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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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (650) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock was
16,179,024 at June 30,1999
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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
Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998 3
Condensed Consolidated Statements of Operations for the Three-and
Six-Month Periods Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Six-Month
Periods Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3: Quantitative and Qualitative Disclosure About Market Risk 13
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 14
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,
1999 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,877 $ 8,553
Short-term investments 2,376 12,806
Accounts receivable, net 21,402 21,590
Inventories 15,985 14,362
Refundable and deferred income tax assets 3,428 3,126
Other current assets 3,486 3,214
-------------- --------------
Total current assets 61,554 63,651
Property and equipment, net 4,564 3,850
Other assets 7,794 7,645
-------------- --------------
Total assets $ 73,912 $ 75,146
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,594 $ 10,438
Accrued expenses 6,327 5,647
Income taxes payable 214 274
Current portion of capital lease obligations 91 90
Deferred revenue 4,450 6,105
-------------- --------------
Total current liabilities 24,676 22,554
Long-term portion of capital lease obligations 23 69
Shareholders' equity:
Common stock 16 16
Capital in excess of par 60,182 59,721
Accumulated deficit (10,985) (7,214)
-------------- --------------
Total shareholders' equity 49,213 52,523
-------------- --------------
Total liabilities and shareholders' equity $ 73,912 $ 75,146
============== ==============
</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,
------------------------------------ ---------------------------------
1999 1998 1999 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net revenues:
Hardware products and services $ 25,341 $ 14,677 $ 48,126 $ 37,251
Software licenses and services 2,533 7,988 6,172 16,078
--------------- ---------------- -------------- ---------------
Total net revenues 27,874 22,665 54,298 53,329
Cost of revenues:
Hardware products and services 15,725 10,556 29,789 27,899
Software licenses and services 636 2,785 1,746 5,252
--------------- ---------------- -------------- ---------------
Total cost of revenues 16,361 13,341 31,535 33,151
--------------- ---------------- -------------- ---------------
Gross margin 11,513 9,324 22,763 20,178
Operating expenses:
Research and development 3,272 3,291 6,711 6,762
Marketing and selling 8,622 8,076 16,980 15,581
General and administrative 1,498 1,413 3,183 2,454
--------------- ---------------- -------------- ---------------
Total operating expenses 13,392 12,780 26,874 24,797
--------------- ---------------- -------------- ---------------
Operating income (loss) (1,879) (3,456) (4,111) (4,619)
Interest income, net 96 466 340 877
Other income - 1,862 - 1,862
--------------- ---------------- -------------- ---------------
Income (loss) before income taxes (1,783) (1,128) (3,771) (1,880)
Provision for income taxes (income tax benefit) - (395) - (658)
--------------- ---------------- -------------- ---------------
Net income (loss) $ (1,783) $ (733) $ (3,771) $ (1,222)
--------------- ---------------- -------------- ---------------
--------------- ---------------- -------------- ---------------
Net income (loss) per share
Basic $ (0.11) $ (0.04) $ (0.23) $ (0.07)
--------------- ---------------- -------------- ---------------
--------------- ---------------- -------------- ---------------
Diluted $ (0.11) $ (0.04) $ (0.23) $ (0.07)
--------------- ---------------- -------------- ---------------
--------------- ---------------- -------------- ---------------
Shares used in per share computations
Basic 16,135 16,731 16,095 16,672
--------------- ---------------- -------------- ---------------
--------------- ---------------- -------------- ---------------
Diluted 16,135 16,731 16,095 16,672
--------------- ---------------- -------------- ---------------
--------------- ---------------- -------------- ---------------
</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,
--------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operations:
Net income (loss) $ (3,771) $ (1,222)
Reconciliation to cash provided by operations:
Depreciation and amortization 1,824 1,573
Deferred income taxes - (695)
Gain on sale of investment - (1,862)
Changes in:
Accounts receivable, net 188 11,802
Inventories (1,623) 2,530
Other current assets (272) (607)
Accounts payable 3,156 (5,918)
Income taxes payable (362) (192)
Accrued expenses (170) (1,073)
Deferred revenue (1,655) (1,525)
--------------- ---------------
Cash provided by (used in) operations (2,685) 2,811
Cash flows from investing activities:
Short-term investments, net 10,430 (266)
Proceeds from sale of investment 2,141
Changes in other assets (350) 676
Property and equipment purchases (1,487) (644)
--------------- ---------------
Cash provided by (used in) investing activities 8,593 1,907
Cash flows from financing activities:
Principal payments on capital lease obligations (46) (109)
Repurchases of common stock (148) (6,975)
Proceeds from issuance of stock, net 610 8,305
--------------- ---------------
Cash provided by (used in) financing activities 416 1,221
--------------- ---------------
Increase (decrease) in cash and equivalents 6,324 5,939
Cash and equivalents:
Beginning of period 8,553 21,240
--------------- ---------------
End of period $ 14,877 $ 27,179
--------------- ---------------
--------------- ---------------
</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 entries, which in the
opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. This Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K. The consolidated
results of operations for the three and six-month periods ended June 30,
1999 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 1999.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted-average number of common
shares and potential common shares from stock options and warrants
outstanding, when dilutive, using the treasury stock method. At June 30, 1999
and 1998 there were 3,863,307 and 3,764,278 options and warrants outstanding,
respectively, that could potentially dilute earnings per share ("EPS") in the
future that were not included in the computation of diluted EPS because to do
so would have been antidilutive for those periods.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ------------
<S> <C> <C>
Purchased components and sub-assemblies $12,122 $10,733
Work in process 690 1,285
Finished goods 3,173 2,344
----- -------
15,985 14,362
------ ------
</TABLE>
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $3,100 and $4.500 for the second quarters of 1999 and 1998,
respectively, and $7,400 and $9,800 for the first six months of 1999 and
1998, respectively. Income tax payments were $49,300 and $61,600 for the
second quarters of 1999 and 1998, respectively and $94,500 and $101,800 for
the first six months of 1999 and 1998, respectively.
STOCK REPURCHASE PROGRAM
In November 1997, the Company's Board of Directors adopted a program to
repurchase up to 1,000,000 shares of the Company's common stock during the
12-month period ended October 31, 1998. In July 1998, the repurchase program
was completed with an aggregate of 1,000,000 shares repurchased at prices
ranging from $6.50 to $9.63 at a total aggregate price of $8.5 million. In
June 1998, the Company announced an additional program to repurchase up to
750,000 shares of the Company's common stock during the 12-month period ended
May 31, 1999. Repurchases of 694,800 shares have been made as of June 30,
1999 under this program at prices ranging from $4.63 to $8.25 at a total
aggregate price of $4.4 million.
6
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAJOR CUSTOMERS AND OPERATING SEGMENTS
International Business Machines Corporation ("IBM") accounted for
approximately 12% and 20% of the Company's revenues for the second quarters
of 1999 and 1998, respectively, and approximately 10% and 23% for the first
six months of 1999 and 1998, respectively. Tech Data and Adtcom accounted for
approximately 12% and 15%, respectively, of the Company's revenues for the
second quarter of 1999 and approximately 14 % and 13 %, respectively, for the
first six months of 1999. Revenues from Ingram Micro were 10% of the total
for the second quarter of 1998, and 6% the first six months of 1998.
The Company has one operating segment, the thin client business segment.
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 IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1998, CONTAINED IN THE COMPANY'S 1998 ANNUAL
REPORT ON FORM 10-K.
OVERVIEW
Network Computing Devices, Inc. (the "Company") provides thin client hardware
and software that deliver simultaneous, high-performance, easy-to-manage and
cost effective access to all of the information on enterprise intranets and
the Internet from thin client, UNIX and PC desktops. The Company's product
line includes the NCD THINSTAR line of Windows-based terminals, optimized to
access Microsoft's Windows NT Server 4.0, Terminal Server Edition, the NCD
EXPLORA thin clients and the NCD NC200 and NCD NC400 network computers,
acquired in the acquisition of Tektronix Inc.'s Network Displays business
unit ("NWD"). On the software side, the Company's products are the NCD
THINPATH family of client and server software, developed to enhance the
connectivity, management and features of the NCD thin clients as well as PCs
in accessing information and applications on Terminal Server. Some of the
software products were part of the NCD THINSTAR software family in 1998; they
have been re-named and were announced in March 1999 as part of the NCD
THINPATH software family. These products are sold through distributor/VAR
channels, system integrators and OEMs worldwide.
The Company sells hardware products to International Business Machines
Corporation ("IBM") pursuant to an agreement dated June 27, 1996 (the "IBM
Agreement") of a network application terminal for resale by IBM.The IBM
Agreement is non-exclusive and provides for IBM to purchase a portion of its
requirements of such products from the Company through December 31, 2000,
although no minimum purchase volumes are required by the contract.
RECENT DEVELOPMENTS
On December 31, 1998, the Company completed the acquisition of Tektronix'
Network Displays business unit ("NWD") for $3.0 million in cash and warrants
to purchase one million shares of the Company's common stock at $8.00 per
share. The acquisition was accounted for as a purchase business combination
with a total purchase price of $5.9 million. The purchase price was allocated
as follows: $1.7 million to net assets acquired, $1.4 million to in-process
research and development and $2.8 million to other intangible assets. In
addition to acquiring certain assets of NWD, approximately 83 former NWD
employees, primarily in sales, marketing and engineering roles, joined NCD.
In conjunction with this acquisition, the Company undertook various
restructuring activities to eliminate redundancies with the acquired
business, including the reduction in personnel of approximately 40 employees.
The Company recorded a charge of approximately $1.0 million in the fourth
quarter of 1998 related to these restructuring activities. During the second
quarter and first six months of 1999, the Company paid approximately $93,000
and $734,000, respectively, in restructuring costs, leaving approximately
$166,000 accrued at June 30, 1999.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the second quarters of 1999 and 1998 were $27.9
million and $22.7 million, respectively, representing an increase of 23%, and
$54.3 million and $53.3 million for the first six months of 1999 and 1998,
respectively. Sales related to the IBM Agreement accounted for approximately
12% and 20% of revenues in the second quarters of 1999 and 1998,
respectively, and approximately 10% and 23% in the first six months of 1999
and 1998, respectively.
8
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HARDWARE REVENUES
Hardware revenues are primarily from the sale of thin client products and
related hardware. Revenues were $25.3 million and $14.7 million for the
second quarters of 1999 and 1998, respectively, and $48.1 million and $37.3
million for the first six months of 1999 and 1998, respectively. Increases in
shipments of the Company's Windows-based Terminals and network computer
products acquired in the NWD acquisition offset the combined impact of
decreased shipments to IBM, lower average selling prices and decreased
shipments of monitors.
SOFTWARE REVENUES
Software revenues are primarily from the sale and licensing of software
products and related support services. Revenues from software and related
services were $2.5 million and $8.0 million for the second quarters of 1999
and 1998, respectively, and $6.2 million and $16.1 million for the first six
months of 1999 and 1998, respectively. This decrease primarily reflects the
transition from the sale of the Citrix based software to the sale of software
developed-in-house. The Company's OEM relationship with Citrix for Citrix'
WinFrame product ended on September 30, 1998. This will result in
significantly reduced sales of Citrix based products, and, potentially, a
decrease in total software revenues in future periods if the Company's newly
announced software products do not achieve sufficient marketplace acceptance.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on hardware revenues were 38% and 28%
for the second quarters of 1999 and 1998, respectively, and 38% and 25% for
the first six months of 1999 and 1998, respectively. The increases in margin
relate to decreased sales of lower-margin products including monitors and
products sold to IBM on an OEM basis under the IBM Agreement and improved
margins from the acquired Tektronix products.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on software revenues were 75% and 65%
for the second quarters of 1999 and 1998, respectively, and 67% for the first
six months of 1999 and 1998, respectively. These increases in gross margin
percentages reflect the transition from the sale of OEM'd software to the
sale of software developed in-house. Absolute dollar margins were still below
prior periods, however, due to lower volume.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.3 million, unchanged for
the second quarters of both 1999 and 1998 , and $6.7 million and $6.8 million
for the first six months of 1999 and 1998, respectively. As a percentage of
net revenues, R&D expenses were 12% and 15% for the second quarters of 1999
and 1998, respectively, and 12% and 13% for the first six months of 1999 and
1998, respectively.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $8.7 million and $8.1 million for the
second quarters of 1999 and 1998, respectively, and $17.0 million and $15.6
million for the first six months of 1999 and 1998, respectively. The
increases primarily reflect increased personnel costs related to the
acquisition of the Network Displays business unit of Tektronix. As a
percentage of net revenues, marketing and selling expenses were 31% and 36%
for the second quarters of 1999 and 1998, respectively, and 31% and 29% for
the first six months of 1999 and 1998, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were virtually unchanged at $1.5
million and $1.4 million for the second quarters of 1999 and 1998,
respectively, and $3.2 million and $2.5 million for the first six months of
1999 and 1998, respectively. As a percentage of net revenues, G&A expenses
were 5% and 6% for the second quarters of 1999 and 1998, respectively, and 6%
and 5% for the first six months of 1999 and 1998, respectively.
INTEREST INCOME, NET
Interest income, net of interest expense, was $96,000 and $466,000 for the
second quarters of 1999 and 1998, respectively, and $340,000 and $877,000 for
the first six months of 1999 and 1998, respectively. The decrease was
primarily due to the combined effect of lower average balances and lower
interest rates in interest-earning accounts.
9
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INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized no income tax benefit in the second quarter and the
first six months of 1999, respectively, compared to an income tax benefit of
$395,000 and $658,000 in the second quarter and first six months of 1998,
respectively. At June 30, 1999, the Company's net deferred tax assets were
approximately $6.9 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 recognized deferred tax assets. See Future
Performance and Risk Factors below.
FINANCIAL CONDITION
Total assets of $73.9 million at June 30, 1999 decreased from $75.1 million at
December 31, 1998. The change in total assets primarily reflects decreases in
cash and short-term investments of $4.1 million offset by increases in
inventories of $1.6 million, plant and property by $0.7 million and other
assets of $0.6 million. Total current liabilities as of June 30, 1999
increased by $2.1 million, or 9 %, from $22.6 million at December 31, 1998.
The change was primarily related to an increase in accounts payable of $3.2
million and partially offset by a decrease in deferred revenue of $1.7 million.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1999 are estimated at
approximately $2.0 million.
LIQUIDITY
As of June 30, 1999, the Company had combined cash and equivalents and
short-term investments totaling $17.3 million, with no significant debt. Cash
used in operations was $2.7 million in the first six months of 1999 compared
to cash provided by operations of $2.8 million in the first six months of
1998. In the first six months of 1999, an increase in inventories of $1.6
million and a net loss of $3.8 million were only partially offset by an
increase in accounts payable of $3.2 million. In the first six months of
1998, decreases in accounts receivable and inventories of $11.8 million and
$2.5 million, respectively, and depreciation and amortization of $1.6 million
were largely offset by decreases in accounts payable and deferred revenue of
$5.9 million and $1.5 million, respectively, the gain on sale of Precept
investment of $1.9 million and a net loss of $1.2 million. Cash flows provided
by investing activities of $1.9 million in the first six months of 1998
primarily reflects proceeds from the sale of the company's investment in
Precept Software, Inc. of $2.1 million. Cash flows provided by financing
activities of $1.2 million in the first six months of 1998 primarily reflects
Intel's investment in the Company's common stock, offset by corporate common
stock repurchase 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.
YEAR 2000 ISSUES
In the next year, most companies could face a potentially serious information
systems problem because many software applications and operational programs
written in the past were designed to handle date formats with two-digit years
and thus may not properly recognize calendar dates beginning in the Year
2000. This problem could result in computers either outputting incorrect data
or shutting down altogether when attempting to process a date such as
"01/01/00." In response to this, the Company has formed a task force (the
"Task Force") specifically assigned to addressing Year 2000 issues.
The Task Force is composed of members from all essential functional groups
within the Company. The Task Force meets regularly, and the meeting minutes
are reviewed on a regular basis at the Executive Staff's operational meeting.
The Company has reviewed all of its current product offerings and believes
that its current products are Year 2000 compliant. As to the Company's
internal operations, the Task Force's general plan of action includes
inventorying all essential systems, equipment and facilities, contacting
suppliers to ascertain vendor readiness for Year 2000, testing all critical
systems and resolving all mission-critical problems by the end of the third
quarter of 1999. The Company is currently on schedule to complete all
mission-critical Year 2000 problems by the end of October of 1999.
The Company has completed a comprehensive inventory, and is currently in the
process of completing the evaluation, remediation and testing of its systems,
equipment and facilities. The Company has also identified all essential
suppliers and has contacted them to determine whether these suppliers'
operations, products and services are, or will be, Year 2000 ready. The
Company has received substantially all supplier responses. In addition, the
Company is in the process of an on-going
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audit of its largest supplier to ensure Year 2000 readiness. The Company has
a number of projects underway to replace or upgrade systems, equipment and
facilities that are not currently Year 2000 ready. To date, the Company has
not identified any specific contingency plans should the replacement or
upgrade of these systems not be completed on a timely basis.
The Company estimates its total Year 2000 costs to be between $600,000
and $700,000. As of June 30, 1999, the Company has spent approximately
$280,000 related to Year 2000 issues.
In addition to potential costs or losses directly associated with the Year
2000 issue, the Company could experience reduced revenues resulting from
other companies' information systems budgets being allocated to solving Year
2000 issues, thus reducing amounts available to purchase the Company's
products. The Company could also be exposed to a potential adverse impact
resulting from the failure of key suppliers, financial institutions and other
third parties to adequately address the Year 2000 problem, despite assurances
to the contrary given to the Company. However, the Company cannot currently
estimate the incidental costs and losses which may be incurred from reliance
on these third parties, nor can any assurance be given that the Year 2000
problem will not have a material adverse effect on the Company's business,
operating results or financial condition.
The Company believes that the most likely worst case scenario related to Year
2000 compliance that the Company may experience would be a delay or inability
to procure components from suppliers or an interruption of orders from key
customers due to their failure to successfully remediate Year 2000 related
issues. Such scenarios, if they were to develop, could materially, adversely
affect the Company and its operations. The Company has in place only general
contingency plans, such as replacement of suppliers and stockpiling of
critical components, to respond to such scenarios.
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. The Company's future success
will depend substantially upon increased acceptance of the thin client
computing model and the successful marketing of the Company's new thin client
computing hardware and software products. There can be no assurance that the
Company's new thin client computing products will compete successfully with
alternative desktop solutions or that the thin client computing model will be
widely adopted in the rapidly evolving desktop computer market. The failure
of new markets to develop for the Company's thin client computing products
would have a material, adverse effect on the Company's business, operating
results and financial condition.
OTHER RISK FACTORS
The Company experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the thin client computing market has
intensified over the past several years, resulting in price reductions and
reduced profit margins. The Company expects this intense competition to
continue, and there can be no assurance that the Company will be able to
continue to compete successfully against current and future competitors as
the desktop computer market evolves and competition increases. The Company's
software products also face substantial competition from software vendors
that offer similar products, including several large software companies,
including Microsoft and Citrix.
The Company's operating results have varied significantly, particularly on a
quarterly basis, as a result of a number of factors, including general
economic conditions affecting industry demand for computer products, the
timing and market acceptance of new product introductions by the Company and
its competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to
competitive factors, and the availability and pricing of key components, such
as DRAMs, video monitors, integrated circuits and electronic sub-assemblies,
some of which require
11
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substantial order lead times. The Company's operating results may fluctuate
in the future as a result of these and other factors, including the Company's
success in developing and introducing new products, its product and customer
mix, licensing costs, the level of competition which it experiences and its
ability to develop and maintain strategic business alliances.
The Company operates with a relatively small backlog. Revenues and operating
results therefore generally depend on the volume and timing of orders
received, which are difficult to forecast and which may occur
disproportionately during any given quarter or year. The Company's expense
levels are based in part on its forecast of future revenues. If revenues are
below expectations, the Company's operating results may be adversely
affected. The Company has experienced a disproportionate amount of shipments
occurring in the last month of its fiscal quarters. This trend increases the
risk of material quarter-to-quarter fluctuations in the Company's revenues
and operating results.
The Company's future results will depend to a considerable extent on its
ability to continuously develop, introduce and deliver in quantity new
hardware and software products that offer its customers enhanced performance
at competitive prices. The introduction of new or enhanced products also
requires the Company to manage the transition from older, displaced products
in order to minimize disruption to customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. As the
Company is continuously engaged in this product development and transition
process, its operating results may be subject to considerable fluctuation,
particularly when measured on a quarterly basis. The inability to finance
important research and development projects, delays in the introduction of
new and enhanced products, the failure of such products to gain market
acceptance, or problems associated with new product transitions could
adversely affect the Company's operating results.
The Company has significant deferred tax assets and will have to generate
approximately $17 million of future taxable income to realize its net
deferred tax assets. If the Company is unable to realize its net deferred tax
assets, it will have to establish an additional valuation allowance, which
could have a material, adverse effect on future operating results. Although
management believes that the Company will achieve the operating results
necessary to realize these assets, there can be no assurance that future
levels of taxable income will be sufficient to realize the net deferred tax
assets.
The Company relies increasingly on independent distributors and resellers for
the distribution of its products. In early 1996, the Company experienced
significant returns of its software products from its distributors. Although
controls have since been improved, there can be no assurance that the Company
will not experience some level of returns in the future. In addition, there
can be no assurance that the Company's distributors and resellers will
continue their current relationships with the Company or that they will not
give higher priority to the sale of other products, which could include
products of the Company's competitors. A reduction in sales effort or
discontinuance of sales of the Company's products by its distributors and
resellers could lead to reduced sales and could adversely affect the
Company's operating results. In addition, there can be no assurance as to the
continued viability or the financial stability of the Company's distributors
and resellers, the Company's ability to retain its existing distributors and
resellers or the Company's ability to add distributors and resellers in the
future.
The Company relies on independent contractors for virtually all of the
sub-assembly of the Company's thin client computing products. The Company's
reliance on these independent contractors limits its control over delivery
schedules, quality assurance and product costs. In addition, a number of the
Company's independent suppliers are located abroad. The Company's reliance on
these foreign suppliers subjects the Company to risks such as the imposition
of unfavorable governmental controls or other trade restrictions, changes in
tariffs and political instability. The Company currently obtains all of the
sub-assemblies used for its thin client computing products (consisting of all
major components except monitors and cables) from a single supplier located
in Thailand. Any significant interruption in the supply of sub-assemblies
from this contractor would have a material, adverse effect on the Company's
business and operating results. However, the Company now has the capability
to obtain sub-assemblies from an alternative location of its single supplier,
which is located in Mexico. Disruptions in the provision of components by the
Company's other suppliers, or other events that would require the Company to
seek alternate sources of supply, could also lead to supply constraints or
delays in delivery of the Company's products and adversely affect its
operating results.
A number of components and parts used in the Company's products, including
certain semiconductor components, also are currently available from single or
limited sources of supply. The Company has no long-term purchase agreements
or other guaranteed supply arrangements with suppliers of these single or
limited source components. The Company has generally been able to obtain an
adequate supply of parts and components in a timely manner from existing
sources under purchase orders and endeavors to maintain inventory levels
adequate to guard against interruptions in supplies. However, the
12
<PAGE>
Company's inability to obtain sufficient supplies of these parts and
components from existing suppliers or to develop alternate supply sources
would adversely affect the Company's operating results.
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those
markets. International sales and operations may also be subject to risks such
as the imposition of governmental controls, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the
laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have an adverse
effect on the Company's future international sales and, consequently, on the
Company's operating results.
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees . The Company
believes that its future success will depend in large part on its ability to
attract and retain highly-skilled engineering, managerial, sales and
marketing personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting,
integrating and retaining such personnel. Failure to attract and retain key
personnel could have a material, adverse effect on the Company's business,
operating results or financial condition.
The market price of the Company's common stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors
or customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general
conditions in the computer industry, developments in the financial markets
and other factors. In particular, shortfalls in the Company's quarterly
operating results from historical levels or from levels forecast by
securities analysts could have an adverse effect on the trading price of the
common stock. The Company may not be able to quantify such a quarterly
shortfall until the end of the quarter, which could result in an immediate
and adverse effect on the common stock price. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies
and which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk sensitive instruments as of June 30, 1999 are
primarily exposed to interest rate risks. Because of the short-term
maturaties of these instruments, a 100 basis point change in related interest
rates would not have a material effect on their fair value. Fluctuations in
foreign exchange rates do not have a material effect on the Company's
financial statements.
13
<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 26, 1999.
(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 Company's 1999 Stock Option Plan was approved
by a vote of 11,808,695 shares for, 2,486,823 shares against and 50,956
shares abstaining.
(c) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 1992 Employee Stock Purchase Plan by 200,000
shares was approved by a vote of 13,926,996 shares for, 383,490 shares
against and 35,988 shares abstaining.
(d) A proposal to increase the number of shares of Common Stock reserved for
issuance under the Company's 1994 Outside Directors' Stock Option Plan by
50,000 shares was approved by a vote of 13,759,744 shares for, 539,621
shares against and 47,109 shares abstaining.
(e) A proposal to ratify the selection of KPMG LLP as independent auditors of
the Company for the current fiscal year was approved by a vote of
14,286,659 shares for, 35,482 shares against, and 24,333 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 13, 1999
By: /s/ RUDOLPH G. MORIN
-------------------------------------
Rudolph G. Morin
Executive Vice President, Operations &
Finance and Chief Financial
Officer (Duly Authorized and Principal
Financial and Accounting Officer)
15
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,877
<SECURITIES> 2,376
<RECEIVABLES> 22,828
<ALLOWANCES> 1,426
<INVENTORY> 15,985
<CURRENT-ASSETS> 61,554
<PP&E> 29,328
<DEPRECIATION> 24,764
<TOTAL-ASSETS> 73,912
<CURRENT-LIABILITIES> 24,680
<BONDS> 0
0
0
<COMMON> 60,198
<OTHER-SE> (10,985)
<TOTAL-LIABILITY-AND-EQUITY> 73,912
<SALES> 54,298<F1>
<TOTAL-REVENUES> 54,298
<CGS> 31,535<F2>
<TOTAL-COSTS> 31,535
<OTHER-EXPENSES> 26,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (3,771)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,771)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
<FN>
<F1>INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES
<F2>INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES
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