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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
California 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (650) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Registrant's Common Stock was 16,460,231
at June 30, 1998.
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NETWORK COMPUTING DEVICES, INC.
INDEX
<TABLE>
<CAPTION>
DESCRIPTION PAGE NUMBER
- ------------------------------------------------------------ -----------
<S> <C>
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the Three-
and Six-Month Periods Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the Six-
Month Periods Ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,179 $ 21,240
Short-term investments 10,506 10,240
Accounts receivable, net 13,346 25,148
Inventories 12,882 15,412
Refundable and deferred income tax assets 5,458 4,763
Other current assets 3,450 2,843
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Total current assets 72,821 79,646
Property and equipment, net 3,495 4,424
Other assets 1,489 2,444
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Total assets $ 77,805 $ 86,514
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------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,293 $ 11,211
Accrued expenses 7,882 8,955
Income taxes payable 405 597
Current portion of capital lease obligations 90 154
Deferred revenue 3,393 4,918
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Total current liabilities 17,063 25,835
Long-term portion of capital lease obligations 115 160
Shareholders' equity:
Undesignated preferred stock - -
Common stock 59,960 58,630
Retained earnings 667 1,889
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Total shareholders' equity 60,627 60,519
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Total liabilities and shareholders' equity $ 77,805 $ 86,514
------- -------
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</TABLE>
See accompanying notes.
3
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Hardware products and services $ 14,677 $ 26,889 $ 37,251 $ 49,816
Software licenses and services 7,988 7,473 16,078 15,610
--------- ---------- ---------- ----------
Total net revenues 22,665 34,362 53,329 65,426
Cost of revenues:
Hardware products and services 10,556 18,767 27,899 33,836
Software licenses and services 2,785 1,550 5,252 4,542
--------- ---------- ---------- ----------
Total cost of revenues 13,341 20,317 33,151 38,378
--------- ---------- ---------- ----------
Gross margin 9,324 14,045 20,178 27,048
Operating expenses:
Research and development 3,291 3,527 6,762 6,971
Marketing and selling 8,076 8,229 15,581 15,370
General and administrative 1,413 1,677 2,454 3,342
--------- ---------- ---------- ----------
Total operating expenses 12,780 13,433 24,797 25,683
--------- ---------- ---------- ----------
Operating income (loss) (3,456) 612 (4,619) 1,365
Interest income, net 466 549 877 1,017
Other income 1,862 - 1,862 200
--------- ---------- ---------- ----------
Income (loss) before income taxes (1,128) 1,161 (1,880) 2,582
Provision for income taxes (income tax benefit) (395) 464 (658) 1,033
--------- ---------- ---------- ----------
Net income (loss) $ (733) $ 697 $ (1,222) $ 1,549
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income (loss) per share
Basic $ (0.04) $ 0.04 $ (0.07) $ 0.09
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Diluted $ (0.04) $ 0.04 $ (0.07) $ 0.08
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Shares used in per share computations
Basic 16,731 17,121 16,672 17,105
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Diluted 16,731 18,820 16,672 18,857
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (1,222) $ 1,549
Reconciliation to cash provided by operations:
Depreciation and amortization 1,573 1,616
Gain on sale of investment (1,862) -
Changes in:
Accounts receivable, net 11,802 (3,746)
Inventories 2,530 (826)
Refundable and deferred income taxes (695) 4,028
Other current assets (607) 539
Accounts payable (5,918) 2,174
Income taxes payable (192) -
Accrued expenses (1,073) (582)
Deferred revenue (1,525) 211
---------- ---------
Cash provided by operations 2,811 4,963
Cash flows from investing activities:
Short-term investments, net (266) (10,467)
Proceeds from sale of investment 2,141 -
Changes in other assets 676 106
Property and equipment purchases (644) (1,589)
---------- ---------
Cash provided by (used in) investing activities 1,907 (11,950)
Cash flows from financing activities:
Principal payments on capital lease obligations (109) (484)
Repurchases of common stock (6,975) (3,402)
Proceeds from issuance of stock, net 8,305 1,397
---------- ---------
Cash provided by (used in) financing activities 1,221 (2,489)
---------- ---------
Increase (decrease) in cash and equivalents 5,939 (9,476)
Cash and equivalents:
Beginning of period 21,240 23,832
---------- ---------
End of period $ 27,179 $ 14,356
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
5
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network Computing
Devices, Inc. (the "Company") furnished herein reflects all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's consolidated financial
position, results of operations and cash flows for the periods presented. This
Quarterly Report on Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1997 Annual Report on Form 10-K. The consolidated results of operations for the
three- and six-month periods ended June 30, 1998 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire year
ending December 31, 1998.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and disclosures of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997 and requires reclassification of financial statements
for earlier periods to be provided for comparative purposes. The Company has
not determined the manner in which it will present the information required by
SFAS No. 130 in its annual consolidated financial statements for the year ending
December 31, 1998. The Company's total comprehensive income (loss) for all
periods presented herein would not have differed from those amounts reported as
net income (loss) in the consolidated statements of operations.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income (loss) per
share is computed using the weighted-average number of common shares and common
equivalent shares from stock options (1,699,330 and 1,751,912 in the second
quarter and first six months of 1997, respectively) outstanding, when dilutive,
using the treasury stock method. In the second quarter of 1998 there were
3,764,278 options outstanding that could potentially dilute basic earnings per
share ("EPS") in the future that were not included in the computation of diluted
EPS because to do so would have been antidilutive for that period and for the
six-month period ended June 30, 1998.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Purchased components and sub-assemblies $10,623 $13,178
Work in process 560 545
Finished goods 1,699 1,689
------- -------
$12,882 $15,412
------- -------
------- -------
</TABLE>
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease liabilities,
were $4,500 and $14,000 for the second quarters of 1998 and 1997, respectively,
and $9,800 and $36,000 for the first six months of 1998 and 1997, respectively.
Income tax payments were $61,600 and $60,100 for the second quarters of 1998 and
1997, respectively, and $101,800 and $113,700 for the first six months of 1998
and 1997, respectively. An income tax refund of $3.0 million was received
during the second quarter of 1997.
6
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STOCK REPURCHASE PROGRAM
In April 1997, the Company's Board of Directors adopted a program to repurchase
up to 1,000,000 shares of the Company's common stock during the 12-month period
ended April 30, 1998. Repurchases were made under the program using the
Company's cash resources. Shares repurchased are available for the issuance
under the Company's stock plans and for other corporate purposes. In September
1997, the repurchase program was completed with an aggregate of 1,000,000 shares
repurchased at prices ranging from $8.38 to $12.00 per share for a total
purchase price of $10.7 million. In November 1997, the Company's Board of
Directors adopted an additional program to repurchase up to 1,000,000 shares of
the Company's common stock during the 12-month period ending October 31, 1998.
Repurchases of 998,000 shares have been made through June 30, 1998 under the
second program at prices ranging from $6.50 to $9.63 at a total aggregate price
of $8.5 million. Total repurchases of 1,998,000 shares were made under both
programs at prices ranging from $6.50 to $12.00 per share for a total purchase
price of $19.2 million. In June 1998, the Company announced an additional
program to repurchase up to 750,000 shares of the Company's common stock.
MAJOR CUSTOMERS AND RELATED ACCOUNTS RECEIVABLE
International Business Machines Corporation ("IBM") accounted for approximately
20% and 23% of the Company's revenues for the second quarters of 1998 and 1997,
respectively, and approximately 23% and 20% for the first six months of 1998 and
1997, respectively. At June 30, 1998, related accounts receivable due from IBM
were approximately $3.9 million.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED
TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING
THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK
FACTORS."
THE FOLLOWING DISCUSSION SHOULD BE READ ONLY IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997, CONTAINED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM
10-K.
OVERVIEW
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 THINSTAR and NCD EXPLORA family of thin clients, NCD THINSTAR
CONECTIVITY SUITE, NCD WINCENTER-TM- multi-user WINDOWS NT application server
software, and NCD PC-XWARE-Registered Trademark- software that delivers PC
access to UNIX and multi-user WINDOWS NT PCs. These products are sold through
OEMs, system integrators and distributor/VAR channels worldwide.
The Company sells hardware product to International Business Machines
Corporation ("IBM") pursuant to the joint development agreement dated June 27,
1996 (the "IBM Agreement") of a network application terminal for resale by IBM.
The IBM Agreement provides for IBM to purchase a substantial portion of its
requirements for such products from the Company through December 31, 2000.
RECENT DEVELOPMENTS
During the first quarter of 1998, the Company signed a non-exclusive
three-year agreement with Intel Corporation under which the Company and Intel
will collaborate to produce desktop devices based on guidelines for Lean
Client systems outlined by Intel in December 1997. Under the terms of the
agreement, the Company will develop a "reference platform design" consisting
of Pentium-based lean client hardware integrated with software technology
from both companies. Subject to the Company's successful completion of the
development project, including the Company's demonstration of volume
production, Intel has agreed to (i) reference the Company's lean client
design(s) as the "preferred design" for the lean client marketplace and (ii)
refrain from developing a board level product(s) substantially equivalent to
the Company's lean client design(s) for a specified period of time. The
agreement provides that the Company will develop new product designs based on
Intel architecture and the Company will have a limited period of exclusivity
for such design(s). Thereafter, Intel shall have the option to acquire a
non-exclusive license to any Company lean client design(s) developed by the
Company under the auspices of the agreement. The agreement further
contemplates that Intel may elect to terminate the agreement for convenience
prior to the Company's completion of its development efforts upon Intel's
payment to the Company of substantial specified lump sum payments.
In June 1998, the Company announced that they have developed a WINDOWS-based
terminal, endorsed by Microsoft, based on Microsoft's CE operating system. This
new WINDOWS-based terminal, which utilizes Microsoft's RDP protocol and/or
Citrix's ICA protocol, can access Microsoft's NT operating system from multiple
desktops.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the second quarters of 1998 and 1997 were $22.7 million
and $34.4 million, respectively, representing a decrease of 34%, and $53.3 and
$65.4 million for the first six months of 1998 and 1997, respectively,
representing a decrease of 19%. Sales related to the IBM Agreement accounted
for approximately 20% and 23% of revenues in the second
8
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quarters of 1998 and 1997, respectively, and approximately 23% and 20% in the
first six months of 1998 and 1997, respectively.
HARDWARE REVENUES
Hardware revenues consist primarily of revenues from the sale of thin client
products and related hardware, and to a lesser extent, fees for related service
activities. Hardware revenues were $14.7 million and $26.9 million for the
second quarters of 1998 and 1997, respectively, and $37.3 million and $49.8
million for the first six months of 1998 and 1997, respectively. The decline
from the second quarter of 1997 to the second quarter of 1998 reflects decreased
shipments to IBM and the combined impact of lower volume and lower average
selling prices to other customers. The decline in the first six months of 1998
compared with the same period in 1997 primarily reflects a change in the mix of
products sold, reflecting substantially lower average selling prices, offset
partially by increased shipments of monitors in the first quarter of 1998.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Current software products
that are generating revenue include NCD WINCENTER, the Company's multi-user
WINDOWS NT application server software, NCD PC-XWARE, the Company's thin
client software for PCs, and NCDWARE, the Company's proprietary thin client
software. Revenues from software and related services were $8.0 million and
$7.5 million for the second quarters of 1998 and 1997, respectively, and
$16.1 million and $15.6 million for the first six months of 1998 and 1997,
respectively. The mix of software revenues changed slightly, reflecting
higher WINCENTER revenues and software support revenues and lower PC-XWARE
revenues in the second quarter and first six months of 1998. In addition,
revenues for the second quarter and first six months of 1997 reflected
$250,000 and $1.0 million, respectively, related to an agreement with AT&T
that terminated in September 1997. The Company contracts with other third
parties including Microsoft Corporation and Citrix Systems, Inc. ("Citrix")
to license technology used in certain of its software products. These third
parties have the right, upon certain specified notification, to terminate
such licensing agreements. Citrix has recently notified the Company of its
intent to terminate this relationship as of September 30, 1998. This could
result in significantly reduced sales of WINCENTER products, and,
accordingly, software revenues in future periods.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on Hardware revenues were 28% and 30% for
the second quarters of 1998 and 1997, respectively, and 25% and 32% for the
first six months of 1998 and 1997, respectively. The decrease in margin for the
second quarter and first six months of 1998 reflects lower margins on products
sold to IBM on an OEM basis, increased sales of low margin monitors and
increased sales of other lower margin products. The Company currently
anticipates that the mix of hardware OEM revenues as a component of total
hardware revenues will continue to rise. In addition, the Company plans to
increase the percentage of revenues generated through indirect channels. The
combined impact of these changes is likely to result in reduced overall gross
margin percentages on hardware revenues in future periods.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on Software revenues were 65% and 79% for
the second quarters of 1998 and 1997, respectively, and 67% and 71% for the
first six months of 1998 and 1997, respectively. The decrease in gross margin
percentages for the second quarter and first six months of 1998 is related to
the combined impact of high margin AT&T revenues recognized in the second
quarter and first six months of 1997 which were not recognized in 1998 and
reduced margin from increased NCD WINCENTER sales and the reduction of NCD
PC-XWARE sales. Certain technology used in the Company's products is licensed
from third parties on a royalty-bearing basis; accordingly, royalties are a
significant component of total software cost of sales for 1998 and 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.3 million and $3.5 million for
the second quarters of 1998 and 1997, respectively, and $6.8 million and $7.0
million for the first six months of 1998 and 1997, respectively. Although R&D
expenses decreased slightly in absolute dollars, the investment in R&D as a
percentage of net revenues increased as the Company continued to invest in R&D
in a period of lower revenues. As a percentage of net revenues, R&D expenses
were 15% and 10% for the second quarters of 1998 and 1997, respectively, and 13%
and 11% for the first six months of 1998 and 1997, respectively.
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MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $8.1 million and $8.2 million for the second
quarters of 1998 and 1997, respectively, and $15.6 million and $15.4 million for
the first six months of 1998 and 1997, respectively. Although marketing and
selling expenses remain relatively static in absolute dollars, these expenses
increased as a percentage of net revenues as the Company continued to invest in
tradeshows and its focus on technical support in a period of lower revenues. As
a percentage of net revenues, marketing and selling expenses were 36% and 24%
for the second quarters of 1998 and 1997, respectively, and 29% and 23% for the
first six months of 1998 and 1997, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.4 million and $1.7 million
for the second quarters of 1998 and 1997, respectively, and $2.5 million and
$3.3 million for the first six months of 1998 and 1997, respectively. The
decrease in the second quarter and first six months of 1998 primarily reflects
increased efficiencies and continued cost controls related to personnel costs,
facilities costs and outside service fees. As a percentage of net revenues, G&A
expenses were 6% and 5% for the second quarters of 1998 and 1997, respectively,
and 5% for the first six months of both 1998 and 1997.
INTEREST INCOME, NET
Interest income, net of interest expense, was $466,000 and $549,000 for the
second quarters of 1998 and 1997, respectively, and $877,000 and $1.0 million
for the first six months of 1998 and 1997, respectively. The decreases were
primarily due to lower average balances in interest-earning accounts.
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income for the second quarter and first six months of 1998 reflects the
sale of approximately 90% of the Company's interest in Precept Software, Inc.
("Precept") after Precept was acquired by Cisco Systems in March 1998,
resulting in a net gain of approximately $1.9 million. The Company acquired
shares of Precept in 1995 in return for providing specialized software. Other
income in the first six months of 1997 reflects the receipt of insurance
proceeds for certain legal expenses incurred in association with the
securities litigation costs.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit of $395,000 and $658,000 in the
second quarter and first six months of 1998, respectively, compared to an income
tax provision of $464,000 and $1.0 million in the second quarter and first six
months of 1997, respectively. At June 30, 1998, the Company's gross deferred
tax assets are approximately $5.9 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.
FINANCIAL CONDITION
Total assets of $77.8 million at June 30, 1998 decreased from $86.5 million at
December 31, 1997. The change in total assets reflects decreases in accounts
receivable and inventories of $11.8 million and $2.5 million, respectively,
partially offset by increases in cash and short-term investments of $6.2
million. Cash and short-term investments increased primarily from customer
receipts partially offset by corporate repurchases of common stock of $7.0
million. Total liabilities as of June 30, 1998 decreased by $8.8 million, or
34%, from December 31, 1997. The decrease was primarily related to decreases in
accounts payable and deferred revenue of $5.9 million and $1.5 million,
respectively.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1998 are estimated at
approximately $800,000. At June 30, 1998, the Company had commitments for
capital expenditures of approximately $270,000, primarily related to
manufacturing tooling and facilities.
LIQUIDITY
As of June 30, 1998, the Company had combined cash and equivalents and
short-term investments totaling $37.7 million, with no significant debt. Cash
provided by operations was $2.8 million in the first six months of 1998 compared
to $5.0 million in the first six months of 1997. In 1998, decreases in accounts
receivable and inventories of $11.8 million and $2.5 million,
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respectively, and depreciation and amortization of $1.6 million were largely
offset by decreases in accounts payable and deferred revenues of $5.9 million
and $1.5 million, respectively, the gain on sale of the Precept investment of
$1.9 million and a net loss of $1.2 million. In the first six months of 1997,
decreases in refundable and deferred income taxes of $4.0 million, increases in
income taxes payable of $2.1 million, net income of $1.5 million and
depreciation of $1.6 million were only partially offset by an increase in
accounts receivable of $3.7 million. Cash flows from investing activities in
1998 primarily reflects proceeds from the sale of the Precept investment. Cash
flows provided by financing activities in 1998 primarily reflects Intel's
investment in the Company's common stock, offset by corporate common stock
repurchases of $7.0 million.
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
network computing products and related software. Until several years ago, the
Company's thin client product offerings primarily focused on the UNIX
marketplace using the Company's X protocol. The Company's introduction of its
WINCENTER multi-user WINDOWS NT application server software and new,
lower-priced thin client network computing devices allowed the Company to offer
thin client network computing systems that provide users with access to Windows
applications. The Company's expansion of its thin client computing model into
the WINDOWS-based environment has been limited because of the Company's
inability to offer an endorsed Microsoft solution within the WINDOWS market
prior to the introduction of the WINDOWS-based terminal in June 1998 and intense
competition from alternative desktop systems, particularly personal computers,
whose selling prices are at historic lows for relatively high performance
configurations. The Company's future success will depend 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.
RELIANCE ON OEM RELATIONSHIPS
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the execution
of the IBM Agreement. The production cycle of related product requires the
Company to rely on IBM to provide accurate product requirement forecasts, which
have in the past, and will in the future, be subject to changes by IBM. Should
the Company commence production of related product based on provided forecasts
that are subsequently reduced, the Company bears the risk of increased levels of
unsold inventories. Should the expected business volumes associated with the
IBM Agreement not occur, or occur in volumes below management's expectations,
there would be a material, adverse effect on the Company's operating results.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of potential OEM relationships
for the Company's thin client computing products, which would likely lead to
overall reduced gross margins on total revenues.
OTHER RISK FACTORS
The Company experiences significant competition from other thin client
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the thin client computing market has intensified
over the past several years, resulting in price reductions and reduced profit
margins. The Company expects this intense competition to continue, and there
can be no assurance that the Company will be able to continue to compete
successfully against current and future competitors as the desktop computer
market evolves and competition increases. The Company's software products also
face substantial competition from software vendors that offer similar products,
including several large software companies. Additionally, as the Company
expands the network computing model into the Windows-based environment, the
Company's
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software products will face increased competition in this evolving market,
including new product offerings from Microsoft Corporation and Citrix Systems,
Inc.
The Company operates with a relatively small backlog. Revenues and operating
results therefore generally depend on the volume and timing of orders received,
which are difficult to forecast and which may occur disproportionately during
any given quarter or year. The Company's expense levels are based in part on
its forecast of future revenues. If revenues are below expectations, the
Company's operating results may be adversely affected. The Company has
experienced a disproportionate amount of shipments occurring in the last month
of its fiscal quarters. This trend increases the risk of material
quarter-to-quarter fluctuations in the Company's revenues and operating results.
The Company's operating results have varied significantly, particularly on a
quarterly basis, as a result of a number of factors, including general economic
conditions affecting industry demand for computer products, the timing and
market acceptance of new product introductions by the Company and its
competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to
competitive factors, and the availability and pricing of key components, such as
DRAMs, video monitors, integrated circuits and electronic sub-assemblies, some
of which require substantial order lead times. The Company's operating results
may fluctuate in the future as a result of these and other factors, including
the Company's success in developing and introducing new products, its product
and customer mix, licensing costs, the level of competition which it experiences
and its ability to develop and maintain strategic business alliances.
The Company's future results will depend to a considerable extent on its ability
to continuously develop, introduce and deliver in quantity new hardware and
software products that offer its customers enhanced performance at competitive
prices. The introduction of new or enhanced products also requires the Company
to manage the transition from older, displaced products in order to minimize
disruption to customer ordering patterns, avoid excessive levels of older
product inventories and ensure that adequate supplies of new products can be
delivered to meet customer demand. As the Company is continuously engaged in
this product development and transition process, its operating results may be
subject to considerable fluctuation, particularly when measured on a quarterly
basis. The inability to finance important research and development projects,
delays in the introduction of new and enhanced products, the failure of such
products to gain market acceptance, or problems associated with new product
transitions could adversely affect the Company's operating results.
The Company has significant deferred tax assets and will have to generate a
significant amount of future taxable income to realize its deferred tax
assets. If the Company is unable to realize its deferred tax assets, it will
have to establish a valuation allowance which could have a material adverse
effect on future operating results. There can be no assurance that future
levels of pretax earnings for financial reporting purposes will be sufficient
to realize the deferred tax assets.
The Company relies substantially on independent distributors and resellers,
particularly in European markets and is expanding that model in the US, for the
marketing and distribution of its products. There can be no assurance that the
Company's distributors and resellers will continue their current relationships
with the Company or that they will not give higher priority to the sale of other
products, which could include products of the Company's competitors. A
reduction in sales effort or discontinuance of sales of the Company's products
by its distributors and resellers could lead to reduced sales and could
adversely affect the Company's operating results. In addition, there can be no
assurance as to the continued viability or the financial stability of the
Company's distributors and resellers, the Company's ability to retain its
existing distributors and resellers or the Company's ability to add distributors
and resellers in the future.
The Company relies on independent contractors for virtually all of the
sub-assembly of the Company's thin client computing products. The Company's
reliance on these independent contractors limits its control over delivery
schedules, quality assurance and product costs. In addition, a number of the
Company's independent suppliers are located abroad. The Company's reliance on
these foreign suppliers subjects the Company to risks such as the imposition of
unfavorable governmental controls or other trade restrictions, changes in
tariffs and political instability. The Company currently obtains all of the
sub-assemblies used for its thin client computing products (consisting of all
major components except monitors and cables) from a single supplier located in
Thailand. Any significant interruption in the supply of sub-assemblies from
this contractor would have a material adverse effect on the Company's business
and operating results.
A majority of the Company's international sales are denominated in U.S. dollars,
and an increase in the value of the U.S. dollar relative to foreign currencies
could make the Company's products less competitive in those markets.
International sales and operations may also be subject to risks such as the
imposition of governmental controls, export license requirements, restrictions
on the export of technology, political instability, trade restrictions, changes
in tariffs and difficulties in staffing and managing international operations
and managing accounts receivable. In addition, the laws of certain countries do
not
12
<PAGE>
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. There can be no assurance that these
factors will not have an adverse effect on the Company's future international
sales and, consequently, on the Company's operating results.
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees, particularly
Robert G. Gilbertson, President and Chief Executive Officer and Rudolph G.
Morin, Executive Vice President of Operations & Finance and Chief Financial
Officer. The Company believes that its future success will depend in large part
on its ability to attract and retain highly-skilled engineering, managerial,
sales and marketing personnel. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results or financial condition.
The market price of the Company's common stock has fluctuated significantly over
the past several years and is subject to material fluctuations in the future in
response to announcements concerning the Company or its competitors or
customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general conditions
in the computer industry, developments in the financial markets and other
factors. In particular, shortfalls in the Company's quarterly operating results
from historical levels or from levels forecast by securities analysts could have
an adverse effect on the trading price of the common stock. The Company may not
be able to quantify such a quarterly shortfall until the end of the quarter,
which could result in an immediate and adverse effect on the common stock price.
In addition, the stock market has, from time to time, experienced extreme price
and volume fluctuations that have particularly affected the market prices for
technology companies and which have been unrelated to the operating performance
of the affected companies. Broad market fluctuations of this type may adversely
affect the future market price of the Company's common stock.
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.
See Part II - Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Future Performance and Risk Factors
contained in the Company's 1997 Annual Report on Form 10-K.
13
<PAGE>
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 28, 1998.
(a) The following seven persons nominated by management were elected as
directors at the meeting:
Robert G. Gilbertson
Philip Greer
Douglas H. Klein
Paul Low
Stephen A. MacDonald
Rudolph G. Morin
Peter Preuss
(b) A proposal to approve the reincorporation of the Company in the State of
Delaware and other related changes to the rights of shareholders was
adjourned until June 19, 1998.
(c) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 1989 Stock Option Plan by 500,000 shares was
approved by a vote of 12,655,136 shares for, 3,189,986 shares against and
11,854 shares abstaining.
(d) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan by 200,000 shares
was approved by a vote of 15,512,266 shares for, 316,706 shares against and
128,004 shares abstaining.
(e) A proposal to ratify the selection of KPMG Peat Marwick LLP as independent
auditors of the Company for the current fiscal year was approved by a vote
of 15,841,256 shares for, 60,179 shares against, and 55,541 shares
abstaining.
On June 19, 1998 the proposal to reincorporate the Company in the State of
Delaware was approved by a vote of 9,124,514 shares for, 1,807,884 shares
against and 68,705 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the three-month period
ended June 30, 1998.
14
<PAGE>
NETWORK COMPUTING DEVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Network Computing Devices, Inc.
(Registrant)
Date: August 7, 1998
By: /s/ Rudolph G. Morin
--------------------------------
Rudolph G. Morin
Executive Vice President, Operations & Finance and
Chief Financial Officer (Duly Authorized and
Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,179
<SECURITIES> 10,506
<RECEIVABLES> 15,202
<ALLOWANCES> 1,856
<INVENTORY> 12,882
<CURRENT-ASSETS> 72,821
<PP&E> 27,558
<DEPRECIATION> 24,063
<TOTAL-ASSETS> 77,805
<CURRENT-LIABILITIES> 17,063
<BONDS> 0
0
0
<COMMON> 59,960
<OTHER-SE> 667
<TOTAL-LIABILITY-AND-EQUITY> 77,805
<SALES> 53,329<F1>
<TOTAL-REVENUES> 53,329
<CGS> 33,151<F2>
<TOTAL-COSTS> 33,151
<OTHER-EXPENSES> 24,797
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (1,880)
<INCOME-TAX> (658)
<INCOME-CONTINUING> (1,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
<FN>
<F1>Includes revenues from licensing of software and support services.
<F2>Includes costs from licensing of software and support services.
</FN>
</TABLE>
