
servers, can run on NCD WINCENTER and can be accessed from NCD thin clients
and other X-capable devices such as a UNIX workstation, a competing brand of
X terminal, or a personal computer with X display server software.
SOFTWARE PRODUCTS
PC CONNECTIVITY SOFTWARE. Personal computer users who wish to obtain access
to UNIX or VMS applications, but who also desire to maintain local DOS or
Windows application processing, are potential customers for the Company's
PC-XWARE software. A PC running X Window System software can match the
performance of a low-end X-based thin client, and can be useful for PC users
who need less frequent access to thin client computing resources.
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WINDOWS SERVER SOFTWARE. Users of thin clients, UNIX workstations and older
PCs who want to run the latest Windows applications on their existing hardware,
comprise the target market for NCD WINCENTER, the Company's Windows application
server software. This product is an enterprise-oriented solution designed to
accommodate growth in large, heterogeneous computing environments.
PRODUCTS
THIN CLIENT SYSTEMS
The Company offers a broad line of thin client products that provide businesses
and other enterprises with an open systems approach to network computing based
on the Company's Network Computing Architecture. The Company's thin client
systems include NCD EXPLORA desktop devices, NCDWARE operating system software
and NCD WINCENTER, the Company's Windows application server software.
THIN CLIENTS. The Company's thin client products are desktop devices that are
used to access information and applications residing on compute servers on a
local area or wide area network. The Company's thin clients offer graphical
multi-window interfaces for users in various operating system environments.
Thin clients provide a cost-effective high-performance alternative to network
workstations and personal computers. Although the Company's initial X-based
thin clients (referred to as "X terminals") were used primarily in UNIX and
other large computer-based environments, the recent introduction of multi-user
versions of the WINDOWS NT operating system and the Company's NCD WINCENTER
Windows application server software allows thin clients to be used in network
environments including environments using Windows application software.
The Company's thin clients product line includes models with various screen
sizes and a range of software extensions and network interfaces. Hardware
platforms are based on different microprocessors, addressing a wide range of
price/performance requirements. Custom ASICs used in the design of most of the
Company's products help reduce the cost of connection logic and provide
hardware acceleration for certain graphics functions. NCD's thin clients
feature single-board electronics and incorporate current ergonomic standards in
monitor technology. NCD's thin clients come with a full line of peripherals,
including mouse and several keyboard options.
The Company's NCD EXPLORA 700 and NCD HMXPRO24 products are high-performance
network computers that are targeted at the UNIX workstation market and
customers with Java requirements. The NCD HMXPRO24 supports up to 24-bit color
and up to 1600-by-1200 pixel screen resolution on 15, 17, 19 and 21-inch
monitors. Suggested list prices start at $1,695 for the NCD EXPLORA 700 and
$2,895 for the NCD HMXPRO24.
The NCD EXPLORA 400 and the NCD EXPLORA 450 are the Company's low-end thin
client products. The target markets for these products include the legacy
desktop replacement market (when sold in conjunction with NCD WINCENTER), the
terminal replacement market and the intranet market. The NCD EXPLORA is based
on the 32-bit PowerPC RISC processor. The NCD EXPLORA 400 Series can
accommodate up to 128 megabytes of memory. Display resolution is adjustable
from 640-by-480 to 1280-by-1024 pixel screen resolution, with 15, 17, 19 and 21-
inch monitors available. The NCD EXPLORA 400 and the NCD EXPLORA 450 thin
clients are packaged in a compact and attractive space saving case that is
extremely quiet due to the lack of a noise-producing fan, as well as in a
monitor support package that fits nicely underneath the monitor. Suggested
list prices for the NCD EXPLORA family currently range from $695 to $940.
NCDWARE. The Company's thin clients run NCDWARE, NCD's proprietary operating
system. NCDWARE incorporates extensive enhancements to the basic X server
software to improve performance, system manageability and robustness. A key
aspect of NCDWARE is its capability to support both X and Citrix Systems' ICA
protocols. NCDWARE supports a wide variety of communications protocols.
NCDWARE provides Network Audio System for audio applications, capability for
running local window managers and local terminal emulation sessions and network
management capability.
NCD WINCENTER. NCD WINCENTER PRO is Windows application server software that
runs on Intel-based computers, typically Pentium-class systems. NCD WINCENTER
includes Microsoft NT as the base operating system and WINFRAME, Microsoft-
authorized multi-user software that the Company licenses from Citrix Systems,
Inc. ("Citrix"). See "Proprietary Rights and Licenses." NCD WINCENTER also
includes NCD-developed graphics and network features that make NCD WINCENTER
compatible with the X Window protocol supported by NCD thin clients and UNIX
workstations. NCD WINCENTER allows a single server to provide Windows
applications to many users simultaneously. NCD WINCENTER is compatible with
off-the-shelf applications software for WINDOWS 3.1, WINDOWS 95 and WINDOWS NT
and can typically serve up to 50 users, depending
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upon server performance, applications and usage. NCD WINCENTER can be used
to add Windows applications to existing UNIX network environments, to create
multi-user Windows systems, or to implement intranets within enterprises.
Users can access NCD WINCENTER from any NCD thin client (including older
model X terminals), competing brands of X terminals, UNIX and VAX
workstations that support X Windows and personal computers with X display
server software. Suggested list prices for NCD WINCENTER start at $459 per
user with a five-user minimum.
PC CONNECTIVITY PRODUCTS
NCD MARATHON. NCD MARATHON is a suite of TCP/IP products for Windows-based
personal computers. NCD MARATHON includes important networking functionality
that is not currently available from Microsoft, including graphical client and
server support, Network File System (NFS) client and server support and
multiple terminal emulation modes. Versions of NCD MARATHON are available for
WINDOWS 3.1, WINDOWS 95 and WINDOWS NT. The WINDOWS 3.1 version includes the
Company's proprietary TCP/IP stack as well as a dialer for remote TCP/IP
applications. Suggested list prices start at $195.
NCD PC-XWARE. NCD PC-XWARE is a family of PC X server software products for
Windows PCs that provide connectivity to X Windows applications running on UNIX
and other multi-user host systems. There are versions of NCD PC-XWARE for
WINDOWS 3.1, WINDOWS 95 and WINDOWS NT. NCD PC-XWARE includes all the basic
capabilities of MARATHON and adds high performance X server software. NCD PC-
XWARE is based on the Company's NCDWARE network computing software and offers
many of the same local application and network management features. NCD PC-
XWARE also allows personal computer users to access application software
running on the Company's NCD WINCENTER application server. Suggested list
prices start at $395.
PRODUCT DEVELOPMENT
The Company believes that its ability to maintain its position as a major
supplier of thin client solutions and expand the market for this style of
computing and information access products will depend in large part upon its
ability to enhance its existing line of thin client and software products, and
to continue developing new hardware and software products that incorporate the
latest improvements in technology. Accordingly, the Company is committed to
investing significant resources in software and hardware development
activities.
The Company's current research and development programs include:
- Server and client side emulation products for thin clients and
multi-user Windows NT environments;
- A new Intel Pentium-Registered Trademark- based lean client for
Windows applications access in the terminal replacement market;
- Enhanced NCD PC-XWARE for Windows 98;
- French, German and Spanish versions of NCD WINCENTER; and
- Advanced terminal platform concepts considering increased levels of
logic integration.
There can be no assurance that any of these development efforts will result in
the introduction of new products or that any such products will be commercially
successful. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Future Performance and Risk Factors --
New Product Development and Timely Introduction of New and Enhanced Products."
During 1997, 1996 and 1995, the Company's research and development expenditures
were $14,179,000, $14,930,000 and $13,119,000, respectively.
THE FOREGOING DISCUSSION CONCERNING THE COMPANY'S PRODUCT DEVELOPMENT PROGRAM
INCLUDES FORWARD-LOOKING STATEMENTS. ACTUAL PRODUCT DEVELOPMENT RESULTS MAY
DIFFER SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE
DESCRIBED UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- FUTURE PERFORMANCE AND RISK FACTORS."
MARKETING AND SALES
The principal objectives of the Company's marketing strategy are to increase
awareness of the benefits of network oriented computing, maintain the Company's
position as a recognized leader in the thin client industry and differentiate
the Company's hardware and software products from competing products. The
Company's marketing activities include participation in trade
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shows, conferences and seminars, advertising and press relations with leading
trade publications, publication of technical articles and a telemarketing
program.
In addition, the Company is increasing its focus on the use of value-added
resellers and the OEM channel of distribution; marketing programs are being put
in place to train and support the indirect channel.
Much of the Company's work is done in cooperation with major strategic
partners, such as IBM, Microsoft, Intel and Citrix. The Company's marketing
team is responsible for strategies and joint programs with these companies who
are very important to our success.
The Company regards its technical support and system engineering personnel as
an integral part of its marketing strategy because of the technical nature of
the sales process and the strategic change that thin client computing
represents to our customers. These personnel participate directly in the sales
cycle by educating prospective customers on the advantage of network computing
and assisting in system planning, configuration and the integration of thin
clients into the information technology strategies of our customers.
The Company has moved away from a direct domestic sales model towards the use
of resellers, distributors and systems integrators, as well as OEMs.
Substantially all of the Company's international sales are delivered through
the indirect channel. Besides the U.S. organization, the Company has
established subsidiaries in Australia, France, the United Kingdom, Germany
and Sweden, which provide sales and technical support to the Company's
distributors in those regions.
NCD's direct sales force has been retrained and their compensation base changed
to encourage them to work through the indirect channel. These highly skilled
technical sales specialists will manage the channel in their geographic
territory and assist their partners in building their business.
International sales, including sales to foreign OEM customers, represented
approximately 34%, 33% and 33% of the Company's net revenues during 1997, 1996
and 1995, respectively. International sales may be subject to government
controls and other risks, including export licenses, federal restrictions on
the export of critical technology, changes in demand resulting from currency
exchange fluctuations, political instability, trade restrictions and changes in
tariffs. To date, the Company has experienced no material difficulties due to
these factors.
The Company also sells its PC connectivity software products through an
internal telesales team that fulfills orders through the indirect channel.
The Company also sells its products to OEMs who combine the Company's products
with computers and peripherals, add application software and sell complete
computer systems to end-users. OEM sales represented approximately 26%, 15%
and 15% of the Company's revenues for the years ended December 31, 1997, 1996
and 1995, respectively.
IBM accounted for 26% of the Company's net revenues in 1997. No single
customer of the Company accounted for more than 10% of the Company's net
revenues during 1996 and 1995.
SERVICE AND SUPPORT
The Company believes that its ability to provide service and support is and
will continue to be an important element in the marketing of its products. The
Company maintains in-house repair facilities and also provides telephone and
electronic mail access to its technical support staff. The Company's technical
support engineers not only provide assistance in diagnosing problems but work
closely with customers to address system integration issues and to assist
customers in increasing the efficiency and productivity of their systems. The
Company provides system level software support through its factory-based
technical maintenance organization and field system engineers, and also offers
software update services that allow customers to purchase subsequent releases
of its software products. Eurographics Industries Ltd., a leading European
service organization, provides certain repair services for the Company's
European distributors and OEM customers.
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COMPETITION
The desktop computer and information access markets are characterized by
rapidly changing technology and evolving industry standards. The Company
experiences significant competition from other network computer manufacturers,
suppliers of personal computers and workstations, and software developers.
The Company is a major supplier of thin client computing systems and
products. Competitive X-based network computing products are offered by a
number of established computer manufacturers which have substantially greater
name recognition, engineering, manufacturing and marketing capabilities and
greater financial resources than those available to the Company. The Company
also competes with a number of other manufacturers of network computing
products, including Tektronix, Inc. ("Tektronix") and Wyse Technology, Inc.
("Wyse"). The Company believes that the principal competitive factors among
thin client suppliers include price, breadth of product line, product
performance, software features, network expertise, service and support, and
market presence. Price competition is particularly intense among suppliers
of lower-priced, lower-margin thin clients such as the Company's NCD EXPLORA
400 and NCD EXPLORA 450 models. Workstation manufacturers who offer thin
client products, may have advantages over independent thin client vendors,
including the Company, based on their ability to "bundle" their network
computers, workstations and personal computers in certain large system sales.
The Company and other manufacturers of thin clients also face significant
competition from established computer manufacturers whose personal computer and
workstation products offer alternatives to thin clients for most applications.
In the high-performance, technical segment of the desktop computer market, thin
clients compete with workstation networks offered by such manufacturers as HP,
Digital Equipment Corporation ("DEC"), IBM and Sun Microsystems, Inc. Because
thin client computing does not require application processing capability on
every desktop, thin client computing systems compete favorably on a
price/performance basis with workstation networks and offer cost advantages in
initial system installation, as well as subsequent system upgrading and
administration. However, the significant market presence and reputation of the
larger workstation manufacturers, and customer perceptions regarding their need
for desktop application processing capability, constitute obstacles to the
penetration of this market segment by thin client manufacturers.
At the low end of the commercial segment of the computer market, the Company
competes with suppliers of lower cost ASCII and 3270 terminals. These products
do not offer the graphics and windowing capabilities offered by NCD's thin
client systems, but are still appealing to certain price sensitive customers.
Moreover, PC networks offer an alternate means of upgrading from ASCII and 3270
terminal systems in many commercial applications.
The introduction of the Company's NCD WINCENTER multi-user Windows application
server software and lower-priced NCD EXPLORA thin clients allowed the Company
to offer thin client computing systems that provide access to Windows
applications. Other network computing companies, including Tektronix and
Wyse, currently offer systems competitive with the Company's, but only
Tektronix offers multi-user Windows NT server software similar to the
Company's. Moreover, a number of other companies are offering, or have
announced their intention to offer, network computing products and systems
based on other technologies. There can be no assurance that the Company's new
thin client products will compete successfully with competitive network
computing products or that the thin client computing model will be widely
adopted in the rapidly evolving Windows market.
The Company also sells its NCD WINCENTER multi-user Windows application server
software on a stand-alone basis to customers who wish to configure thin client
computing systems using desktop devices offered by other manufacturers. The
Company is experiencing intense competition in this new and rapidly evolving
market from vendors who have introduced competitive products. These
competitors include a product from Tektronix which is also based on software
provided by Citrix which makes a multi-user product out of WINDOWS NT software.
The Company believes that the principal competitive factors in this new market
include price, performance, features, network compatibility and support.
Competition in the thin client computing market has intensified over the past
several years, resulting in price reductions, reduced profit margins and
increased efforts to maintain market share, which have adversely affected the
Company's operating results. In addition, intense competition from
alternative desktop computing products, particularly personal computers, has
slowed the growth of the thin client computing market. The Company expects
this intense competition to continue. 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.
7
<PAGE>
NCD PC-XWARE software products face direct competition from several software
companies that offer similar products, including Hummingbird Communications,
Ltd., a Canadian company, Visionware, a subsidiary of The Santa Cruz Operation,
Inc., NetManage, Inc., FTP Software, Inc. and Walker, Ritchie, Quinn, a
privately-held company. In addition, several large system companies, including
DEC and IBM, offer PC X server software.
MANUFACTURING AND SUPPLIES
The Company conducts certain thin client production activities at its
Mountain View, California facility. These operations consist primarily of
final assembly and configuration, testing and quality control of material,
components, sub-assemblies and systems. The Company utilizes a manufacturing
control system which includes purchasing, inventory control and cost
accounting functions. The Company tests each thin client in a network
environment using a Company-developed, computer integrated manufacturing
("CIM") system. In addition, the Company employs a statistical process
control system ("SPC") and conducts regular on-site inspections at its
vendors' facilities to maintain quality control.
The Company relies largely on one independent contractor for the sub-assembly
of the Company's thin client products. The Company's reliance on 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 foreign suppliers also 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 substantially all of the sub-
assemblies used for its thin client products (consisting of all major
components except monitors and cables) from a single supplier located in
Thailand. Any significant interruption in the supply of sub-assemblies from
this contractor would have a material adverse effect on the Company's business
and operating results. Disruptions in the provision of components by the
Company's other suppliers, or other events that would require the Company to
seek alternate sources of supply, could also lead to supply constraints or
delays in delivery of the Company's products and adversely affect its operating
results. The operations of certain of the Company's foreign suppliers were
briefly disrupted during 1992 due to political instability in Thailand.
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.
The Company has, from time to time, experienced delays in the receipt of
monitors from certain of its suppliers. In addition, the Company is required
to place orders for monitors several months in advance of its anticipated
requirements, and its ability to react to short-term increases or decreases in
customer demand is, therefore, limited. Prolonged or repeated delays in the
receipt of monitors could have a material adverse effect on the Company's
operations.
The Company's products incorporate memory components, such as video random
access memory chips ("VRAMs"), that are available from multiple sources but
have been subject to substantial fluctuations in availability and price.
Certain other components, including microprocessors and ASICs, though generally
available from multiple sources, are subject to industry-wide demand which
could result in limited availability or significant fluctuations in pricing.
To date, these fluctuations have not had a material effect on the Company's
operating results and the Company has been able to obtain an adequate supply of
such components. There can be no assurance that the Company will be able to
obtain adequate supplies of these components in the future or that price
fluctuations will not adversely affect the Company's operating results.
The Company currently outsources the reproduction and packaging of its software
to domestic vendors located in California and Oregon.
BACKLOG
The Company assembles its thin client products based upon its projections of
near-term demand. Orders from large end-users and OEMs are generally placed by
the customer on an as-needed basis, and products are typically shipped by the
Company within 45 days after receipt of a firm purchase order. The Company
does not generally have a significant backlog, and its
8
<PAGE>
backlog at any particular time, or fluctuations in backlog from time to time,
may not be representative of actual sales for any succeeding period.
Because of the ease of manufacturing software products, the Company is able to
effect the manufacture and shipment of these products quickly in response to
customer orders without maintaining significant inventories, and, as a result,
has historically had little, if any, backlog at any particular time. The
Company does not, therefore, consider backlog for these products to be a
significant measure of actual sales for any succeeding period.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of copyright, trademark and trade
secret laws, employee and third-party non-disclosure agreements and other
intellectual property protection methods to protect its proprietary technology.
The Company holds six U.S. patents. Although management intends to pursue a
policy of obtaining patents for appropriate inventions, the Company believes
that its success will depend primarily on the innovative skills, technical
competence and marketing abilities of its personnel rather than upon the
ownership of patents. There can be no assurance that patents will issue from
any pending or future patent applications or that any claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that any rights granted thereunder will provide
adequate protection to the Company.
Certain technology used in the Company's products is licensed from third
parties on a royalty-bearing basis. The costs associated with such royalties
increased substantially during 1996, and are now a significant component of
total software cost of sales. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Generally, such
licenses grant to the Company non-exclusive, worldwide rights with respect to
the subject technology and terminate only in the event of material breach.
In March 1996, the Company entered into a license agreement with Citrix
pursuant to which the Company was granted the right to incorporate WINFRAME,
Citrix's Microsoft-authorized multi-user software, into the Company's WINCENTER
PRO Windows application server software and other related products. The
Company is required to pay Citrix a per-copy royalty, subject to certain
specified minimum royalty obligations. Under the license agreement, the
Company was also granted an option to license additional software for bundling
in future WINCENTER products in exchange for the payment of a one-time license
fee. The license agreement has an initial term of two and one half years,
subject to automatic renewal for successive one-year terms unless notice of
nonrenewal is provided 60 days in advance by the Company or six months in
advance by Citrix.
The Company's software products are generally licensed on a right-to-use basis.
The Company relies primarily on "shrink wrap" or "break the seal" licenses.
Certain provisions of such licenses, including provisions protecting against
unauthorized copying and reverse engineering, may not be enforceable under the
laws of some jurisdictions. In addition, the laws of some foreign countries in
which the Company's software products are distributed do not protect the
Company's intellectual property rights to the same extent as U.S. law.
There can be no assurance that third parties will not assert infringement
claims against the Company or its suppliers with respect to current or future
products. Although the Company has historically been able to resolve all
asserted claims on terms which have not had a material effect on the Company's
operations, there is no assurance that any future claims may not require the
Company to enter into unfavorable royalty arrangements or result in costly
litigation.
EMPLOYEES
As of December 31, 1997, the Company had 352 full-time employees, of whom 79
were primarily engaged in research and development, 54 in technical support,
113 in marketing and sales, 59 in manufacturing and 47 in administration and
finance. None of the Company's employees is represented by a collective
bargaining agent. The Company has experienced no work stoppages and believes
that its employee relations are good.
Competition for employees in the computer and software industries is intense.
The Company believes that its future success will depend, in part, on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel.
9
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of March 27, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert G. Gilbertson 56 President and Chief Executive Officer
Rudolph G. Morin 60 Executive Vice President, Operations &
Finance and Chief Financial Officer
Cecil M. Dye 57 Senior Vice President, Worldwide Sales
Lorraine J. Hariton 44 Senior Vice President, Marketing and
Business Development
</TABLE>
Mr. Gilbertson has served as President and Chief Executive Officer of the
Company since May 1996. Prior to joining the Company, Mr. Gilbertson served
as Chairman of Avidia Systems, Inc., a manufacturer of ATM switching systems,
and also as President and Chief Executive Officer of CMX Systems, Inc., a
manufacturer of precision measurement and positioning products from 1993 to
1996. In 1994, CMX ranked No. 103 on the Inc. Magazine list of the 500
fastest growing privately held companies in the U.S. Prior thereto, he
served as President and Chief Executive Officer of Data Switch Corporation,
which was named turnaround company of the decade by CFO Magazine. Mr.
Gilbertson holds an MBA from the University of Chicago, served as Chairman of
the Board of the American Electronics Association, and was a member of the
faculty of Harvard Business School for five years.
Mr. Morin has served as Executive Vice President, Operations & Finance and
Chief Financial Officer since June 1996. Prior to joining the Company, Mr.
Morin served as Senior Vice President, Finance and Administration for Memorex
Telex Corporation from 1993 to 1996. Prior thereto, he worked with Mr.
Gilbertson at Data Switch, where he was Executive Vice President. Mr. Morin's
background also includes more than ten years with Thyssen Bornemisza Inc. as
head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Dye has served as Senior Vice President, Worldwide Sales since March 1997
and served as Senior Vice President, Sales and Marketing from September 1996 to
March 1997. Prior to joining the Company, Mr. Dye served as the Senior Vice
President of Worldwide Sales and Service for Wyse Technology from 1994 to 1996.
Prior thereto, Mr. Dye spent 24 years with Digital Equipment Corp., most
recently as vice president and general manager of the western region. Mr. Dye
holds an MBA from Xavier University.
Ms. Hariton has served as an executive officer of the Company since September
1993 and was appointed Senior Vice President, Marketing and Business
Development in March 1997. Ms. Hariton joined the Company as Vice President,
Marketing, and in 1996 was appointed to the position of Vice President,
Business Development. From 1992 to 1993, Ms. Hariton was employed by Verifone
Corporation as Director of Marketing. From 1986 to 1992, she was employed by
ROLM Corporation in a variety of sales and marketing positions. Ms. Hariton
holds an MBA from Harvard University.
ITEM 2. PROPERTIES.
The Company's principal administrative, marketing, manufacturing and research
and development operations are located in adjacent buildings in Mountain View,
California. These facilities consist of approximately 178,000 square feet and
are occupied under leases which expire between February 1999 and February 2003.
Approximately 28,000 square feet in these facilities are currently being sublet
to a third party. The annual gross rent for these facilities currently
approximates $1,700,000. The Company's PC X software operations are located in
a 30,000 square foot facility in Beaverton, Oregon, under a lease expiring in
October 2000, with gross rent of approximately $246,000 for 1997. The Company
also leases a 20,000 square foot facility in Novato, California, under a lease
expiring in July 2001 which is currently being subleased to third parties. The
Company believes that its existing facilities are adequate for its present
requirements and that suitable
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<PAGE>
additional space will be available as needed. The Company's field sales and
service offices worldwide consist of leased office space totaling
approximately 23,000 square feet, with current aggregate gross rents of
approximately $767,000 for 1997.
ITEM 3. LEGAL PROCEEDINGS.
In April 1996, two purported class action complaints, WOODWARD, ET AL V.
BRADLEY, ET AL and CURLEY, ET AL V. MARINARO, ET AL, were filed in the United
States District Court for the Northern District of California, and a third
purported class action complaint, MAIZEL, ET AL V. MARINARO, ET AL, was filed
in the Superior Court of the State of California for the County of Santa Clara.
In May 1996, a fourth purported class action complaint, CLEVELAND, ET AL V.
MARINARO, ET AL, was filed in the United States District Court for the Northern
District of California. The plaintiffs in the MAIZEL, CURLEY and CLEVELAND
actions claimed to be suing on behalf of a class of persons who purchased the
Company's Common Stock during the period February 2, 1995 to March 21, 1996;
the plaintiffs in the WOODWARD action claimed to be suing on behalf of a class
of persons who purchased the Company's Common Stock during the period February
1, 1996 to March 21, 1996. Certain named current and former officers and a
director of the Company were named as defendants in the actions. The MAIZEL
complaint also named as defendants Morgan Stanley & Co. and Stephen Milunovich,
an employee of Morgan Stanley & Co. The complaints alleged, among other
things, that the Company issued false and misleading statements to the public
about the Company's financial performance and prospects, in violation of
California and federal securities laws. The complaint in the MAIZEL action
alleged that the officer and director defendants sold or otherwise disposed of
the Company's Common Stock in violation of California securities laws.
The parties entered a settlement agreement during the first quarter of 1997.
As part of the settlement arrangement, the Company agreed to contribute $1.1
million toward the $12 million in costs to settle all pending securities
litigation. The Company anticipates that no further charges related to such
settlement will be incurred in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the Company's fiscal year ended December 31, 1997.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
MARKET PRICE DATA
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "NCDI" since the Company's initial public offering in June
1992. The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Common Stock on such market:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1997:
First Quarter $15.375 $9.375
Second Quarter 13.50 9.375
Third Quarter 11.875 8.25
Fourth Quarter 10.875 6.25
1996:
First Quarter $ 8.00 $3.75
Second Quarter 7.00 2.9375
Third Quarter 6.1875 3.125
Fourth Quarter 10.75 6.25
</TABLE>
The closing sale price for the Common Stock on February 27, 1998 was $12.625.
As of February 28, 1998, the Company had approximately 236 holders of record
of its Common Stock and 16,354,169 shares of Common Stock were outstanding.
The market price of the Company's Common Stock has fluctuated significantly
and is subject to significant fluctuations in the future. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Performance and Risk Factors."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included in "Item 8. Financial Statements
and Supplementary Data."
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues $133,400 $120,608 $139,328 $160,871 $144,265
Operating income (loss) 1,736 (17,241) (7,657) (15,507) 12,925
Income (loss) before income taxes and cumulative
effect of accounting change 3,831 (8,721) (6,205) (7,285) 13,758
Net income (loss) 2,681 (5,232) (4,029) (10,843) 9,241
Net income (loss) per share - basic 0.16 (0.32) (0.25) (0.68) 0.59
Net income (loss) per share - diluted 0.15 (0.32) (0.25) (0.68) 0.59
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 31,480 $ 35,671 $ 36,150 $ 31,220 $ 35,632
Working capital 53,811 60,981 57,470 62,802 67,481
Total assets 86,514 85,693 97,537 101,029 94,169
Capital lease obligations, less current portion 160 314 991 1,497 1,990
Total shareholders' equity 60,519 67,425 68,014 71,889 76,537
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL
PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY
OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS."
Network Computing Devices, Inc. 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 EXPLORA and family of thin clients, NCD WINCENTER
PRO-TM- multi-user WINDOWS NT-Registered Trademark- application server
software, and NCD PC-XWARE-Registered Trademark- software that delivers PC
access to UNIX and multi-user WINDOWS NT PCs.
In January 1995, the Company entered into a software development and
licensing agreement with AT&T to develop a custom version of MARINER for AT&T
(the "AT&T Agreement"). The AT&T Agreement provided for total minimum
royalties of $15 million through 1998, and contemplated the development of
additional Internet access products for license to AT&T. In September 1995,
the AT&T Agreement was amended to terminate these provisions for additional
product development and to provide instead that the Company would be paid
fees totaling $9 million through 1996 for development work completed at the
time of the amendment and for a license to evaluate the MARINER product. In
1995, the Company recognized license fees totaling $6.8 million under the
AT&T Agreement and received $500,000 in fees for non-recurring engineering
costs that offset research and development expenses. In 1995, the Company
also recognized revenues of $300,000 from other customers related to the
MARINER product line. In light of the Company's inability to develop a
long-term relationship with AT&T, as well as other changes in the Internet
market, including the development of intense price competition among vendors
of Internet access products, the Company determined in late 1995 to sell the
MARINER product line and focus its attention on its core business of
providing desktop information access solutions for thin client computing
environments. In February 1996, the Company sold the MARINER product line to
FTP Software, Inc. ("FTP") for $9.8 million. The Company paid FTP a one-time
license fee of $2.5 million for the right to incorporate MARINER technology
into future versions of the Company's hardware and software products. The net
gain recognized on this transaction was $7.0 million.
During 1995, the Company took various actions to reorganize the two basic
components of its business into two separate business units: the Systems
business, consisting of the Company's thin client computing products and
related software; and the Software business, consisting of its lines of PC
connectivity software and, initially, its electronic messaging software and
its MARINER Internet access software. In addition, the Company took steps to
consolidate the management and sales organizations of the geographically
separated segments of its Software business and reoriented its software sales
strategy toward the increased use of distributors, value added resellers
("VARs") and other resellers.
During the third quarter of 1995, the Company created and began implementing
a plan to restructure the business to improve its operating performance. The
plan included substantial modifications to the Company's manufacturing
processes, phasing out lower margin products, a reduction in the amount of
leased space, and a reduction in the number of employees. During the third
quarter of 1995, the Company recognized charges totaling $7.5 million for the
implementation of this plan. Included in these restructuring charges were
amounts related to the severance of personnel, phase-out of certain products,
and costs associated with the termination of lease obligations. In the fourth
quarter of 1996, the Company substantially concluded such restructuring
activities, and an amount of $1.1 million in related accruals was determined
to be in excess of amounts required. As a result, the Company recognized a
$1.1 million credit for business restructuring during the fourth quarter of
1996. The credit relates primarily to lease obligations that were exited or
subleased at dates or rates more favorable than those anticipated at the time
of the initial restructuring plan.
During 1996, the Company underwent significant changes to its operations,
including changes in senior management, product focus, and business unit
organization. During the first half of the year, the Company initiated and
completed the disposition of two software product lines, MARINER and
Z-MAIL-Registered Trademark-. Also during the first half of 1996, the Company
recorded operating losses of $18.3 million, and combined cash and short-term
investments had declined from $36.2 million at December 31, 1995 to $26.4
million at June 30, 1996. By the end of the second quarter, the Company
announced that it had appointed a new President and Chief Executive Officer,
Robert G. Gilbertson, and a new Executive Vice President of Operations &
Finance and Chief Financial Officer, Rudolph G. Morin. Shortly thereafter,
Doug Klein, a founder of the Company, was appointed to Senior Vice President &
Chief Technology Officer and Lorraine Hariton, the Vice President of Business
14
<PAGE>
Development, was added to the senior management team. In September 1996,
Cecil M. Dye was appointed Senior Vice President of Sales & Marketing. This
new senior management team initiated a "turnaround" program that included
recombining its Systems and Software business units, spending and hiring
controls, significant reorganization of the Research & Development and Sales
& Marketing functions and asset management initiatives. By the end of the
second half, profitable, cash-flow positive operations had been achieved. The
Company's ability to continue this trend is subject to various risks and
uncertainties, however, and there is no assurance that this trend toward
profitability will continue into the future. The above results
notwithstanding, there is no assurance that this trend toward profitability
will continue into the future (see below under "Future Performance and Risk
Factors").
In June 1996, the Company announced an agreement with International Business
Machines Corporation ("IBM") for the joint development of a network
application terminal for resale by IBM. In November 1997, the agreement (the
"IBM Agreement") was amended to include a renewal through December 31, 2000.
Under the IBM Agreement as amended, IBM agreed to fund a portion of the
Company's development efforts through the first quarter of 1998. The IBM
Agreement as amended further provides for IBM to purchase a substantial
portion of its requirements for such products from the Company during 1997
through December 31, 2000. In March 1997, IBM commenced shipping production
versions of such products. However, the volume of sales to IBM under the IBM
Agreement may be difficult to predict. Notwithstanding the foregoing
provisions, a material shortfall in IBM's orders from the quantity levels
anticipated by the Company for any period will have a material adverse effect
on the Company's operating results. See "Item 7. Management's Discussion and
Analysis of Financial Position and Results of Operations -- Future
Performance and Risk Factors -- Fluctuations in Operating Results."
During 1997 the Company continued to implement cost and hiring controls
initiated in the 1996 "turnaround" and was able to report four profitable
quarters, despite short-falls in orders related to the Company's "thin
client" systems. Assuming this trend will continue until the new Microsoft
Windows-based software and systems are in the final stages of development,
the Company anticipates lower revenues and a modest loss in the first half of
1998 and expects the ramp-up of orders to begin by the third quarter of 1998.
During the first quarter of 1998, the Company signed a 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 non-exclusive agreement,
the Company will develop a "reference platform design" that consists of
Pentium-based lean client hardware integrated with software technology from
both companies. Intel will supply the Company with Pentium microprocessors,
associated logic components and related software. The Company will create,
manufacture and market lean client systems and operating software.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of operations as a percentage of net revenues for the periods
indicated. Figures are rounded to the nearest whole percentage, and line
items presenting subtotal and total percentages may therefore differ, due to
rounding, from the sum of the percentages for each line item.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Hardware products and services 75% 79% 79%
Software licenses and services 25% 21% 21%
----- ----- -----
Total net revenues 100% 100% 100%
Cost of revenues:
Hardware products and services 53% 60% 59%
Software licenses and services 7% 6% 3%
----- ----- -----
Total cost of revenues 61% 67% 62%
----- ----- -----
Gross profit 39% 33% 38%
Operating expenses:
Research and development 11% 12% 9%
Marketing and selling 23% 27% 25%
General and administrative 5% 9% 6%
Charge (credit) for business restructuring -- (1)% 3%
Litigation settlement (0)% 1% --
----- ----- -----
Total operating expenses 38% 48% 43%
----- ----- -----
Operating income (loss) 1% (14)% (5)%
Non-operating income and gains, net 2% 7 % 1%
----- ----- -----
Income (loss) before income taxes 3% (7)% (4)%
Provision for income taxes (income tax benefit) 1% (3)% (2)%
Net income (loss) 2% (4)% (3)%
----- ----- -----
----- ----- -----
</TABLE>
As mentioned above under "Overview," the Company determined to recombine its
two former business units (i.e., "Systems" and "Software") into a single
operation in June 1996. Although the Company is now managed as one operating
entity, the Company is reporting hardware and software revenues
independently. Revenues, cost of revenues and gross margins relating to prior
operating periods have been conformed to the current presentation, and the
following discussions of net revenues and gross margins address the revised
presentation.
TOTAL NET REVENUES
Total net revenues for 1997 were $133.4 million, an increase of 11% from 1996
net revenues of $120.6 million. Net revenues for 1996 decreased by 13%
compared to 1995 net revenues of $139.3 million. International revenues were
34% of total net revenues for 1997, representing a slight increase from 33%
in 1996 and 1995. Sales to IBM accounted for 26% of revenues in 1997. No
single customer of the Company accounted for more than 10% of the Company's
net revenues during 1996 or 1995.
HARDWARE REVENUES
Hardware revenues consist primarily of revenues from the sale of thin client
products, related hardware, and to a lesser extent, fees for related service
activities. Hardware revenues were $100.6 million for 1997, an increase of 6%
compared to revenues
16
<PAGE>
of $95.0 million in 1996. Hardware revenues for 1996 decreased 13% compared
to revenues of $109.7 million in 1995. The increase in revenues in 1997
reflects the increased shipments related to the IBM Agreement, offset by
lower average selling prices ("ASPs"). The decline in revenues for 1996
was due to a decline in units shipped and a decline in the ASPs of the
Company's hardware products due to the Company's introduction of lower-priced
EXPLORA thin clients and pricing competition.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Current software products
that are generating revenue include WINCENTER-TM-, the Company's multi-user
WINDOWS NT application server software, PC-XWARE, the Company's thin client
software for PCs, and NCDWARE-Registered Trademark-, the Company's
proprietary thin client software. Through the first quarter of 1996, Software
revenues also included revenues from the development and licensing of the
Company's MARINER Internet connectivity product line (which was sold in the
first quarter of 1996), and the Z-MAIL product line (which was sold during
the second quarter of 1996). Revenues from software and related services were
$32.8 million for 1997, an increase of 28% compared to revenues of $25.6
million in 1996. The increase in 1997 software revenues compared to 1996
resulted from increased sales of WINCENTER and related support services.
Revenues from software and related services of $25.6 million for 1996
decreased by 13% compared to revenues of $29.6 million in 1995. The decrease
in 1996 software revenues when compared to 1995 software revenues was
primarily due to reductions in revenues of $3.9 million related to the
Company's former Z-MAIL product line, and $6.4 million related to the
Company's former MARINER product line. In addition, PC-XWARE revenues
declined by $6.0 million during a period in which its sales force was in
transition. These revenue declines were offset in part by higher WINCENTER
revenues.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on Hardware revenues were 29%, 23% and
25% for the years ended December 31, 1997, 1996 and 1995, respectively. The
increase in margin for 1997 relates to lower material costs, reflecting
declines in the cost of certain semiconductor and other components. In
addition, the Company benefited from certain reduced component prices related
to volume purchase discounts in association with the IBM Agreement during
1997 while no such purchasing benefits were realized in 1996. The Company
currently anticipates that the mix of hardware OEM revenues as a component of
total hardware revenues will continue to rise. In addition, the Company plans
to increase the mix of revenues generated through indirect channels. The
anticipated changes in the mix of revenues by sales channel are likely to
result in overall reduced gross margin percentages on hardware revenues in
future periods. The slight decline in margin in 1996 compared to 1995 is
primarily due to increased sales of lower-priced EXPLORA thin clients, which
generally carry lower margins, offset in part by comparatively lower sales
discounts and material costs. Sales discounts during 1996 declined when
compared to 1995 as a result of more stringent pricing controls, and material
costs declined primarily as a result of market declines in the cost of
certain semiconductor components. In 1996, the Company recorded a $3.0
million charge associated with the reduction of certain inventories to market
value. This compares to a $2.7 million charge to cost of revenues in 1995
associated with business restructuring activities described above under
"Overview." Exclusive of these charges, the gross margin percentages on
Hardware revenues would have been 27% for both 1996 and 1995.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on Software revenues were 70% for both
years ended December 31, 1997 and 1996, and 88% for the year ended December
31, 1995. The decline in 1996 when compared to 1995 was due primarily to a
higher mix of WINCENTER revenues in 1996, which carry a lower margin because
of higher third-party royalty costs, and reduced revenues of other software
products, including revenues associated with Z-MAIL and MARINER. Certain
technology used in the Company's products is licensed from third parties on a
royalty-bearing basis. Accordingly, royalties are now a significant component
of total software cost of sales for 1997 and 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $14.2 million, $14.9 million
and $13.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. R&D expenses decreased in 1997 compared to 1996 primarily due
to the absence of costs of $2.5 million related to the Z-MAIL and MARINER
product lines which were sold in the first half of 1996.
17
<PAGE>
Absent these costs, R&D expenses in 1997 increased 15% reflecting increased
investment in the area of thin client computing products. Total R&D expenses
increased in 1996 compared to 1995 due to additional spending related to thin
client computing products. R&D expenses in 1995 included $2.2 million related
to the Z-MAIL and MARINER product lines. As a percentage of net revenues, R&D
expenses, excluding Z-MAIL and MARINER costs were 11%, 10% and 8% for 1997,
1996 and 1995, respectively. The Company plans to increase its investment in
research and development in the area of thin client computing products
through 1998.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $30.5 million, $32.1 million and $34.1
million for the years ended December 31, 1997, 1996 and 1995, respectively.
The decreases in all comparable periods reflect increased efficiencies
related to the reconsolidation of the Company's remaining business units,
which commenced in June of 1996. As a percentage of net revenues, marketing
and selling expenses were 23%, 27% and 25% for 1997, 1996 and 1995,
respectively, resulting from the combined impact of lower net revenues in
1996 and decreased spending in both 1997 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $6.1 million, $10.3 million
and $8.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in 1997 when compared to 1996 primarily reflects
increased efficiencies related to the reconsolidation in 1996 as well as
continued cost controls related to personnel costs and outside service fees.
The increase in 1996 over 1995 was primarily related to both severance costs
associated with the elimination of certain positions within the Company and
increased personnel costs during early 1996 that resulted from the division
of the Company into two separate business units (Systems and Software). As
mentioned above under "Overview," in June of 1996, the Company determined to
recombine its remaining business units. As a percentage of net revenues, G&A
expenses were 5%, 9% and 6% for 1997, 1996 and 1995, respectively, reflecting
decreased spending in 1997 and the combined impact of increased spending and
lower net revenues in 1996.
BUSINESS RESTRUCTURING
During 1995, the Company created and began implementing a plan to restructure
the business in order to improve the Company's operating performance
potential. The plan included substantial modifications to the Company's
manufacturing processes, phasing out activities related to less profitable
products, a reduction in facilities, and a reduction in the number of
employees. During 1995, the Company recognized charges totaling $7.5 million
for the implementation of this plan. Included in these restructuring charges
were amounts related to the severance of personnel, phase-out of certain
products, and costs associated with the termination of lease obligations. In
1996, the Company substantially concluded such restructuring activities and
an amount of $1.1 million in related accruals was determined to be in excess
of amounts required. As a result, the Company recognized a $1.1 million
credit for business restructuring during 1996. The credit relates primarily
to lease obligations that were exited or subleased at dates or rates more
favorable than those anticipated at the time of the initial restructuring
plan. See "Business Restructuring" in Note 4 of the "Notes to Consolidated
Financial Statements" contained herein.
LITIGATION SETTLEMENT
The $1.1 million charge for litigation settlement that was recognized in 1996
represents the Company's voluntary contribution toward a total of $12 million
in costs to settle all pending securities litigation. The settlement
agreement was executed by all parties in 1997, and the Company anticipates
that no further charges related to such settlement will be incurred in the
future. A credit of $147,000 representing the excess of the $1.1 million
accrual was recognized in 1997 when all expenses related to the litigation
settlement were determined.
INTEREST INCOME, NET
Interest income, net of interest expense, was $1.9 million, $1.6 million and
$1.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increases were primarily due to higher average balances in
interest-earning accounts in addition to lower interest expense related to
declining capital lease obligations. This was partially offset by declining
interest rates across the periods presented.
18
<PAGE>
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income in 1997 reflects the receipt of insurance proceeds for certain
legal expenses incurred in association with the securities litigation costs.
No significant other income was produced during 1996 or 1995.
GAIN ON SALE OF PRODUCT LINES
The gain on sale of product lines in 1996 represents the net gain on the sale
of the MARINER product line in February 1996, offset by a slight loss on the
sale of the Z-MAIL product line in June 1996. (See "Overview.")
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax provision of $1.2 million in 1997
compared to income tax benefit of $3.5 million and $2.2 million in 1996 and
1995, respectively. At December 31, 1997, the Company's gross deferred tax
assets are approximately $6.0 million. 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 deferred tax assets recorded and,
accordingly, has established no asset valuation allowances. See "Note 6.
Income Taxes -- Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
Total assets of $86.5 million at December 31, 1997 increased from $85.7
million at December 31, 1996. The change in total assets reflects increases
in inventories and accounts receivable of $5.6 million and $3.6 million,
respectively, partially offset by decreases in cash and short-term
investments, income tax assets and other current assets of $4.2 million, $3.5
million and $0.8 million, respectively. Total liabilities as of December 31,
1997 increased by $7.7 million, or 42%, from December 31, 1996. The increase
was primarily related to increased accounts payable balances associated with
increased inventory receipts in the last month of the year.
CAPITAL REQUIREMENTS
Capital spending requirements for 1998 are estimated at approximately $3.3
million, and at December 31, 1997, the Company had commitments for capital
expenditures of approximately $400,000. These commitments are primarily
related to manufacturing tooling and facilities.
LIQUIDITY
As of December 31, 1997, the Company had combined cash and equivalents and
short-term investments totaling $31.5 million, with no significant debt.
Cash provided by operations was $9.8 million in 1997 compared to cash used in
operations of $9.2 million in 1996 and cash provided by operations of $11.2
million in 1995. Cash provided by operations in 1997 primarily reflects a net
income of $2.7 million, depreciation of $3.3 million, increases in accounts
payable of $6.8 million and decreases in refundable and deferred income taxes
of $3.1 million partially offset by increases in inventories and accounts
receivable of $5.6 million and $3.6 million, respectively. Cash used in
operations in 1996 primarily reflects a net loss of $5.2 million, the gain on
sale of product lines of $6.9 million, decreases in accounts payable of $9.5
million and increases in refundable and deferred income taxes of $3.2 million
partially offset by depreciation of $4.6 million and decreases in accounts
receivable and inventories of $7.0 million and $4.5 million, respectively.
Cash provided by operations in 1995 primarily reflects decreases in
inventories and accounts receivable of $9.2 million and $3.2 million,
respectively, depreciation of $4.5 million and increases in income taxes
payable and deferred revenue of $2.9 million and $2.3 million, respectively,
partially offset by a net loss of $4.0 million, a decrease in accounts
payable of $3.7 million and an increase in refundable and deferred income
taxes of $2.2 million. Cash flows used in financing activities in 1997
reflects repurchases of $12.2 million of 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.
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
computing products and related software. During the past several years, the
Company and other manufacturers of network computing systems and products
have experienced intense competition from alternative desktop computing
products, particularly personal computers, which has slowed the growth and
development of the network computing market. Until recently, the absence of
X protocol support from Microsoft, combined with the proliferation of
off-the-shelf Windows-based application software, constituted an obstacle to
the expansion of the network computing model into Windows-based environments.
The introduction of the Company's WINCENTER multi-user WINDOWS NT
application server software and new, lower-priced thin client computing
products have allowed the Company to offer thin client computing systems
that provide users with access to Windows applications, although sales of
these new products have been limited to date. The Company's future success
will depend in substantial part upon increased acceptance of the 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.
19
<PAGE>
COMPETITION
The desktop computer and information access markets are characterized by
rapidly changing technology and evolving industry standards. The Company
experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the 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.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied significantly, particularly on a
quarterly basis, as a result of a number of factors, including general
economic conditions affecting industry demand for computer products, the
timing and market acceptance of new product introductions by the Company and
its competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to
competitive factors, and the availability and pricing of key components, such
as DRAMs, video monitors, integrated circuits and electronic sub-assemblies,
some of which require substantial order lead times. The Company's operating
results may fluctuate in the future as a result of these and other factors,
including the Company's success in developing and introducing new products,
its product and customer mix, licensing costs, the level of competition which
it experiences and its ability to develop and maintain strategic business
alliances.
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the
execution of the IBM Agreement (see "Overview"). The production cycle of
related product requires the Company to rely on IBM to provide accurate
product requirement forecasts, which have in the past, and will in the
future, be subject to changes by IBM. Should the Company commence production
of related product based on provided forecasts that are subsequently reduced,
the Company bears the risk of increased levels of unsold inventories. Should
the expected business volumes associated with the IBM Agreement not occur, or
occur in volumes below management's expectations, there would be a material,
adverse effect on the Company's operating results.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of 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. In the past, the Company has
experienced reduced orders during the first and third quarters due to buying
patterns common in the computer industry. In addition, sales in Europe have
been adversely affected in the third calendar quarter, when many European
customers reduce their business activities.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS
The markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The Company's future results will depend to a
considerable extent on its ability to continuously develop, introduce and
deliver in quantity new hardware and software products that offer its
customers enhanced performance at competitive prices. The development and
introduction of new products is a complex and uncertain process requiring
substantial financial resources and high levels of innovation, accurate
anticipation of technological and market trends and the successful and timely
completion of product development. Once a hardware product is developed, the
Company must rapidly bring it into volume production, a process that requires
accurate forecasting of customer requirements in order to achieve acceptable
manufacturing costs. The introduction of new or enhanced products also
requires the Company to manage the transition from older, displaced products
in order to minimize disruption to customer ordering patterns, avoid
excessive levels of older product inventories and 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
20
<PAGE>
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.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company relies substantially on independent distributors and resellers,
particularly in European markets, for the marketing and distribution of its
products, particularly its software products. During 1995, the Company
consolidated its Software sales operations by creating a single organization
devoted to the sale of the Company's PC connectivity and messaging software
and re-oriented its software sales strategy toward the increased use of
distributors, VARs and other resellers. In early 1996, the Company
experienced significant returns of its software products from its
distributors. There can be no assurance that the Company will not experience
some level of returns in the future. In addition, there can be no assurance
that the Company's distributors and resellers will continue their current
relationships with the Company or that they will not give higher priority to
the sale of other products, which could include products of the Company's
competitors. A reduction in sales effort or discontinuance of sales of the
Company's products by its distributors and resellers could lead to reduced
sales and could adversely affect the Company's operating results. In
addition, there can be no assurance as to the continued viability or the
financial stability of the Company's distributors and resellers, the
Company's ability to retain its existing distributors and resellers or the
Company's ability to add distributors and resellers in the future.
RELIANCE ON INDEPENDENT CONTRACTORS
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. Although the Company is
currently planning to develop alternative locations in different countries
from which to obtain sub-assemblies, there is no assurance that the Company
will be successful in this pursuit. Disruptions in the provision of
components by the Company's other suppliers, or other events that would
require the Company to seek alternate sources of supply, could also lead to
supply constraints or delays in delivery of the Company's products and
adversely affect its operating results. The operations of certain of the
Company's foreign suppliers were briefly disrupted during 1992 due to
political instability in Thailand.
INTERNATIONAL SALES
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those
markets. In the past, a significant portion of international revenues have
been derived from sales to a customer in the United Kingdom that have been
denominated in pound sterling, and sales denominated in foreign currencies
may increase in the future. These sales are subject to exchange rate
fluctuations which could affect the Company's operating results negatively or
positively, depending on the value of the U.S. dollar against the other
currency. Where the Company believes foreign currency-denominated sales
could pose significant exposure to exchange rate fluctuations, the Company
acquires forward exchange contracts in an effort to reduce such exposure.
International sales and operations may also be subject to risks such as the
imposition of governmental controls, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the
laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have an
adverse effect on the Company's future international sales and, consequently,
on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees, 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,
21
<PAGE>
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors
or customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general
conditions in the computer industry, developments in the financial markets
and other factors. In particular, shortfalls in the Company's quarterly
operating results from historical levels or from levels forecast by
securities analysts could have an adverse effect on the trading price of the
common stock. The Company may not be able to quantify such a quarterly
shortfall until the end of the quarter, which could result in an immediate
and adverse effect on the common stock price. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies
and which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Company's common stock.
RISKS RELATED TO YEAR 2000 PROBLEM
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." The Company has examined all of its
critical software and operational applications as well as the software
products it has sold and found no potential problems related to the Year 2000
issue. However, the Company could experience reduced revenues resulting from
other Companys' information systems budgets being allocated to solving Year
2000 issues, thus reducing amounts available to purchase the Company's
products. In addition, the Company could be exposed to a potential adverse
impact resulting from the failure of financial institutions and other third
parties to adequately address the Year 2000 problem. The Company intends to
devote necessary resources to identify and resolve Year 2000 issues that may
exist with third parties. However, the Company cannot estimate the cost of
this effort at this time, 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.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 24
Consolidated Balance Sheets as of December 31, 1997 and 1996 25
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 26
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 27
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
Supplementary Data: Quarterly Financial Data (Unaudited) 38
</TABLE>
23
<PAGE>
Independent Auditors' Report
The Board of Directors
Network Computing Devices, Inc.
We have audited the accompanying consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Network Computing Devices, Inc. and subsidiaries as of December 31, 1997
and 1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Mountain View, California
January 27, 1998, except as to
Note 10 which is
as of March 16, 1998
24
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 21,240 $ 23,832
Short-term investments 10,240 11,839
Accounts receivable, net of allowances of $2,606 and
$2,603 as of December 31, 1997 and 1996, respectively 25,148 21,549
Inventories 15,412 9,776
Refundable and deferred income tax assets 4,763 8,287
Other current assets 2,843 3,652
--------- ---------
Total current assets 79,646 78,935
Property and equipment, net 4,424 4,895
Other assets 2,444 1,863
--------- ---------
Total assets $ 86,514 $ 85,693
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 11,211 $ 4,383
Accrued expenses 8,955 8,977
Deferred revenue 4,918 3,486
Income taxes payable 597 360
Current portion of capital lease obligations 154 748
--------- ---------
Total current liabilities 25,835 17,954
Long-term portion of capital lease obligations 160 314
Commitments and contingencies
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, no par value: 30,000,000 shares
authorized; 16,283,772 and 17,037,369 shares issued
and outstanding as of December 31, 1997 and 1996,
respectively 58,630 68,217
Retained earnings (accumulated deficit) 1,889 (792)
--------- ---------
Total shareholders' equity 60,519 67,425
--------- ---------
Total liabilities and shareholders' equity $ 86,514 $ 85,693
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
25
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Net revenues:
Hardware products and services $ 100,555 $ 94,973 $ 109,723
Software licenses and services 32,845 25,635 29,605
---------- --------- ----------
Total net revenues 133,400 120,608 139,328
Cost of revenues:
Hardware products and services 71,118 72,715 82,778
Software licenses and services 9,957 7,769 3,607
---------- --------- ---------
Total cost of revenues 81,075 80,484 86,385
---------- --------- ---------
Gross profit 52,325 40,124 52,943
Operating expenses:
Research and development 14,179 14,930 13,119
Marketing and selling 30,455 32,117 34,147
General and administrative 6,102 10,270 8,502
Charge (credit) for business restructuring - (1,052) 4,832
Litigation settlement (credit) (147) 1,100 -
---------- --------- ---------
Total operating expenses 50,589 57,365 60,600
---------- --------- ---------
Operating income (loss) 1,736 (17,241) (7,657)
Interest income 1,946 1,656 1,557
Interest expense (51) (68) (198)
Other income, net 200 - 93
Gain on sale of product lines - 6,932 -
---------- --------- ---------
Income (loss) before income taxes 3,831 (8,721) (6,205)
Provision for income taxes (income tax benefit) 1,150 (3,489) (2,176)
---------- --------- ---------
Net income (loss) $ 2,681 $ (5,232) $ (4,029)
---------- --------- ---------
---------- --------- ---------
Basic earnings per share:
Net income (loss) per share $ 0.16 $ (0.32) $ (0.25)
---------- --------- ---------
---------- --------- ---------
Shares used in per share computations 16,725 16,579 15,832
---------- --------- ---------
---------- --------- ---------
Diluted earnings per share:
Net income (loss) per share $ 0.15 $ (0.32) $ (0.25)
---------- --------- ---------
---------- --------- ---------
Shares used in per share computations 18,313 16,579 15,832
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
26
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Stock Net Unrealized Earnings Total
---------------- Gain (Loss) on (Accumulated Shareholders'
Shares Amount Securities Deficit) Equity
------ ------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1994 15,637 $63,420 $ - $8,469 $71,889
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 1,053 4,150 - - 4,150
Repurchase of common stock (571) (4,027) - - (4,027)
Net unrealized gain on securities - - 31 - 31
Net loss - - - (4,029) (4,029)
------ ------- -------------- ------ -------
Balances as of December 31, 1995 16,119 63,543 31 4,440 68,014
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 928 4,763 - - 4,763
Repurchase of common stock (10) (89) - - (89)
Net unrealized loss on securities - - (31) - (31)
Net loss - - - (5,232) (5,232)
------ ------- -------------- ------ -------
Balances as of December 31, 1996 17,037 68,217 - (792) 67,425
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 438 2,634 - - 2,634
Repurchase of common stock (1,191) (12,221) - - (12,221)
Net income - - - 2,681 2,681
------ ------- -------------- ------ -------
Balances as of December 31, 1997 16,284 $58,630 $ - $1,889 $60,519
------ ------- -------------- ------ -------
------ ------- -------------- ------ -------
</TABLE>
See accompanying notes.
27
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
--------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating actitivites:
Net income (loss) $ 2,681 $ (5,232) $ (4,029)
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of product lines - (6,932) -
Non-cash restructuring charges (credit) - (1,052) 2,474
Depreciation and amortization 3,287 4,559 4,505
Changes in:
Accounts receivable, net (3,599) 7,042 3,152
Inventories (5,636) 4,455 9,224
Refundable and deferred income taxes 3,130 (3,166) (2,227)
Other current assets and other 809 (378) (1,450)
Accounts payable 6,828 (9,510) (3,743)
Income taxes payable 897 (1,446) 2,856
Accrued expenses (22) 1,856 (1,900)
Deferred revenue 1,432 578 2,325
--------- ---------- -----------
Net cash provided by (used in) operating activites 9,807 (9,226) 11,187
--------- ---------- -----------
Cash flows from investing activities:
Purchases of short-term investments (12,649) (3,684) (192,090)
Sales and maturities of short-term investments 14,248 14,600 193,148
Changes in other assets (187) (58) (200)
Capitalization of software costs - - (436)
Net proceeds from sale of product lines - 8,625 -
Property and equipment purchases, net (2,816) (2,273) (3,217)
--------- ---------- -----------
Net cash provided by (used in) investing activities (1,404) 17,210 (2,795)
--------- ---------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (748) (1,175) (1,535)
Repurchases of common stock (12,221) (89) (4,027)
Proceeds from issuance of stock, net 1,974 3,748 3,127
--------- ---------- -----------
Net cash provided by (used in) financing activities (10,995) 2,484 (2,435)
--------- ---------- -----------
Increase in cash and cash equivalents (2,592) 10,468 5,957
Cash and cash equivalents:
Beginning of year 23,832 13,364 7,407
--------- ---------- -----------
End of year $ 21,240 $ 23,832 $ 13,364
--------- ---------- -----------
--------- ---------- -----------
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ - $ - $ 929
--------- ---------- -----------
--------- ---------- -----------
Income tax benefit from employee stock transactions $ 660 $ 860 $ 1,023
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
See accompanying notes.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. ("the Company") was
incorporated on February 17, 1988. The Company provides thin client hardware
and software that delivers high-performance, easy-to-manage, simultaneous
access to any application from thin client, UNIX and PC desktops. The
Company's product lines include the NCD EXPLORA and family of thin clients,
NCD WINCENTER PRO multi-user WINDOWS NT application server software, and
NCD PC-XWARE software that delivers PC access to UNIX and multi-user WINDOWS
NT PCs.
CONSOLIDATION The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Company has
invested in a joint venture in Japan (Nihon NCD), which is accounted for at
cost. The functional currency for the Company and its subsidiaries is the U.S.
dollar. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a maturity date of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS The Company has classified all of its short-term
investments as "available-for-sale" securities. The carrying value of such
securities is adjusted to fair market value, with unrealized gains and
losses, net of deferred taxes, being excluded from earnings and reported as a
separate component of shareholders' equity. Cost is determined by specific
identification for purposes of computing realized gains or losses.
INVENTORIES Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis, or market (net
realizable value).
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment
under capital leases is stated at the lower of fair value or the present value
of the minimum lease payments at the inception of the lease. Depreciation is
computed using the straight-line method. Useful lives of three to five years
are used for equipment and furniture; demonstration equipment is depreciated
over an 18-month period. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the lease term or the useful lives of
the respective assets.
REVENUE RECOGNITION Revenues on the sale of hardware products and from the
licensing of software products are generally recognized upon shipment, provided
that no significant obligations remain and collection of the resulting
receivable is deemed probable. Product warranty costs and an allowance for
sales returns are accrued at the time the related revenues are recognized.
Service contract revenues are recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to
engineering expense when incurred. Costs incurred in the development of new
software products and enhancements to existing software products are also
expensed as incurred until the technological feasibility of the product has
been established. After technological feasibility has been established, any
additional costs are capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86. Capitalized software technology is
amortized to cost of goods sold over eighteen months to three years, based on
the expected life of the product.
INCOME TAXES Under the asset and liability method of SFAS No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
USE OF ESTIMATES Management of the Company has made a number of estimates and
assumptions relating to the valuation and reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
29
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's
cash and cash equivalents, short-term investments, accounts receivable, and
accounts payable approximate their respective fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a material
impact on the Company's consolidated financial position or results 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 (1,588,000 shares in 1997) outstanding, when dilutive, using the
treasury stock method. In 1996 and 1995 there were 3,236,208 and 2,784,154
options outstanding, respectively, 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
those years. In 1998, the Company issued 750,000 shares that will dilute
basic EPS in the future.
STOCK-BASED COMPENSATION The Company accounts for its employee stock-based
compensation plans using the intrinsic value method. As such, compensation
expense is recorded on the date of grant if the current market price of the
underlying stock exceeded the exercise price.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components in the
consolidated financial statements. It does not, however, require a specific
format for the statement, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining the preferred format.
This statement is effective for fiscal years beginning after December 15,
1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to stockholders. SFAS No. 131 is effective for financial
statements for periods beginning after December 31, 1997. The Company has not
yet determined whether it has any separately reportable business segments.
RECLASSIFICATION Certain items in the accompanying 1995 consolidated
financial statements have been reclassified in order to conform to the
current year's presentation.
NOTE 2. SHORT-TERM INVESTMENTS
Short-term investments consisted of the following as of December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Corporate debt securities $ 7,491 $ -- $ -- $ 7,491
Commercial paper 981 -- -- 981
Certificates of deposit 1,768 -- -- 1,768
------- ---------- ---------- -------
$10,240 $ -- $ -- $10,240
------- ---------- ---------- -------
------- ---------- ---------- -------
</TABLE>
30
<PAGE>
The maturities of available-for-sale securities as of December 31, 1997 were
as follows (in thousands):
<TABLE>
<CAPTION>
Within One to
One Year Two Years
-------- ---------
<S> <C> <C>
Corporate debt securities $5,478 $2,013
Commercial paper 981 --
Certificates of deposit 1,768 --
------ ------
$8,227 $2,013
------ ------
------ ------
</TABLE>
Short-term investments consisted of the following as of December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Corporate debt securities $ 5,355 $ -- $ -- $ 5,355
Commercial paper 4,808 -- -- 4,808
U.S. Treasury Notes 1,676 -- -- 1,676
------- ---------- ---------- -------
$11,839 $ -- $ -- $11,839
------- ---------- ---------- -------
------- ---------- ---------- -------
</TABLE>
NOTE 3. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Inventories as of December 31 consisted of (in thousands):
Purchased components and sub-assemblies $13,178 $8,396
Work in process 545 240
Finished goods 1,689 1,140
------- ------
$15,412 $9,776
------- ------
------- ------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Property and equipment as of December 31 consisted of (in thousands):
Office equipment $13,077 $11,700
Machinery and equipment 6,108 4,936
Demonstration equipment 3,708 3,756
Furniture and fixtures 2,068 2,064
Leasehold improvements 2,003 1,778
------- -------
26,964 24,234
Less accumulated depreciation
and amortization 22,540 19,339
------- -------
$ 4,424 $ 4,895
------- -------
------- -------
</TABLE>
Included in property and equipment is approximately $870,000 and $1,840,000 of
equipment under capital leases as of December 31, 1997 and 1996, respectively.
Accumulated amortization related to this equipment is approximately $616,000
and $1,674,000 as of December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued expenses as of December 31 consisted of (in thousands):
Payroll-related costs $2,882 $3,472
Royalties 2,061 1,887
Warranty 631 495
Other accrued expenses 3,381 3,123
------ ------
$8,955 $8,977
------ ------
------ ------
</TABLE>
31
<PAGE>
Income taxes paid were $262,000, $223,000 and $204,000 for 1997, 1996 and
1995, respectively. Interest paid was $51,000, $119,000 and $46,000 for 1997,
1996 and 1995, respectively.
NOTE 4. BUSINESS RESTRUCTURING
In 1995, the Company began implementing a strategic restructuring plan. The
restructuring costs were accrued in 1995. Such costs have been segregated
into two fundamentally different classifications within the consolidated
statements of operations for the year ended December 31, 1995: cost of
hardware revenues, and operating expenses. Included in cost of hardware
revenues is $2.7 million related to products in inventory that are being
phased out as part of the business restructuring. Included in 1995 operating
expenses under the caption, "Charge (credit) for business restructuring" is
$4.8 million related to severance of employees, the write-down of assets
impaired by the restructuring plan, and exit costs for leased facility
obligations.
In 1996, the Company determined that the restructuring plan was substantially
complete, and an operating credit of $1.1 million was recorded during that
period, as shown in the Statements of Operations under the caption "Charge
(credit) for business restructuring."
A description of the types and amounts (in thousands) of accruals made for
restructuring costs in 1995, and the cumulative amounts charged against such
accruals, is presented below.
<TABLE>
<CAPTION>
Initial Re-classes December 31,
Amounts Asset Cash to Other Credit 1996
Accrued Write-offs Payments Accruals Recognized Balance
------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Reserve for the write-down of
phase-out inventories $2,706 $(2,706) $ -- $ -- $ -- $ --
Employee termination benefits 1,580 -- (1,327) (171) (82) --
Exiting facilities-related
obligations 2,256 -- (1,341) (126) (789) --
Asset impairment & other 996 (815) -- -- (181) --
------ ------- ------- --------- --------- ---------
Total $7,538 $(3,521) $(2,668) $ (297) $ (1,052) $ --
------ ------- ------- --------- --------- ---------
------ ------- ------- --------- --------- ---------
</TABLE>
32
<PAGE>
NOTE 5. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM In October 1994, the Company's Board of Directors
adopted a program to repurchase up to 1,500,000 shares of the Company's
common stock during the twelve-month period ending October 31, 1995. At
October 31, 1995, the Company had repurchased 790,000 shares for a total cost
of $4,973,000 under this 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 ending 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. Repurchases of 191,400 shares were made
in 1997 under the second program at prices ranging from $7.19 to $8.75 at a
total aggregate price of $1.5 million. Total repurchases of 1,191,400 shares
were made in 1997 at prices ranging from $7.19 to $12.00 per share for a
total purchase price of $12.2 million.
STOCK PURCHASE PLAN In 1992, the Company established the 1992 Employee Stock
Purchase Plan and has reserved 1,250,000 shares of common stock for issuance
thereunder. The plan permits eligible employees to purchase common stock
through payroll deductions of up to 10 percent of their base earnings. The
purchase price of the stock is equal to the lesser of 85% of the fair market
value of such shares at the beginning of each six-month offering period (or
the commencement of the employee's participation, if later) or the end of
such offering period. As of December 31, 1997, 1,116,436 shares have been
issued under this plan, of which 211,280 were issued in 1997.
The per share weighted-average fair value of employee stock purchases during
1997, 1996 and 1995 was $2.77, $2.18 and $2.82, respectively, on the date of
grant using the Black-Scholes model with the following weighted-average
assumptions: 1997 -dividend yield of 0%, expected volatility of 84%,
risk-free interest rate of between 5.22% and 5.85%, and an expected life of 1
year; 1996 - dividend yield of 0%, expected volatility of 77%, risk-free
interest rate of between 5.0% and 5.74%, and an expected life of 1 year; 1995
- - dividend yield of 0%, expected volatility of 73%, risk-free interest rate
of between 5.43% and 5.92%, and an expected life of 1 year.
STOCK OPTION PLANS As of December 31, 1997, the Company had reserved
5,605,850 shares and 250,000 shares of common stock for issuance under its
1989 Stock Option Plan and the 1994 Outside Directors' Stock Option Plan,
respectively ("the Plans"). Under the 1989 Stock Option Plan, options are
granted to employees, officers, directors and consultants to purchase shares
of the Company's common stock at not less than the fair market value of
common stock at the grant date (for incentive stock options) or 85% of the
fair market value of such common stock (for nonstatutory stock options).
Options generally vest and become exercisable to the extent of 25% one year
from grant date with the remainder vesting ratably over the 36-month period
thereafter. Prior to August 1994, the options generally expired five years
from grant date. Since August 1994, the options expire ten years from grant
date. Under the 1994 Outside Directors' Stock Option Plan, options are
granted to outside directors to purchase shares of the Company's common stock
at not less than the fair market value of common stock at the grant date.
Options vest and become exercisable to the extent of 25% on the first
anniversary of the grant date with the remainder vesting 25% on each of the
following three anniversary dates. As of December 31, 1997, 1,747,546 options
were exercisable under the Plans.
The per share weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $6.37, $2.39 and $3.41, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997 - dividend yield of 0%, expected
volatility of 84%, risk-free interest rate of between 5.71% and 6.75%, and an
expected life of
33
<PAGE>
between 3 and 5 years; 1996 - dividend yield of 0%, expected volatility of
77%, risk-free interest rate of between 5.27% and 6.65%, and an expected life
of between 3 and 5.25 years; 1995 - dividend yield of 0%, expected volatility
of 73%, risk-free interest rate of between 5.25% and 7.89%, and an expected
life of between 2.5 and 9 years.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its Stock Option and Stock Purchase Plans and, accordingly, no
compensation cost has been recognized for its stock plans in the accompanying
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant dates for its stock plans under
SFAS No. 123, the Company's net income (loss) and income (loss) per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported $2,681 $(5,232) $(4,029)
Pro forma (554) (7,222) (5,045)
Basic income (loss) per share:
As reported $ 0.16 $ (0.32) $ (0.25)
Pro forma (0.03) (0.44) (0.32)
Diluted income (loss) per share:
As reported $ 0.15 $ (0.32) $ (0.25)
Pro forma (0.03) (0.44) (0.32)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
does not apply to awards prior to 1995, and additional awards in future years
are anticipated.
In November 1997, upon approval by the Board of Directors, the Company
repriced 316,120 options originally issued at prices ranging from $11.13 to
$14.75. The options were repriced at $8.50, the then current market value of
the Company's stock. The 1997 cancellations and grants in the summary below
and pro forma amounts above include the 316,120 options.
A summary of option transactions under the Plans follows:
<TABLE>
<CAPTION>
Weighted-
Options Average
Available Options Exercise
For Grant Outstanding Price
----------- ----------- ---------
<S> <C> <C> <C>
Balances as of December 31, 1994 1,006,668 2,747,626 $4.15
Options authorized 200,000 -- --
Options granted (1,295,000) 1,295,000 5.16
Options forfeited or expired 565,194 (565,194) 5.01
Options exercised -- (693,278) 3.27
----------- ----------- -----
Balances as of December 31, 1995 476,862 2,784,154 4.66
Options authorized 1,265,000 -- --
Options granted (2,339,570) 2,339,570 3.78
Options forfeited or expired 1,170,090 (1,170,090) 4.55
Options exercised -- (717,426) 3.95
----------- ----------- -----
Balances as of December 31, 1996 572,382 3,236,208 $4.23
Options authorized 250,000 -- --
Options granted (1,207,175) 1,207,175 9.85
Options forfeited or expired 619,574 (619,574) 9.67
Options exercised -- (226,523) 4.18
----------- ----------- -----
Balances as of December 31, 1997 234,781 3,597,286 $5.18
----------- ----------- -----
----------- ----------- -----
</TABLE>
34
<PAGE>
The following table summarizes information about options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- -----------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Life Price Number Price
- ----------- --------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$3.50 to 3.81 1,614,556 8.43 $ 3.50 873,999 $ 3.50
3.88 659,072 7.40 3.88 518,285 3.88
4.00 to 7.25 617,136 8.31 6.49 310,129 6.58
7.38 to 9.88 643,882 9.48 8.70 30,183 8.51
11.38 to 17.75 62,640 7.69 12.85 14,950 14.51
--------- ---- ----- --------- ------
$3.50 to 17.75 3,597,286 8.40 $5.18 1,747,546 $ 4.34
--------- ---------
--------- ---------
</TABLE>
NOTE 6. INCOME TAXES
The components of the Company's provision for income taxes as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Current
Federal $ 582 $(4,210) $ (972)
State and other 312 301 --
------ ------- -------
Total current 894 (3,909) (972)
------ ------- -------
Deferred
Federal (355) (440) (2,036)
State and other (49) -- (191)
------ ------- -------
Total deferred (404) (440) (2,227)
------ ------- -------
Charge in lieu of income taxes associated with
the exercise of stock options 660 860 1,023
------ ------- -------
$1,150 $(3,489) $(2,176)
------ ------- -------
------ ------- -------
</TABLE>
Total income tax expense (benefit) differs from the expected tax expense
(computed by applying the U.S. federal income tax rate of 34% to loss before
income taxes) as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate $1,303 $(2,967) $(2,110)
State income taxes, net of federal benefit 30 24 --
Tax exempt investment income (53) (364) (136)
Research and experimental credit (63) -- --
Other (67) (182) 70
------ ------- -------
$1,150 $(3,489) $(2,176)
------ ------- -------
------ ------- -------
</TABLE>
35
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net deferred tax assets:
Accruals, allowances and reserves $4,914 $5,552
Property and equipment, principally due to differences
in depreciation and capitalized leases 1,035 792
------ ------
Total gross deferred tax assets 5,949 6,344
Less valuation allowance -- --
------ ------
Net deferred tax assets 5,949 6,344
------ ------
Net deferred tax liabilities (151) (142)
------ ------
$5,798 $6,202
------ ------
------ ------
</TABLE>
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
deferred tax assets recorded and, accordingly, has established no asset
valuation allowances.
NOTE 7. CUSTOMERS AND CREDIT CONCENTRATIONS
Sales to IBM accounted for 26% of net revenues for the year ended December
31, 1997. No sales to any one customer accounted for greater than 10% of net
revenues for the years ended December 31, 1996 and 1995.
Export sales to the Company's international customers outside North America,
primarily Europe, comprised approximately 34%, 33% and 33% of net revenues
for the years ended December 31, 1997, 1996 and 1995, respectively.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term
investments and trade receivables. The Company places its cash equivalents
and short-term investments with high-credit qualified financial institutions
and, by policy, limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base and their dispersion across many different industries and
geographies.
The identifiable assets, operating income, and net income of the Company's
foreign subsidiaries are not significant to the Company's consolidated
financial statements.
NOTE 8. SALE OF PRODUCT LINES
In February 1996, the Company sold its MARINER product line to FTP Software
("FTP") for $9.8 million. The Company paid FTP a one-time license fee of $2.5
million for the right to incorporate MARINER technology into future versions
of the Company's hardware and software products. The net gain recognized on
this transaction was $7.0 million.
In June 1996, the Company sold its Z-MAIL product line to NetManage, Inc. for
a total sales price of $1.3 million. The net loss recognized on this
transaction was $27,000.
36
<PAGE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases its principal facilities under noncancellable operating
lease agreements that expire through 2003. The Company also leases office
facilities in several locations in the United States, and one location each
in Australia, Canada, France, Germany, Japan, Sweden and the United Kingdom,
which are used as sales offices. Rent expense was approximately $2,552,000,
$2,832,000 and $3,083,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
The Company also leases certain equipment under capital leases. As of December
31, 1996, minimum lease payments under all noncancellable lease agreements were
as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year Ending December 31,
1998 $ 160 $2,943
1999 93 2,511
2000 69 2,053
2001 -- 1,017
Thereafter -- 793
----- ------
Total minimum lease payments 322 $9,317
------
------
Less amounts representing interest 8
-----
Present value of minimum lease payments 314
Less current portion 154
-----
Long-term capital lease obligations $ 160
-----
-----
</TABLE>
The above future operating lease payments are anticipated to be offset by the
following sublease contract income:
<TABLE>
<CAPTION>
<S> <C>
1998 $803
1999 821
2000 665
2001 288
------
Total sublease income $2,577
------
------
</TABLE>
NOTE 10. SUBSEQUENT EVENT
During the first quarter of 1998, the Company signed a 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 non-exclusive agreement,
the Company will develop a "reference platform design" that consists of
Pentium-based lean client hardware integrated with software technology from
both companies. Intel will supply the Company with Pentium microprocessors,
associated logic components and related software. The Company will create,
manufacture and market lean client systems and operating software. In
addition, Intel purchased, subject to registration, 750,000 shares of the
Company's common stock.
37
<PAGE>
QUARTERLY FINANCIAL DATA
(Unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- ------- -------- -------
1997
- ----
<S> <C> <C> <C> <C>
Hardware products and services $22, 927 $26,889 $26,532 $24,208
Software licenses and services 8,173 7,473 8,114 9,120
-------- ------- ------- -------
Total net revenues 31,064 34,362 34,646 33,328
Gross profit 13,003 14,045 12,303 12,974
Operating income (loss) 753 612 (354) 725
Income before income taxes 1,421 1,161 81 1,168
Net income 852 697 51 1,081
Net income per share:
Basic 0.05 0.04 0.00 0.07
Diluted 0.05 0.04 0.00 0.06
Shares used in per share computations:
Basic 17,089 17,121 16,355 16,345
Diluted 18,889 18,820 17,848 17,625
1996
- ----
Hardware products and services $24,907 $22,193 $22,642 $25,231
Software licenses and services 5,532 7,135 5,309 7,659
-------- ------- ------- -------
Total net revenues 30,439 29,328 27,951 32,890
Gross margin 8,339 6,526 11,297 13,962
Operating income (loss) (7,847) (10,422) (310) 1,338
Income (loss) before income taxes (449) (10,064) 33 1,759
Net income (loss) (260) (6,047) 20 1,055
Net income (loss) per share:
Basic (0.02) (0.37) 0.00 0.06
Diluted (0.02) (0.37) 0.00 0.06
Shares used in per share computations:
Basic 16,260 16,504 16,615 16,933
Diluted 16,260 16,504 17,122 18,404
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
39
<PAGE>
PART III
Certain information required by Part III is omitted from this report because
the Registrant will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for
its annual meeting of shareholders to be held June 3, 1998, and the information
included therein is incorporated herein by reference to the extent detailed
below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors of the Registrant is incorporated by
reference to the information under the caption "Election of Directors -
Nominees" in the Registrant's Proxy Statement.
Information with respect to executive officers of the Registrant is set forth
in "Item 1. Business - Executive Officers of the Company" in this Annual
Report on Form 10-K.
Information required by Item 405 of Regulation S-K is incorporated by reference
to the information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
information under the captions "Executive Compensation - Summary of Cash and
Certain Other Compensation," "Executive Compensation - Stock Option Grants,"
"Executive Compensation - Option Exercises and Year-End Holdings," "Executive
Compensation - Compensation of Directors," "Executive Compensation -
Employment, Severance and Change of Control Arrangements" and "Executive
Compensation - Compensation Committee Interlocks and Insider Participation"
contained in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information under the caption "Principal Shareholders and Share Ownership by
Management" contained in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information under the caption "Executive Compensation - Employment, Severance
and Change of Control Agreements", "Executive Compensation - Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions"
contained in the Registrant's Proxy Statement.
The Company's Bylaws provide that the Company shall indemnify its directors and
officers to the full extent permitted by California law. The Company has
entered into indemnification agreements with its officers and directors
containing provisions that may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified and to obtain directors' and officers' insurance if
available on reasonable terms. The Company maintains insurance policies
covering officers and directors under which the insurer has agreed to pay the
amount of any claim made against the officers or directors of the Company for
wrongful acts that such officers or directors may otherwise be required to pay
or for which the Company is required to indemnify such officers and directors,
subject to certain exclusions.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements:
See Index to Consolidated Financial Statements at page 25 of this
Report.
(2) Financial Statement Schedule:
Page Schedule Title
---- -------- -----
S-1 II Valuation and Qualifying Accounts and Reserves
S-2 Independent Auditors' Report on Schedule
All other financial statement schedules are omitted because they are
not applicable or not required, or because the required information
is included in the Consolidated Financial Statements and Notes
thereto which are included herein.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or are incorporated by reference into, this Report.
(b) Reports on Form 8-K during the quarter ended December 31, 1997:
None.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NETWORK COMPUTING DEVICES, INC.
By: /s/ Robert G. Gilbertson
-------------------------
Robert G. Gilbertson, President and
Chief Executive Officer
Dated: March 30, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert G. Gilbertson his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him in his name, place and stead, in any and all
capacities to sign any and all amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert G. Gilbertson President, Chief Executive Officer March 30, 1998
- --------------------------- and Director (Principle Executive Officer)
Robert G. Gilbertson
/s/ Rudolph G. Morin Executive Vice President, Operations & March 30, 1998
- --------------------------- Finance, Chief Financial Officer and Director
Rudolph G. Morin (Principal Financial and Accounting Officer)
/s/ Peter Preuss Chairman of the Board of Directors March 30, 1998
- ---------------------------
Peter Preuss
/s/ Philip Greer Director March 30, 1998
- ---------------------------
Philip Greer
/s/ Douglas Klein Director March 30, 1998
- ---------------------------
Douglas Klein
/s/ Paul R. Low Director March 30, 1998
- ---------------------------
Paul R. Low
/s/ Stephen A. MacDonald Director March 30, 1998
- ---------------------------
Stephen A. MacDonald
</TABLE>
42
<PAGE>
SCHEDULE II
NETWORK COMPUTING DEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additions
-------------------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts - Deductions - at End
of Period Expenses Describe Describe of Period
-------------- -------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Allowance for doubtful accounts 2,603 645 - 642(1) 2,606
Warranty reserve 495 615 - 479(2) 631
1996
- ----
Allowance for doubtful accounts 1,976 645 - 18(1) 2,603
Warranty reserve 510 791 - 806(2) 495
1995
- ----
Allowance for doubtful accounts 1,224 1,100 - 348(1) 1,976
Warranty reserve 834 729 - 1,053(2) 510
</TABLE>
(1) Accounts written off.
(2) Warranty costs incurred.
S-1
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Network Computing Devices, Inc.
Under date of January 27, 1998, except as to Note 10 which is as of March 16,
1998, we reported on the consolidated balance sheets of Network Computing
Devices, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
which are listed in the accompanying index. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule in the annual report on
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Mountain View, California
January 27, 1998
S-2
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
Number Description
- --------- -----------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation of Registrant.
3.2(3) Bylaws of Registrant, as amended.
4.2(2) Specimen Common Stock Certificate of Registrant.
4.3 Reference is made to Exhibits 3.1 and 3.2.
10.5(2) Restated Investor Rights Agreement dated May 2, 1990.
10.6(4) Purchase Agreement dated April 25, 1990, between Registrant and The
Motorola Computer Group and correspondence relating thereto (3) and
Amendment thereto dated August 31, 1993.
10.7(2) Master Maintenance Agreement dated September 4, 1990, between
Registrant and the Field Service Division of Motorola Inc.'s
Computer Group.
10.8(2) Lease Agreement dated August 18, 1988, as amended, between
Registrant and Mountain View Industrial Associates for premises
at 350-360 North Bernardo Avenue, Mountain View, California.
10.9(2) Lease Agreement dated September 21, 1989, as amended, between
Registrant and Mountain View Industrial Associates for premises
at 380 North Bernardo Avenue, Mountain View, California.
10.11(5)* 1989 Stock Option Plan, as amended.
10.12(2)* Form of Stock Option Agreements for use with the 1989 Stock Option
Plan.
10.13(2)* Employee Stock Purchase Plan (revised).
10.14(2)* Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.15(2)* Registrant's 401(k) Retirement Plan.
10.18(2) Software Agreement dated March 30, 1990, between Registrant and
AT&T Information Systems, Inc.
10.19(4) Credit Agreement dated March 15, 1994, between Registrant and Union
Bank.
10.20(2) Lease Agreement dated April 29, 1985, as amended, between Graphic
Software Systems, Inc. and Beaverton-Redmond Tech Properties, a
Joint Venture.
10.21(2) Agreement to Form New Distribution Company dated July 23, 1990,
between Registrant and Software Research Associates, Inc.
10.22(2) Distributorship and OEM Agreement and related Trademark License
Agreement, each dated July 23, 1990, between Registrant and Nihon
NCD K.K.
10.23(2) Form of Registrant's standard purchase order.
10.24(7)* Registrant's Incentive Bonus Plan.
10.29(4) Full Service Lease dated October 20, 1993 between Z-Code and
Novato Gateway Associates for premises at 101 Rowland Way, Suite
300, Novato, California.
10.31(5)* 1994 Outside Directors Stock Option Plan.
10.32(5)* Form of Nonstatutory Stock Option Agreement for Outside Directors.
10.34(6) Lease agreement by and between Registrant and Ravendale Investments
dated September 20, 1995.
10.36(6)+ Client/Server Software License Agreement dated March 29, 1996
between Registrant and Citrix Systems, Inc.
10.37(6)+ Software Licensing Agreement dated as of June 30, 1995 between
Registrant and Evans & Sutherland Computer Corporation.
10.38(6)+ License and Development Agreement dated December 18, 1995 between
Registrant and Software.com, Inc.
10.39(6)+ Cooperative Hardware Marketing Agreement dated November 29, 1995
between Registrant and IBM Corporation ("IBM"), as amended
December 20, 1995.
10.40(6)+ X-Station Terminal Transition Agreement dated November 29, 1995
between Registrant and IBM, as amended December 13, 1995.
10.41(7)+ Asset Purchase Agreement dated February 20, 1996 by and between the
Registrant and FTP Software, Inc.
10.42(7)+ Alliance Agreement dated June 27, 1996 by and between the
Registrant and International Business Machines Corporation.
10.43(7)+ Asset Purchase Agreement dated June 3, 1996 by and between the
Registrant and NetManage, Inc.
10.44(8) IBM Letter of Intent and Funding Agreement.
10.45# Attachment 2 to Article 1 - Development of the Alliance Agreement
dated November 4, 1997 between Registrant and IBM Corporation
("IBM")
10.46 Attachment 3 to Article 2 - Manufacturing of the Alliance
Agreement dated November 4, 1997 between Registrant and IBM
Corporation ("IBM")
21.1 List of subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
<PAGE>
24.1 Power of Attorney. Reference is made to page 42 of this Report.
27.1 Financial Data Schedule.
* Constitutes a management contract or compensatory plan or
arrangement equired to be filed pursuant to Item 14(c) of Form
10-K.
+ Confidential treatment has been granted as to a portion of this
exhibit.
# Confidential treatment has been requested as to a portion of this
exhibit.
(1) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1992.
(2) Incorporated by reference to identically numbered exhibit to
Registrant's Form S-1 Registration Statement (No. 33-47246) which
became effective on June 4, 1992 (the "1992 Registration
Statement").
(3) Incorporated by reference to Exhibit 3.3 to the 1992 Registration
Statement.
(4) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1993.
(5) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31, 1994.
(6) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31,
1995.
(7) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-K Report for the year ended December 31,
1996.
(8) Incorporated by reference to identically numbered exhibit to
Registrant's Form 10-Q Report for the quarter ended June 30, 1997.
</TABLE>
<PAGE>
EXHIBIT 10.45
Attachment 2 to Article 1 - Development
of the Alliance Agreement between Network
Computing Devices, Inc. and IBM Corporation
This Attachment is entered into by and between Network Computing Devices, Inc.
("NCD") and International Business Machines Corporation ("IBM").
RECITALS
1. NCD and IBM have entered into an Alliance Agreement effective June 27, 1996
(the "Agreement") in the area of a network application terminal ("thin
client") product.
2. NCD and IBM now desire to supplement and modify Articles 1 and 2 of the
Agreement. This Attachment modifies Article 1, and a related Attachment
(Attachment 3 to Article 2 - Manufacturing) modifies Article 2 of the
Agreement. The provisions of this Attachment are entered into by the parties
in consideration of the provisions of both new Attachments, and this
Attachment shall become effective only when both such Attachments are executed
by the parties. Except as explicitly described herein, this Attachment,
together with the related Attachment described above, supersede and replace the
Letter of Intent between IBM and NCD, dated June 5, 1997.
I. HARDWARE AND SOFTWARE DEVELOPMENT
A. GENERAL DESCRIPTION
This Attachment (1) provides for development of certain versions of
Products and software not specifically described in the initial
Development Article, (2) provides additional implementation details for
software and hardware development described in the Development Article,
and (3) provides schedules for such development. NCD agrees to perform
the tasks and provide the Deliverables described in this Attachment and in
the Exhibits reference herein according to the schedules described in this
Attachment and its Exhibits, provided IBM fulfills those dependencies
described in this Attachment and its Exhibits that are necessary for NCD
to complete such development work.
B. TASKS AND DELIVERABLES
NCD will develop for IBM the Products for Release 2.5 and Release 3.0 as
described in Exhibit A to this Attachment, the terms of which are
incorporated herein by reference.
CERTAIN INFORMATION IN THIS EXHIBIT 10.45 HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH RESPECT TO THE OMITTED PORTIONS.
<PAGE>
Except where specific items are designated as IBM's responsibility, NCD
shall implement and provide as Deliverables to IBM all the functions and
product features described in Exhibit A. NCD shall perform all tasks
necessary to develop, implement, and test all such function and product
features in a high quality manner, and shall perform other tasks
described in such Exhibit.
C. SCHEDULES
Deliverables shall be provided according to the schedules set forth in
Exhibit A, unless the parties' Development Article Coordinators agree to
different schedules.
II. COMPENSATION FOR ADDITIONAL DEVELOPMENT WORK
The parties acknowledge that certain of the development tasks and
Deliverables described or referenced in this Attachment were not described
in the initial Development Article of the Agreement, and represent
additional requirements by IBM. In consideration for this additional
work, IBM shall pay to NCD an NRE amount of $200,000 per calendar month
for development work and resources applied to perform the work and provide
the Deliverables described in this Attachment. Payment of such amount
shall be subject to NCD's application of key resources to accomplish the
work described in the Attachment, and reasonable demonstration that NCD's
total development work performed as described in this Attachment for the
applicable calendar month equalled or exceeded $200,000 in cost (using a
rate of $200,000 per person/year for purposes of this Attachment only.)
IBM's obligation for such payments shall end on March 31, 1998, regardless
of whether all required tasks have been performed, or Deliverables
provided, by that date. NCD may invoice IBM for the amount described
herein no earlier than the final business day of the calendar month for
which the payment was earned, and shall submit with the invoice a summary
of key milestones completed in support of the IBM/NCD Build Plan and a
similar summary in support of hardware development. Copies of such
summaries shall be sent to IBM's Development Article Coordinator. IBM's
payment shall be made no later than 30 days after receipt of the invoice
and summary report.
The parties acknowledge that $200,000 per calendar month in NRE is
currently being paid to NCD under the terms of the Letter of Intent
between IBM and NCD, dated June 5, 1997. The payment described herein
shall replace the payment specified in the Letter of Intent, and shall
become effective for the first calendar month that begins after this
Attachment is executed.
Nothing herein shall require IBM to pay any additional amount for the work
described in this Attachment.
III. ADDITIONAL DEVELOPMENT SUPPORT PROVIDED BY IBM
<PAGE>
In addition to IBM other responsibilities as described in this Attachment
and the Development Article, IBM will provide NCD with the following to
support the development of Products described in this Attachment:
A. IBM will provide NCD with an additional Sun SPARC server as soon as
possible for use in product builds and similar development tasks,
for the time reasonably necessary to complete such tasks. IBM will
provide this server at no charge to NCD, but may do so under
reasonable lease terms or other terms deemed necessary by IBM to
protect its asset.
B. IBM will pay for the IBM-unique board layouts for the
BENGAL-derivative products as requested and authorized by IBM under
a separate Purchase Order.
IV. MAJOR ENHANCEMENTS FOR CITRIX ICA CLIENT SUPPORT
After initially porting the Citrix ICA client support to the NCDware
platform, NCD plans to make future enhancements to such ICA client
support. IBM and NCD agree that such future enhancements may be
considered "Major Enhancements" within the meaning such term in the
Alliance Agreement even if the enhancements do not meet the requirements
of subsection (b) of the definition of Major Enhancements, provided that
the remainder of the definition is satisfied (i.e., the enhancement
provides substantial additional value and utility, and is not a Custom
Enhancement), and provided further that NCD shall offer such Major
Enhancements to IBM in accordance with section 6.2 of the Development
Article, with the following modifications to section 6.2 to apply to these
Major Enhancements only:
For all Major Enhancements to the Citrix ICA client support offered by
NCD to IBM in 1998, NCD and IBM shall negotiate a cumulative total price
that does not exceed the lesser of (1) $100,000, or (2) 50% of NCD's
cost of development for such Major Enhancements;
For all Major Enhancements to the Citrix ICA client support offered by
NCD to IBM in 1999, NCD and IBM shall negotiate a cumulative total price
that does not exceed the lesser of (1) $75,000, or (2) 50% of NCD's
cost of development of such Major Enhancements;
For all Major Enhancements to the Citrix ICA client support offered by
NCD in 2000, NCD and IBM shall negotiate a cumulative total price that
does not exceed the lesser of (1) $75,000, or (2) 50% of NCD's cost of
development of such Major Enhancements.
The initial basic support/port for the Citrix ICA Client provided by NCD to
IBM (initial version for NCDware 5.0X) shall be provided to IBM as part of
Release 3 of the product
<PAGE>
development plan (Exhibit A to this Amendment), and shall not be considered
a Major Enhancement. IBM shall be required to pay the negotiated price for
each of the Major Enhancement to the Citrix ICA client support when IBM
accepts the first offered Major Enhancement for the applicable year.
In addition to the prices negotiated above, IBM shall be responsible for
paying any pass-thru per copy or per unit royalties that NCD must pay to
Citrix based on IBM's distribution of Citrix ICA client code included in the
Major Enhancements, provided that such royalties are identified prior to IBM
accepting a Major Enhancement that requires such royalties. Alternatively,
IBM may obtain its own license with Citrix for distribution of such code.
Nothing herein requires IBM to accept any Major Enhancements offered by NCD,
nor prohibits IBM from preparing its own enhancements.
IV. CHANGE IN DEVELOPMENT ARTICLE COORDINATOR
NCD hereby notifies IBM that its Article 1 Coordinator has been changed
to the following:
John Gilbert
NCD, Inc.
350 North Bernardo Ave.
Mountain View, CA 94043-4207
TELEPHONE: (650) 919-2835
FACSIMILE: (650) 961-6289
IN WITNESS WHEREOF, each party has reviewed this Article and each party has
executed this Article by signature of its authorized representative.
NETWORK COMPUTING DEVICES, INC. INTERNATIONAL BUSINESS
MACHINES CORPORATION
Signature Lorraine Hariton Signature Steven R. Villanueva
------------------ ----------------------
Lorraine Hariton
Printed Name Lorraine Hariton Printed Name Stephen R. Villanueva
<PAGE>
Printed Title Sr. V.P. of Marketing Printed Title Director, OEM Procurement
& Business Development
Date 11/4/97 Date 11/4/97
-------------------------------- --------------------------------
<PAGE>
EXHIBIT A
TO ATTACHMENT 2 TO ARTICLE 1 - DEVELOPMENT
The Release 2.5 Product deliverables will be comprised of:
603 POWERPC PLATFORM
- Technical support for PowerPC 603 porting work
(Actual porting of OS to 603 is an IBM Austin
deliverable)
- Access to BENGAL device driver Code on common 603
components
- Access to HMX device driver Code on common 603
components
- Consultation on boot monitor Code and NCD OS kernel
Code
- QA (quality assurance) test bucket data
- Consulting for QA testing on PowerPC 603 Product
(Kernel QA testing on PowerPC 603 Product is an IBM
Austin responsibility)
- Build and regression test support
- Manufacturing article amendment to include PowerPC 603
Product
- Maintenance and support article to include PowerPC 603
Product
KERNEL QA TESTING ON POWERPC 403 PRODUCT
JVM 1.1.2 BASED ON SUN MICROSYSTEMS MODIFIED JVM 1.1.2
- Port JAE (Java Applet Environment) 1.1.2 to the PowerPC
403 target. Resultant port must run on PowerPC 403 and
PowerPC 603 Products.
- JVM 1.1.2 compliance testing for PowerPC 403 and
PowerPC 603.
(IBM Hursley will complete certification tests and
apply for certification)
(NCD is responsible to provide support for NCD Code
provided)
(IBM is responsible to provide support for IBM inner
loop Code)
- NCD to integrate Inner loop optimization of JVM
(Inner loop Code provided by IBM Austin)
- Modify JVM 1.1.2 to operate correctly with Motif 1.2.2
- Consultation in making JVM 1.1.2 work with PowerPC 603
Product
- Identify JVM 1.1.2 API's (eg. International locales,
IP multi-cast and loading applets via TFTP) not supported.
- Add Java print API to existing NCD OS kernel serial /
parallel API's for KONA (initial Code on 12/5/97 and PTF on
1/5/98)
(IBM Austin will develop the Java print API)
- Provide fixes required for problems related to JVM 1.1.2.
Change to the PowerPC 403 kernel to support changes to the
PowerPC flash boot monitor and changes to incorporate JVM 1.1.2
<PAGE>
EXHIBIT A
TO ATTACHMENT 2 TO ARTICLE 1 - DEVELOPMENT
Changes (if necessary) to the PowerPC 403 boot monitor to load
only the PowerPC 403 kernel.
BUILD SUPPORT
- Integration of Release 2.5 mods into NCD library to
get PowerPC 603 Product changes (4.5 Code branch)
- Weekly Code drops to IBM Rochester until "Golden Master"
coordinated with Release 3.0 builds. (Original bi-weekly
Code drops for Release 2.5 are weekly and take priority
over Release 3.0 Code drops during September and October
1997.
- Provide build process to Rochester for PowerPC 403 and
PowerPC 603 Products.
- NCD is responsible for supporting the 4.5 Code branch.
Although the NCD WinCenter application is not a Deliverable
under Release 2.5, compatibility shall be provided with the
NCD WinCenter application for the Release 2.5 and follow-on
Products.
RELEASE 3.0 VERSION (LAN VERSION)
The Release 2.5 Product deliverables will be comprised of:
BENGAL HARDWARE AND SOFTWARE
BENGAL Derivatives (PowerPC 40x based Products)
- 10/100 Ethernet Products
- Token Ring Product
- Twinax Product (IBM to provide twinax drivers and
design)
- BENGAL Source Code in Code tree and in build process.
The above derivative Products are derived from NCD's BENGAL
design. NCD re-layed out its BENGAL design to fit the ensuing
product into IBM's mechanical form factor and customized the
user interfaces for the Derivative Product to meet IBM's
requirements. If IBM requests any additional features or
functionality beyond NCD's BENGAL product (existing as of the
parties' execution of Attachment 2 to the Article 1) and any
other functions that are listed herein, IBM and NCD agree that
deliverables outside of this Agreement will require
negotiation
<PAGE>
EXHIBIT A
TO ATTACHMENT 2 TO ARTICLE 1 - DEVELOPMENT
and may require additional NRE. IBM Procurement will authorize
this work in writing prior to NCD commencing the work and
prior to IBM undertaking any obligation for additional NRE.
SOFTWARE FUNCTIONS / ENHANCEMENTS
- Document and number all NCD messages
- Provide miniconsole for application launching with
translated messages
(Actual translation will be provided by IBM.)
- Continued support for touch screen, flash memory boot,
PCMCIA file, and VT320 emluator.
- DHCP enhancements as defined in the Release 3.0 SAI
specification (eg. config, retry, multiservers, get config
from server, options 26,43,60)
- Support and consultation for implementing currently
supported VT320 emulator launch via login / utilities.
(Use VT320 support currently resident in BENGAL Code
base, English only version, that currently exists in NCD
Code.) (IBM Network Station Manager (NSM) team in
Rochester will provide configuration support through the
user platform)
- Self update of token ring interface Code.
- Broadcast boot TFTP support
- Support for XDM login from ACT login utility.
- Serial printer support
- Print APIs support and JVM interface (provided by IBM
Austin)
- Local administered MAC address
- Additional SNMP traps and changes as defined in the
Release 3.0 SAI specification.
- Change to the kernel to support the PowerPC 403 and
PowerPC 603 processor based Product flash boot monitor
Code.
- Porting and integration of Citrix Native 32-bit Windows
ICA client protocol (Initial port and integration at
NCDware 5.0x level).
JAVA VM ENHANCEMENTS - JVM 1.1.4 FROM SUN MICROSYSTEMS
- Port JAE (Java Applet Environment) 1.1.4 to the PowerPC
403 target. Resultant port must run on PowerPC 403 and
PowerPC 603 Products.
- JVM 1.1.4 compliance testing for PowerPC 403 and
PowerPC 603.
(IBM Hursley will complete certification tests and apply
for certification)
<PAGE>
EXHIBIT A
TO ATTACHMENT 2 TO ARTICLE 1 - DEVELOPMENT
(NCD is responsible to provide support for NCD Code
provided)
(IBM is responsible to provide support for IBM inner
loop Code)
- NCD to integrate Inner loop optimization of JVM
(Inner loop Code provided by IBM Austin)
- Modify JVM 1.1.4 to operate correctly with Motif 1.2.5
- Consultation in making JVM 1.1.4 work with PowerPC 603
Product
NATIONAL LANGUAGE SUPPORT (NLS)
- Plan defined for BiDi support (NLS and DBCS completed)
- Support and consultancy for NLS implementation.
- Support and consultancy for Motif library support
(1.2.5)
- Support and consultancy for Motif window manager
support (1.2.5)
PROVIDE KERNEL SUPPORT FOR INCLUSION OF THE OMRON INPUT METHOD.
- NCD will provide, within the NRE already provided for in
this Amendment, two person months of consultancy support
to help specify and size the effort required to support
the inclusion of the Omron input method.
- Upon completion of the sizing and consultation, IBM and
NCD will negotiate separately for additional effort or
deliverables required.
- IBM is licensing and contracting for Omron input
method under separate Omron Agreement.
Kernel API support for Navio (now NCI) NC Navigator browser
version 4.
Although the NCD WinCenter application is not a Deliverable
under Release 3.0, compatibility shall be provided with the
NCD WinCenter application for the Release 3.0 and follow-on
Products.
PRODUCT SCHEDULES
It is intended that General Availability of the Release 2.5 hardware and
software will occur in [*] for the Ethernet version of the
603-based Product, and [*] for the Token Ring verions
It is intended that the General availability of the Release 3.0 hardware and
software will occur in [*].
CERTAIN INFORMATION IN THIS EXHIBIT 10.45 HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH RESPECT TO THE OMITTED PORTIONS.
[*]=CONFIDENTIAL TREATMENT REQUESTED - EDITED COPIES.
<PAGE>
EXHIBIT A
TO ATTACHMENT 2 TO ARTICLE 1 - DEVELOPMENT
The parties technical teams will continue to work toward meeting the mutually
agreed-to dates for code drops, test plans, and other detailed items to meet
these GA dates, with adjustments as appropriate to take into account
unforseen development issues or changes to release schedules.
<PAGE>
EXHIBIT 10.46
Attachment 3 to Article 2 - Manufacturing
of the Alliance Agreement between Network
Computing Devices, Inc. and IBM Corporation
This Attachment is entered into by and between Network Computing Devices,
Inc. ("NCD") and International Business Machines Corporation ("IBM").
RECITALS
1. NCD and IBM have entered into an Alliance Agreement effective June 27,
1996 (the "Agreement") in the area of a network application terminal ("thin
client") product.
2. NCD and IBM now desire to supplement and modify Articles 1 and 2 of
the Agreement. This Attachment modifies Article 2, and a related Attachment
(Attachment 2 to Article 1 - Development) modifies Article 1 of the
Agreement. The provisions of this Attachment are entered into by the parties
in consideration of the provisions of both new Attachments, and this
Attachment shall become effective only when both such Attachments are
executed by the parties. Except as explicitly described herein, this
Attachment, together with the related Attachment described above, supersede
and replace the Letter of Intent between IBM and NCD, dated June 5, 1997.
I. ADJUSTMENT TO PRICE FORMULA FOR POWERPC 603 "PHANTOM" PRODUCT
NCD shall manufacture the Products as described in Article 1 - Development
and its Attachments (including Attachment 2 to Article 1) in accordance with
all the terms and conditions of Article 2 - Manufacturing. Such Products
shall be considered "Products" for all purposes under the terms of the
Alliance Agreement, provided, however that in determining the B/M cost of
the PowerPC 603 "Phantom" Product described in Attachment 2 to Article 1,
the following costs shall be added to the B/M for such Product:
A. Incremental Packaging and Freight Costs
NCD's actual Incremental Costs of the following items shall be added to the
B/M costs for the PowerPC 603 "Phantom" Product:
Product Packaging
Freight Costs
<PAGE>
For the purposes of this Attachment, "Incremental Costs" shall mean the
actual difference in charges paid by NCD for the above listed items between
the existing 403-based IBM Network Station Products and the PowerPC 603
"Phantom" Product due to unique characteristics of the PowerPC 603 "Phantom"
Product (i.e., size, weight).
B. Manufacturing/Engineering Support Costs
A Manufacturing/Engineering Support Cost of $1.00 per unit shall be added to
the B/M cost for the initial release of the PowerPC 603-based Product, known
as the PowerPC 603 "Phantom" Product, and for any follow-on or derivative
PowerPC 603-based Products (collectively "PowerPC 603 Family Products"),
but such charge shall apply only until (1) IBM has purchased 100,000 units
of such PowerPC 603 Family Products, or (2) December 31, 1998, whichever
occurs earlier. In the event IBM fails to purchase at least 100,000 units of
PowerPC 603 Family Products from NCD by December 31, 1998, IBM will be
required to pay NCD a lump sum equal to $1.00 times the difference between
100,000 and the actual number of PowerPC 603 Family Products purchased by
IBM, so that the total amount of Manufacturing/Engineering Costs paid to NCD
equals $100,000. In the event a lump sum is due, NCD may invoice IBM for such
lump sum no earlier than January 1, 1999 and no later than March 31, 1999.
IBM shall remit payment on NCD's invoice no later than 60 days after
receiving such invoice.
C. Additional Product Warranty Costs
An additional charge of $1.50 shall be added to the B/M cost for the PowerPC
603 "Phantom" Product to cover the potential increase in NCD's cost of
providing the warranty service for such Product. This additional warranty
charge shall not be subject to the Quarterly Price Reviews and Adjustments
described in section 4.2 of the Manufacturing Article, but such charge will
cease to apply in the event IBM notifies NCD in writing that it is waiving
its right to obtain Product Warranty service (as described in section 12.2 of
the Manufacturing Article) for the PowerPC 603 "Phantom" Product.
Following execution of this Attachment, the parties shall work in good faith
to update the PSPL to reflect the price and related details of the Products
covered by this Attachment.
II. TOOLING FOR POWERPC 603 "PHANTOM" PRODUCT
The provisions of section 8 "Tooling" of the Manufacturing Article shall
apply to the tooling for the Products covered by this Attachment. The parties
agree, however, that soft tooling and the initial production-level tooling
(or "hard tooling") for the PowerPC 603 "Phantom" Product shall be
considered Tooling required by IBM due solely to an IBM mechanical design
change, and IBM shall therefore pay for such Tooling" If requested by IBM,
NCD shall negotiate in good faith with IBM for the amortization of such
Tooling costs over the projected volumes of Products for which such Tooling
would be used.
III. RENEWAL OF MANUFACTURING ARTICLE
<PAGE>
Pursuant to section 7.1 of the Base Agreement, the parties hereby agree that
the Agreement shall be, and hereby is, renewed through December 31, 2000.
IV. AMENDMENT TO IBM VOLUME PERCENTAGE REQUIREMENTS FOR 1999 AND 2000
The parties hereby agree to amend section 14.1 of Article 2 of the Agreement
by making the following modifications:
A. Second unnumbered paragraph, first line, remove "or 100,000
units."
B. Second unnumbered paragraph, third line, remove "or 50,000
units.
V. AMENDMENT TO SECTION 12.2 (PRODUCT WARRANTY) OF ARTICLE 2 AND ADDITIONAL
IMPLEMENTATION DETAIL
Pursuant to Section 12.2 of Article 2, the parties have agreed to
additional implementation details for handling warranty returns and
service. These details are contained in Exhibit A to this Attachment, and
are hereby incorporated into this Attachment by reference. The parties'
Manufacturing Article Coordinators may modify, or waive compliance with,
such details by mutual written agreement.
VI. IBM DESIGNATED AS IMPORTER OF RECORD FOR SHIPMENTS OUTSIDE UNITED STATES
The parties agree that, effective January 1, 1998, IBM shall be
designated as the importer of record for shipment of IBM-ordered
Products to IBM-designated locations outside of the United States.
Accordingly, IBM shall be responsible for paying the applicable import
duties to the governmental authority of the country into which such
Products are imported, and for providing such governmental authority
with the required documentation and certifications necessary for
importation and customs clearance. The "F.O.B. IBM Location" provision
of Article 2 shall remain intact, and NCD shall continue to be
responsible for shipment and delivery of Products to the IBM-designated
delivery point. NCD shall retain the title and the risk of loss for such
Products until they are delivered to the IBM-designated delivery point,
except that if the law of any country into which IBM requests
importation of the Products requires that the importer of record hold
legal title to the Products, then title shall pass to IBM at the last
moment necessary for IBM to comply with such law and become importer of
record. In all cases, risk of loss and responsibility for shipment shall
remain with NCD until the Products are delivered to the IBM-designated
location.
NCD shall diligently execute all documents necessary for IBM to become
importer of record for shipments to non-U.S. locations on or after
January 1, 1998, and shall
<PAGE>
cooperate fully with IBM throughout the term of the Alliance Agreement
in providing all information and certifications necessary for customs
clearance and importation, including but not limited to certifications
and information as to the country of origin of such Products. NCD shall
remain responsible for complying with all labelling specifications
requested by IBM to ensure compliance with import and export laws.
In addition, effective January 1, 1998, the last paragraph of section
4.1 of Article 2 - Manufacturing shall be deleted in its entirety and
replaced with the following:
NCD agrees that it will reimburse IBM for the excess portion of any
duty paid by IBM resulting from the shipment of IBM-ordered Products
to any IBM-location outside of the United States that is greater than
the amount of duty that would have been paid for shipment of the
Products form the United States to the same IBM-designated location on
the same date. Upon being notified in writing by IBM of such duty
excess, NCD shall make such reimbursement by applying a credit
reflecting the excess duty to the invoices submitted to IBM for such
Products. NCD shall show this credit, and identify it as such, as a
separate line item on the invoice, and shall indicate the total amount
of the credit applicable to such invoice as well as the per unit
amount of the credit and the number of units to which it applies. The
duty paid by IBM shall continue to be considered part of the piece
price of Products for purposes of evaluating price competitiveness
under sections 13 and 14 of Article 2, except that any excess duty
credit applied by NCD in accordance with this paragraph shall be
considered to reduce the price by the amount of such credit for the
purpose of sections 13 and 14 or Article 2.
The parties agree that the intent of this change in the importer of
record designation is to have IBM take administrative responsibility
for import clearance in IBM-designated non-U.S. locations It should
not be construed as altering the general responsibility of the parties
with respect to shipment and risk of loss of the Products or altering
the balance of financial obligations except for such expenses incidental
to IBM assuming the administrative responsibility of importer of record.
VII. PRODUCT FULFILLMENT/REPLENISHMENT PLAN DEVELOPMENT
IBM and NCD both agree that the implementation of a competitive
fulfillment/replenishment process is essential to meeting the demands
and rigors of the netowork computing marketplace. NCD agrees to commence
face-to-face discussions and telephonic meetings with IBM within 15 days
after execution of Attachment 3 to Article 2 to dicsuss the parameters
of implementing such a program. At a minimum, IBM and NCD will discuss
the following:
IBM's requirements for the fulfillment/replenishment process; IBM
volume requirements; IBM's desired points of distribution; expenses
and costs and which
<PAGE>
party bears such costs associated with program implementation; and a
proposed timetable for implementation.
IBM and NCD commit to working in good faith to establish a plan for
executing a competitive fulfillment/replenishment process pursuant to a
timetable mutually agreed to by both parties.
VIII. CHANGE IN IBM'S MANUFACTURING ARTICLE COORDINATOR
IBM hereby notifies NCD that IBM's Article 2 Coordinator is
changed to the following:
Glenn Gallagher
IBM Corporation, Dept. U7JA
P.O Box 12195
3039 Cornwallis
Research Triangle Park, NC 27709-2195
PHONE: (919) 486-0835
FAX: (919) 546-7606
IX. BILL OF MATERIALS INFORMATION FOR POWERPC 603 "PHANTOM" PRODUCT
NCD agrees to provide to IBM's Manufacturing Article Coordinator no
later than Monday, November 10, 1997 a fully-costed Bill of
Materials for the PowerPC 603 "Phantom" Product assuming an
ordering process in accordance with the Manufacturing Article
without any special expedite charges. Such Bill of Materials shall
be separately itemized for each component, service and other charge
that comprises the Bill of Materials, and shall represent the best
comptetivie costs that NCD has been able to obtain for such items.
The Bill of Materials shall be accompanied by reasonable
justification/explanation for each of the charges. Where the
contract requires the Bill of Materials to include cost
differentials, or "deltas," the itemization of such delta costs
shall be accompanied by the base costs from which such delta costs
are the result.
IN WITNESS WHEREOF, each party has reviewed this Article and each party has
executed this Article by signature of its authorized representative.
NETWORK COMPUTING DEVICES, INC. INTERNATIONAL BUSINESS
MACHINES CORPORATION
<PAGE>
Signature /s/ Lorraine Hariton Signature /s/ Stephen R. Villanueva
---------------- ---------------------
Printed Name Lorraine Hariton Printed Name Stephen R. Villanueva
Printed Title Sr. V.P. of Printed Title Director, OEM
Marketing & Procurement
Business Development
Date 11/4/97 Date 11/4/97
-------------------------- --------------------------
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
- ---------------------------------------------------------------------
REPAIR PROCESS FOR FACTORY FAILED PARTS:
When a new 8361 unit fails in test at either Raleigh, Greenock, or
other IBM manufacturing location; the manufacturing location will do
the following:
Manufacturing will accumulate the failed new units, fill out the
IBM paperwork and send with the parts to the reclamation
department who will fill out an RPR form and initiate a P.O. and
route these to the buyer. The buyer, to get authorization to
return the units, will send an e-mail(for either Greenock or
Raleigh) to: [email protected]
with a copy to : [email protected]
[email protected]
This e-mail will include: the IBM person to contact, where to
ship the units back to, the serial numbers for all units covered
by the RMA, and a problem description for each unit (if available).
NCD will respond with a Return Material Authorization(RMA) number.
The response will be no later than the end of the next work day.
The buyer will provide this RMA number to the Reclamation
department and will process a Purchase Order to get these parts
returned and repaired. The buyer will also process a debit memo
for the quantity of parts returned. This will cause the purchase
price for the returned units to be subtracted from the next new
build invoice(s) unless the failed parts are repaired and returned
before any pending new build invoices are paid.
The Raleigh Reclamation Department will ship the failed parts
along with the RPR form to NCD at the following address:
Attn: RMA number xxxxxxx fill in the RMA number here
NCD INC.
301A Ravendale Ave.
Mountain View, California 94043
The Greenock Reclamation Department will ship the failed parts
along with the RPR form to NCD at the following address:
Attn: RMA number xxxxxxx fill in the RMA number here
Eurographics Industries Limited
Unit 6, 24 Premier Way
Abbey Park Industrial Estate
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
Romsey, Hampshire, England S051 9AQ
Parts will be returned to NCD once per month or whenever a quantity of 20 to
50 is accumulated, or once per week if the failure rate exceeds 10 units/week.
Parts will be returned in the original shipping material with an acceptable
overpack. Shipping via ground transportation is acceptable.
Shipping cost to NCD will be paid by IBM.
NCD will:
- - Repair or replace these systems within two weeks(ten working days not
counting shipping time) of their receipt from IBM and ship them back to the
IBM manufacturing location address indicated on the RPR form.
Note: Systems that failed in the field cannot be sent to any IBM
manufacturing site after repair; these units must be sent to the IBM field
parts location.
- - Provide failure/repair data to designated IBM person(s) within two weeks of
completing lot repair. Failure data will be provided via e-mail in a mutually
agreed format.
- - Retest the units using the NCD Repair Process fo IBM M/T 8361 and 8362 -
see attachment.
- - Perform all of the same quality assurance processes used on new units.
- - During repair, install any required E.C.'s that have occurred since the
unit was first shipped. The individual E.C. will specify if it needs to be
applied on factory/field returned product.
- - Mark the repaired unit with a code that indicates it was repaired and the
date it was repaired. The mark to be made with indelible ink. Mark to be
located on the logic card inside the covers.
- - Any unit that comes back for repair within six months of having been
previously repaired must be scrapped and replaced.
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
- - The S/N of the unit does not need to change.
- - Shipping these repaired units to IBM is at NCD cost. Shipping via ground
transportation is acceptable.
- ---------------------------------------------------------------------------
REPAIR PROCESS FOR FIELD RETURNED UNITS
IBM Mechanicsburg will return field failed units to the following address:
Attn: RMA number xxxxxxx fill in the RMA number here
NCD INC.
301A Ravendale Ave.
Mountain View, California 94043
IBM Europe will return field failed units to the following address:
Attn: RMA number xxxxxxx fill in the RMA number here
Eurographics Industries Limited
Unit 6, 24 Premier Way
Abbey Park Industrial Estate
Romsey, Hampshire, England S051 9AQ
The failed units will be in their original shipping container with an
acceptable overpack.
When the field parts depot(Mechanicsburg or Someplace in Europe) has
accumulated a quantity of failed parts, the Parts Analyzer (currently Dave
Lebo in Mechanicsburg 717-795-4169, and Tony Rennie in Greenock) will
generate a list of the serial numbers to be repaired. The analyzer will
contact NCD via email(see e-mail address below) to determine which parts are
covered by NCD's warranty and which are to be repaired at IBM's cost.
The analyzer will list the serial numbers and a problem description for each
unit(if available) in an RMA form along with the name of the IBM person to
contact, and where to ship the units back to; and then contact the IBM buyer
to arrange for repair. The buyer will process a P.O. based on the data in the
RMA. The buyer will send an e-mail to NCD to get authorization to return the
parts. The e-mail (for either
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
Europe or Raleigh) will be sent to: [email protected]
with a copy to : [email protected]
and [email protected]
This e-mail will include: the IBM person to contact, where to ship the units
back to, the serial numbers for all units covered by the RMA, and a problem
description for each unit(if available). NCD will respond with a Return
Material Authorization(RMA) number no later than the end of the next work
day. The buyer will provide this RMA number to the analyzer.
Mechanicsburg/Europe will ship failed parts along with the RMA form to NCD at
the address(es) above.
Shipping charge to NCD will be paid by IBM
NCD will:
- - Remove any extra memory SIMMs or Video memory left in the unit, record P/Ns
and serial number on which this occurred. Record the serial number and
missing parts of any system returned missing parts. Return the extra parts to
IBM at IBM's request.
- - Scrap and replace any unit that comes back for repair within six months of
having been previously repaired.
- - Clean the returned units.
- - Covers must be in good working order and have same appearance as a new
cover; or the cover must be replaced.
- - Repair the failed units. Any unit that is not repairable and is still under
warranty must be replaced with a new unit; if out of warranty, it will be
returned to IBM to be scrapped and IBM will be charged a diagnostic fee.
- - Repair or replace these systems within two weeks(ten working days not
counting shipping time) of their receipt from IBM and ship them back to the
IBM field location address indicated on the RPR form. If quantity to repair
exceeds 100 units, the repair time must be negotiated at the time the P.O. is
placed.
- - During repair, install any required E.C.'s that have occurred since the
unit was first shipped. The individual E.C. will specify if it needs to be
applied on factory/field returned
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
product.
- - Retest the units using an approved process. NCD Inc will submit their
repair process for review. When approved that document will become part of
this process.
- - Perform all of the same quality assurance processes used on new
units.
- - The S/N of the unit does not change.
- - Mark the repaired unit with a code that indicates it was repaired
and the date it was repaired. The mark to be made with indelible ink.
Mark to be located on the logic card inside the cover.
- - Place repaired unit in a new shipping container marked per IBM
specifications.
- - Send repaired field returned cards at NCD Inc cost back to the Field
location indicated on the RMA form - not to any manufacturing locations.
Shipping via ground transportation is acceptable.
- - Provide failure/repair data to IBM within two weeks of repair.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
NCD Repair Process for IBM M/T 8361 and 8362
NCD Receiving coordinator will;
1. Verify serial number and part number of unit against RMA # issued to
customer. If the serial numbers do not match, the unit is put on
hold until the issue can be resolved (customer service will
contact the customer)
2. Receive the unit into the system.
3. Print a traveler (paperwork that accompanies the unit through the
<PAGE>
EXHIBIT A
TO ATTACHMENT 3 TO ARTICLE 2 - MANUFACTURING
process).
4. Checks s/n of unit for "second time back status"
Any units coming back within 6 months of last repair date is
sent to MRB. MRB must get approval of IBM quality engineering to
reuse any second time back board. Without this approval, board
cannot be sent back to IBM.
5. Units are sent to technicians for repair.
Repair technicians will;
6. Verify data/configuration of the unit (boot prom version, Ethernet
address, simms, etc.) and record information on traveler.
7. Any information regarding additional or missing parts will be
forwarded to customer service. Customer service will contact
customer for resolution of these issues.
Invoicing required as a result of these issues will be handled
by the Customer Service representative.
8. Write any upgrades required on the traveler.
9. Attempt to duplicate problem with manual "bench test"
If problem is duplicated or a problem is found the unit is
repaired and proceeds to the next process step.
If there is no problem found, the unit is put through a
two day burn-in test. If no problem is found during this burn-in
the unit will continue through the process and if no other
problem is found it will be classified as "NO Trouble Found". If
the unit fails during this burn-in, it will be worked on until
the problem is identified and repaired or the board will be
replaced.
10. Required E.C. upgrades are installed on units.
11. Unit is put into overnight "burn-in test" (which is the same as the
new build burn-in.)
The overnight burn-in test; cycles power, cycles temp
and does a continuous composite cycle test (~5 minutes)
This looping test does a complete functional test; a minimum
amount of passes are required in order to pass test, data is
logged onto database automatically.
12. After successful completion of the overnight burn-in the manual
<PAGE>
EXHIBIT A
TO ATTACHMNT 3 TO ARTICLE 2 - MANUFACTURING
bench test is repeated.
If the unit cannot pass the overnight burn-in and the manual
bench test, the pcb or unit will be replaced.
13. Original configuration and factory defaults are loaded.
Any extra parts (simms, etc.) are removed and all parts required
to meet original configuration are installed. This unit will be
exactly as it was originally shipped with the addition of any
required E.C.'s
14. Complete inspection of rework and configuration of unit.
15. Mark date unit was repaired on the PCB.
16. All repair information is entered into the database.
17. Unit is sent to base packaging station.
Base Packaging will;
18. Do a cosmetic inspection of the unit - replacing any parts which do
not meet the cosmetic criteria.
19. Fill out the Repair Notification Form
Any serial numbers that were changed, (pcb or unit) will be noted
on this form.
20. Insure all labels are correct and package the unit.
21. Submit lot to Quality for inspection.
Shipping;
22. Verify the quantity of parts ready for shipment against the
quantity received for that RMA.
Initially, no partial shipments will be made on Field Returned
unit RMAs; any unit that was unrepairable will be replaced at a
cost to IBM that is different than units that are repaired. As
the product matures, IBM can elect to not have the unit replaced
and just pay a screening cost that is different than the cost of
units that are repaired.
23. Ship back any additional parts per customers requirements.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Organization Jurisdiction Name
------------ -----------------
NCD Graphic Software Corporation Oregon
Network Computing Devices Australia
Australia Pty. Ltd.
Network Computing Devices Canada
(Canada), Inc.
Network Computing Devices England
(UK) Limited
Network Computing Devices France
(France) S.A.R.L.
Network Computing Devices Germany
(Germany) GmbH
Network Computing Devices Sweden
(Scandinavia) AB
NCD International Inc. California
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Network Computing Devices, Inc.
We consent to incorporation by reference in the registration statements on
Form S-8 (Nos. 33-51594 and 39-65638) of Network Computing Devices, Inc.
of our reports dated January 27, 1998, except as to Note 10 which is as
of March 16, 1998, relating to the consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, and the related schedule,
which reports appear in the December 31, 1997, annual report on Form
10-K of Network Computing Devices, Inc.
KPMG PEAT MARWICK LLP
Mountain View, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,240
<SECURITIES> 10,240
<RECEIVABLES> 27,754
<ALLOWANCES> 2,606
<INVENTORY> 15,412
<CURRENT-ASSETS> 79,646
<PP&E> 26,964
<DEPRECIATION> 22,540
<TOTAL-ASSETS> 86,514
<CURRENT-LIABILITIES> 25,835
<BONDS> 0
0
0
<COMMON> 58,630
<OTHER-SE> 1,889
<TOTAL-LIABILITY-AND-EQUITY> 86,514
<SALES> 133,400<F1>
<TOTAL-REVENUES> 133,400
<CGS> 81,075<F2>
<TOTAL-COSTS> 81,075
<OTHER-EXPENSES> 50,589
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 3,831
<INCOME-TAX> 1,150
<INCOME-CONTINUING> 2,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,681
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
<FN>
<F1>INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT REVENUES.
<F2>INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT REVENUES.
</FN>
</TABLE>
