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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 North Bernardo Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (650) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of the Registrant's Common Stock was
16,045,933 at April 30, 1999.
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NETWORK COMPUTING DEVICES, INC.
INDEX
<TABLE>
<CAPTION>
Description Page Number
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<S> <C>
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the Three-
Month Periods Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Three-
Month Periods Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3: Market Risk Sensitive Instruments 13
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,196 $ 8,553
Short-term investments 8,490 12,806
Accounts receivable, net 18,922 21,590
Inventories 13,905 14,362
Deferred income taxes 3,332 3,126
Other current assets 3,174 3,214
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Total current assets 57,019 63,651
Property and equipment, net 3,772 3,850
Other assets 7,943 7,645
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Total assets $68,734 $75,146
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,274 $10,438
Accrued expenses 6,104 5,647
Income taxes payable 363 274
Current portion of capital lease obligations 91 90
Deferred revenue 4,586 6,105
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Total current liabilities 18,418 22,554
Long-term portion of capital lease obligations 46 69
Shareholders' equity:
Common stock 16 16
Capital in excess of par value 59,456 59,721
Retained earnings (accumulated deficit) (9,202) (7,214)
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Total shareholders' equity 50,270 52,523
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Total liabilities and shareholders' equity $68,734 $75,146
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</TABLE>
See accompanying notes
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
Net revenues:
Hardware products and services $22,785 $22,573
Software licenses and services 3,639 8,091
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Total net revenues 26,424 30,664
Cost of revenues:
Hardware products and services 14,064 17,344
Software licenses and services 1,110 2,466
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Total cost of revenues 15,174 19,810
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Gross margin 11,250 10,854
Operating expenses:
Research and development 3,439 3,471
Marketing and selling 8,358 7,505
General and administrative 1,685 1,041
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Total operating expenses 13,482 12,017
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Operating income (loss) (2,232) (1,163)
Interest income, net 244 411
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Income (loss) before income taxes (1,988) (752)
Provision for income taxes (income tax benefit) - (263)
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Net income (loss) $(1,988) $ (489)
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Net income (loss) per share
Basic $ (0.12) $ (0.03)
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Diluted $ (0.12) $ (0.03)
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Shares used in per share computations
Basic 16,054 16,612
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Diluted 16,054 16,612
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</TABLE>
See accompanying notes
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
Cash flows from operations:
Net loss $(1,988) $ (489)
Reconciliation to cash provided by (used in) operations:
Depreciation 831 830
Amortization of goodwill 101 -
Deferred income taxes - (246)
Changes in:
Accounts receivable, net 2,668 1,866
Inventories 457 1,651
Other current assets 40 (335)
Accounts payable (3,164) (1,370)
Income taxes payable (117) (112)
Accrued expenses (290) (1,086)
Deferred revenue (772) (549)
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Cash provided by (used in) operations (2,234) 160
Cash flows from investing activities:
Short-term investments, net 4,316 (492)
Changes in other assets (399) 885
Property and equipment purchases, net (753) (269)
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Cash provided by investing activities 3,164 124
Cash flows from financing activities:
Principal payments on capital lease obligations (22) (61)
Repurchases of common stock (555) -
Proceeds from issuance of stock, net 290 7,407
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Cash provided by (used in) financing activities (287) 7,346
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Increase in cash and equivalents 643 7,630
Cash and equivalents:
Beginning of period 8,553 21,240
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End of period $ 9,196 $28,870
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</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 1998 Annual Report on Form 10-K. The consolidated
results of operations for the three-month period ended March 31, 1999 are not
necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending December 31, 1999.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted-average number of common
shares and potential common shares from stock options and warrants
outstanding, when dilutive, using the treasury stock method. At March 31,
1999 and 1998 there were 4,960,457 and 3,471,402 options and warrants
outstanding, respectively, that could potentially dilute earnings per share
("EPS") in the future that were not included in the computation of diluted
EPS because to do so would have been antidilutive for those periods.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Purchased components and sub-assemblies $10,619 $10,733
Work in process 776 1,285
Finished goods 2,510 2,344
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$13,905 $14,362
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</TABLE>
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $4,300 and $5,300 for the first three months of 1999 and
1998, respectively. Income tax payments were $45,200 and $40,200 for the
first three months of 1999 and 1998, respectively.
STOCK REPURCHASE PROGRAM
In November 1997, the Company's Board of Directors adopted a program to
repurchase up to 1,000,000 shares of the Company's common stock during the
12-month period ended October 31, 1998. In July 1998, the repurchase program
was completed with an aggregate of 1,000,000 shares repurchased at prices
ranging from $6.50 to $9.63 at a total aggregate price of $8.5 million. In
June 1998, the Company announced an additional program to repurchase up to
750,000 shares of the Company's common stock during the 12-month period
ending May 31, 1999. Repurchases of 664,800 shares have been made as of
March 31, 1999 under this program at prices ranging from $4.98 to $8.25 at a
total aggregate price of $4.2 million.
MAJOR CUSTOMERS AND OPERATING SEGMENTS
International Business Machines Corporation ("IBM") accounted for
approximately 9% and 24% of the Company's revenues for the first three months
of 1999 and 1998, respectively. Tech Data and Adtcom accounted for
approximately 18% and 14%
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of the Company's revenues for the first three months of 1999, respectively.
Revenues from Tech Data and Adtcom were less than 10% of revenues for the
first three months of 1998.
The Company has one operating segment, the thin client business segment.
7
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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, 1998, CONTAINED IN THE COMPANY'S
1998 ANNUAL REPORT ON FORM 10-K.
OVERVIEW
Network Computing Devices, Inc. (the "Company") provides thin client hardware
and software that delivers simultaneous, high-performance, easy-to-manage and
cost effective access to all of the information on enterprise intranets and
the Internet from thin client, UNIX and PC desktops. The Company's product
line includes the NCD THINSTAR line of Windows-based terminals, optimized to
access Microsoft's Windows NT Server 4.0, Terminal Server Edition, the NCD
EXPLORA thin clients and the NCD NC200 and NCD NC400 network computers,
acquired in the acquisition of Tektronix Inc. Network Displays business unit
("NWD"). On the software side, the Company's products are the NCD THINPATH
family of client and server software, developed to enhance the connectivity,
management and features of the NCD thin clients as well as PCs in accessing
information and applications on Terminal Server. Some of the software
products were part of the NCD THINSTAR software family in 1998; they have
been re-named and were announced in March 1999 as part of the NCD THINPATH
software family. These products are sold through distributor/VAR channels,
system integrators and OEMs worldwide.
The Company sells hardware products to International Business Machines
Corporation ("IBM") pursuant to the joint development agreement dated June
27, 1996 (the "IBM Agreement") of a network application terminal for resale
by IBM. The non-exclusive IBM Agreement provides for IBM to purchase a
portion of its requirements for such products from the Company through
December 31, 2000, although no minimum purchase volumes are required by the
contract.
RECENT DEVELOPMENTS
On December 31, 1998, the Company completed the acquisition of Tektronix'
Network Displays business unit ("NWD") for $3.0 million in cash and warrants
to purchase one million shares of the Company's common stock at $8.00 per
share. The acquisition was accounted for as a purchase business combination
with a total purchase price of $5.9 million. The purchase price was
allocated as follows: $1.7 million to net assets acquired, $1.4 million to
in-process research and development and $2.8 million to other intangible
assets. In addition to acquiring certain assets of NWD, approximately 83
former NWD employees, primarily in sales, marketing and engineering roles,
joined NCD. In conjunction with this acquisition, the Company undertook
various restructuring activities to eliminate redundancies with the acquired
business, including the reduction in personnel of approximately 40 employees.
The Company recorded a charge of approximately $1.0 million in the fourth
quarter of 1998 related to these restructuring activities. During the first
quarter of 1999, the Company paid approximately $640,000 of restructuring
liabilities, leaving approximately $260,000 accrued at March 31, 1999.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the first three months of 1999 were $26.4 million, a
decrease of 14% from 1998 first quarter net revenues of $30.7 million. Sales
related to the IBM Agreement accounted for approximately 9% and 24% of
revenues in the first three months of 1999 and 1998, respectively. Other
major customers of the Company in the first quarter of 1999 included Tech
Data and Adtcom which accounted for approximately 18% and 14% of the
Company's revenues, respectively.
HARDWARE REVENUES
Hardware revenues consist primarily of revenues from the sale of thin client
products and related hardware, and to a lesser extent, fees for related
service activities. Hardware revenues were $22.8 million for the first three
months of 1999, essentially
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unchanged from revenues of $22.6 million in the first three months of 1998.
The mix in revenues changed, however, as shipments of the Company's
Windows-based Terminals and network computer products acquired in the NWD
acquisition offset the combined impact of decreased shipments to IBM, lower
average selling prices and decreased shipments of monitors.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Software products that are
included in revenue for the periods presented are (i) NCD THINPATH, the
Company's proprietary software to extend the functionality of its
Windows-based Terminals and for implementing thin client computing to a
variety of enterprise desktops, (ii) NCD WINCENTER, the Company's multi-user
WINDOWS NT application server software and (iii) NCD PC-XWARE, the Company's
thin client software for PCs. Revenues from software and related services
decreased 55% to $3.6 million for the first three months of 1999 from $8.1
million for the first three months of 1998. This decrease primarily reflects
decreased WINCENTER revenues related to the Company's transition from an OEM
of Citrix' WinFrame for NT 3.5 products to a provider of value-add software
to that product, and the market's move from Citrix WinFrame for NT 3.5 to
MetaFrame for NT 4.0 concurrently with the availability of multi-user Windows
NT 4.0 from Microsoft. The Company's OEM relationship with Citrix for Citrix'
WinFrame product ended on September 30, 1998. This will result in
significantly reduced sales of WINCENTER products, and, potentially, a
decrease in total software revenues in future periods if the Company's newly
announced software products do not achieve sufficient marketplace acceptance.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on hardware revenues were 38% and 23%
for the first three months of 1999 and 1998, respectively. The increase in
margin for the first three months of 1999 relates to decreased sales of lower
margin products including monitors and products sold to IBM on an OEM basis
under the IBM Agreement.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on software revenues were 69% and 70%
for the first three months of 1999 and 1998, respectively. The slight
decrease in gross margin percentages for the first three months of 1999 is
primarily related to increased royalty costs associated with NCD WINCENTER
products which have transitioned to MetaFrame for NT 4.0. The effect of this
transition is minimal, however, as NCD WINCENTER sales decreased as a
percentage of total software revenues. Certain technology used in the
Company's products is licensed from third parties on a royalty-bearing basis;
accordingly, royalties are a significant component of total software cost of
sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses of $3.4 million and $3.5 million
for the first three months of 1999 and 1998, respectively, were essentially
unchanged. As a percentage of net revenues, R&D expenses were 13% and 11%
for the first three months of 1999 and 1998, respectively, as the Company
continues to invest in development efforts in a period of lower revenues.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $8.4 million and $7.5 million for the
first three months of 1999 and 1998, respectively. The increase primarily
reflects increased salary costs related to additional sales personnel as a
result of the acquisition of the Network Displays business unit of Tektronix.
As a percentage of net revenues, marketing and selling expenses were 32% and
24% for the first three months of 1999 and 1998, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.7 million and $1.0
million for the first three months of 1999 and 1998, respectively. The
increase in the first three months of 1999 reflects increased costs related
to outside service fees and the amortization of goodwill. As a percentage of
net revenues, G&A expenses were 6% and 3% for the first three months of 1999
and 1998, respectively.
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INTEREST INCOME, NET
Interest income, net of interest expense, was $244,000 and $411,000 for the
first three months of 1999 and 1998, respectively. The decrease was
primarily due to the combined effect of lower average balances at lower
interest rates in interest-earning accounts.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized no income tax benefit for the first three months of
1999 and an income tax benefit of $263,000 in the first three months of 1998.
At March 31, 1999, the Company's net deferred tax assets were approximately
$6.8 million. During 1998, the Company recorded a valuation allowance against
a portion of its deferred tax assets because operating losses created
uncertainty about the Company's ability to generate sufficient taxable income
to utilize all deferred tax assets. Based on the Company's expected
operating results, management believes that it is more likely than not that
the Company will realize the benefit of the recognized deferred tax assets.
See Future Performance and Risk Factors below.
FINANCIAL CONDITION
Total assets of $68.7 million at March 31, 1999 decreased from $75.1 million
at December 31, 1998. The change in total assets primarily reflects
decreases in cash and short-term investments and accounts receivable of $3.7
million and $2.7 million, respectively. Total liabilities as of March 31,
1999 decreased by $4.2 million, or 18%, from December 31, 1998. The decrease
was primarily related to decreases in accounts payable and deferred revenue
of $3.2 million and $1.5 million, respectively.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1999 are estimated at
approximately $2.8 million. At March 31, 1999, the Company had commitments
for capital expenditures of approximately $660,000, primarily related to
manufacturing tooling.
LIQUIDITY
As of March 31, 1999, the Company had combined cash and equivalents and
short-term investments totaling $17.7 million, with no significant debt.
Cash used in operations was $2.2 million in the first three months of 1999
compared to cash provided by operations of $0.2 million in the first three
months of 1998. In the first three months of 1999, a decrease in accounts
payable of $3.2 million and the net loss of $2.0 million were only partially
offset by a decrease in accounts receivable of $2.7 million. In the first
three months of 1998, decreases in accounts receivable and inventories of
$1.9 million and $1.7 million, respectively, and depreciation of $830,000
were largely offset by decreases in accounts payable and accrued expenses of
$1.4 million and $1.1 million, respectively, and a net loss of $489,000. Cash
flows provided by financing activities in the first three months of 1998
primarily reflects Intel's investment in the Company's common stock.
The Company believes that its existing sources of liquidity, including cash
generated from operations, will be sufficient to meet operating cash
requirements and capital lease repayment obligations at least through the
next twelve months.
YEAR 2000 ISSUES
In the next year, most companies could face a potentially serious information
systems problem because many software applications and operational programs
written in the past were designed to handle date formats with two-digit years
and thus may not properly recognize calendar dates beginning in the Year
2000. This problem could result in computers either outputting incorrect data
or shutting down altogether when attempting to process a date such as
"01/01/00." In response to this, the Company has formed a task force (the
"Task Force") specifically assigned to addressing Year 2000 issues.
The Task Force is composed of members from all essential functional groups
within the Company. The Task Force meets regularly, and the meeting minutes
are reviewed on a regular basis at the Executive Staff's operational meeting.
The Company has reviewed all of its current product offerings and believes
that its current products are Year 2000 compliant. As to the Company's
internal operations, the Task Force's general plan of action includes
inventorying all essential systems, equipment and facilities, contacting
suppliers to ascertain vendor readiness for Year 2000, testing all critical
systems and resolving all mission-critical problems by the end of the third
quarter of 1999. The Company is currently on schedule to complete all
mission-critical Year 2000 problems by the end of the third quarter of 1999.
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The Company has completed a comprehensive inventory, and is currently in the
process of completing the evaluation, remediation and testing of its systems,
equipment and facilities. The Company has also identified all essential
suppliers and has contacted them to determine whether these suppliers'
operations, products and services are, or will be, Year 2000 ready. The
Company has received substantially all supplier responses. In addition, the
Company is in the process of an on-going audit of its largest supplier to
ensure Year 2000 readiness. The Company has a number of projects underway to
replace or upgrade systems, equipment and facilities that are not currently
Year 2000 ready. To date, the Company has not identified any specific
contingency plans should the replacement or upgrade of these systems not be
completed on a timely basis.
The Company estimates the total Year 2000 costs to be between $500,000 to
$750,000. As of March 31, 1999, the Company has spent approximately $83,000
related to Year 2000 issues. The Company has budgeted all Year 2000 costs
independently of the Company's information technology budget. All costs will
be paid from the Company's operating funds.
In addition to potential costs or losses directly associated with the Year
2000 issue, the Company could experience reduced revenues resulting from
other companies' information systems budgets being allocated to solving Year
2000 issues, thus reducing amounts available to purchase the Company's
products. The Company could also be exposed to a potential adverse impact
resulting from the failure of key suppliers, financial institutions and other
third parties to adequately address the Year 2000 problem, despite assurances
to the contrary given to the Company. However, the Company cannot currently
estimate the incidental costs and losses which may be incurred from reliance
on these third parties, nor can any assurance be given that the Year 2000
problem will not have a material adverse effect on the Company's business,
operating results or financial condition.
The Company believes that the most reasonable likely worst case scenario
related to Year 2000 compliance that the Company may experience would be a
delay or inability to procure components from suppliers or an interruption of
orders from key customers due to their failure to successfully remediate Year
2000 related issues. Such scenarios, if they were to develop, could
materially, adversely affect the Company and its operations. The Company has
in place only general contingency plans, such as replacement of suppliers and
stockpiling of critical components, to respond to such scenarios.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING THIN CLIENT COMPUTING MARKET
The Company derives a majority of its revenues from the sale of thin client
network computing products and related software. Until several years ago,
the Company's thin client product offerings primarily focused on the UNIX
marketplace using the Company's X protocol. The Company's introduction of
its WINCENTER multi-user Windows NT application server software and new,
lower-priced thin client network computing devices allowed the Company to
offer thin client network computing systems that provide users with access to
Windows applications. The Company's expansion of its thin client computing
model into the Windows-based environment has been limited because of the
Company's inability to offer an endorsed Microsoft solution within the
Windows market prior to the introduction of the Windows-based terminal in
June 1998 and intense competition from alternative desktop systems,
particularly personal computers, whose selling prices are at historic lows
for relatively high performance configurations. The Company's future success
will depend substantially upon increased acceptance of the thin client
computing model and the successful marketing of the Company's new thin client
computing hardware and software products. There can be no assurance that the
Company's new thin client computing products will compete successfully with
alternative desktop solutions or that the thin client computing model will be
widely adopted in the rapidly evolving desktop computer market. The failure
of new markets to develop for the Company's thin client computing products
would have a material, adverse effect on the Company's business, operating
results and financial condition.
OTHER RISK FACTORS
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the
execution of the IBM Agreement. The production cycle of related product
requires the Company to rely on IBM to provide accurate product requirement
forecasts, which have in the past, and will in the future, be subject to
changes by IBM. Should the Company commence production of related product
based on provided forecasts that are subsequently reduced, the Company bears
the risk of increased levels of unsold inventories. Should the expected
business
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volumes associated with the IBM Agreement not occur, or occur in volumes
below management's expectations, there would be a material, adverse effect on
the Company's operating results.
The Company experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the thin client computing market has
intensified over the past several years, resulting in price reductions and
reduced profit margins. The Company expects this intense competition to
continue, and there can be no assurance that the Company will be able to
continue to compete successfully against current and future competitors as
the desktop computer market evolves and competition increases. The Company's
software products also face substantial competition from software vendors
that offer similar products, including several large software companies,
including Microsoft and Citrix.
The Company's operating results have varied significantly, particularly on a
quarterly basis, as a result of a number of factors, including general
economic conditions affecting industry demand for computer products, the
timing and market acceptance of new product introductions by the Company and
its competitors, the timing of significant orders from and shipments to large
customers, periodic changes in product pricing and discounting due to
competitive factors, and the availability and pricing of key components, such
as DRAMs, video monitors, integrated circuits and electronic sub-assemblies,
some of which require substantial order lead times. The Company's operating
results may fluctuate in the future as a result of these and other factors,
including the Company's success in developing and introducing new products,
its product and customer mix, licensing costs, the level of competition which
it experiences and its ability to develop and maintain strategic business
alliances.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of potential OEM
relationships for the Company's thin client computing products. This
condition would likely lead to overall reduced gross margins on total
revenues. In addition, the Company operates with a relatively small backlog.
Revenues and operating results therefore generally depend on the volume and
timing of orders received, which are difficult to forecast and which may
occur disproportionately during any given quarter or year. The Company's
expense levels are based in part on its forecast of future revenues. If
revenues are below expectations, the Company's operating results may be
adversely affected. The Company has experienced a disproportionate amount of
shipments occurring in the last month of its fiscal quarters. This trend
increases the risk of material quarter-to-quarter fluctuations in the
Company's revenues and operating results.
The Company's future results will depend to a considerable extent on its
ability to continuously develop, introduce and deliver in quantity new
hardware and software products that offer its customers enhanced performance
at competitive prices. The introduction of new or enhanced products also
requires the Company to manage the transition from older, displaced products
in order to minimize disruption to customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate
supplies of new products can be delivered to meet customer demand. As the
Company is continuously engaged in this product development and transition
process, its operating results may be subject to considerable fluctuation,
particularly when measured on a quarterly basis. The inability to finance
important research and development projects, delays in the introduction of
new and enhanced products, the failure of such products to gain market
acceptance, or problems associated with new product transitions could
adversely affect the Company's operating results.
The Company has significant deferred tax assets and will have to generate
approximately $17 million of future taxable income to realize its net
deferred tax assets. If the Company is unable to realize its net deferred
tax assets, it will have to establish an additional valuation allowance,
which could have a material, adverse effect on future operating results.
Although management believes that the Company will achieve the operating
results necessary to realize these assets, there can be no assurance that
future levels of taxable income will be sufficient to realize the net
deferred tax assets.
The Company relies increasingly on independent distributors and resellers for
the distribution of its products. In early 1996, the Company experienced
significant returns of its software products from its distributors. Although
controls have since been improved, there can be no assurance that the Company
will not experience some level of returns in the future. In addition, there
can be no assurance that the Company's distributors and resellers will
continue their current relationships with the Company or that they will not
give higher priority to the sale of other products, which could include
products of the Company's competitors. A reduction in sales effort or
discontinuance of sales of the Company's products by its distributors and
resellers could lead to reduced sales and could adversely affect the
Company's operating results. In addition, there can be no assurance as to
the continued viability or the financial stability of the Company's
distributors and resellers, the Company's ability to retain its existing
distributors and resellers or the Company's ability to add distributors and
resellers in the future.
12
<PAGE>
The Company relies on independent contractors for virtually all of the
sub-assembly of the Company's thin client computing products. The Company's
reliance on these independent contractors limits its control over delivery
schedules, quality assurance and product costs. In addition, a number of the
Company's independent suppliers are located abroad. The Company's reliance
on these foreign suppliers subjects the Company to risks such as the
imposition of unfavorable governmental controls or other trade restrictions,
changes in tariffs and political instability. The Company currently obtains
all of the sub-assemblies used for its thin client computing products
(consisting of all major components except monitors and cables) from a single
supplier located in Thailand. Any significant interruption in the supply of
sub-assemblies from this contractor would have a material, adverse effect on
the Company's business and operating results. However, the Company now has
the capability to obtain sub-assemblies from an alternative location of its
single supplier, which is located in Mexico. Disruptions in the provision of
components by the Company's other suppliers, or other events that would
require the Company to seek alternate sources of supply, could also lead to
supply constraints or delays in delivery of the Company's products and
adversely affect its operating results.
A number of components and parts used in the Company's products, including
certain semiconductor components, also are currently available from single or
limited sources of supply. The Company has no long-term purchase agreements
or other guaranteed supply arrangements with suppliers of these single or
limited source components. The Company has generally been able to obtain
adequate supplies of parts and components in a timely manner from existing
sources under purchase orders and endeavors to maintain inventory levels
adequate to guard against interruptions in supplies. However, the Company's
inability to obtain sufficient supplies of these parts and components from
existing suppliers or to develop alternate supply sources would adversely
affect the Company's operating results.
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those
markets. International sales and operations may also be subject to risks
such as the imposition of governmental controls, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the
laws of certain countries do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have an
adverse effect on the Company's future international sales and, consequently,
on the Company's operating results.
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees, particularly
Robert G. Gilbertson, President and Chief Executive Officer and Rudolph G.
Morin, Executive Vice President of Operations & Finance and Chief Financial
Officer. The Company believes that its future success will depend in large
part on its ability to attract and retain highly-skilled engineering,
managerial, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting, integrating and retaining such personnel. Failure to attract and
retain key personnel could have a material, adverse effect on the Company's
business, operating results or financial condition.
The market price of the Company's common stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors
or customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general
conditions in the computer industry, developments in the financial markets
and other factors. In particular, shortfalls in the Company's quarterly
operating results from historical levels or from levels forecast by
securities analysts could have an adverse effect on the trading price of the
common stock. The Company may not be able to quantify such a quarterly
shortfall until the end of the quarter, which could result in an immediate
and adverse effect on the common stock price. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies
and which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Company's common stock.
ITEM 3. MARKET RISK SENSITIVE INSTRUMENTS
The Company's market risk sensitive instruments as of March 31, 1999 are
primarily exposed to interest rate risks. Because of the short-term
maturities of these instruments, a 100 basis point change in related interest
rates would not have a material
13
<PAGE>
effect on their fair value. Fluctuations in foreign exchange rates do not
have a material effect on the Company's financial statements.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 27 Financial Data Schedule.
(b) The Company filed the following reports on Form 8-K for the three-month
period ended March 31, 1999:
(i) Form 8-K filed January 14, 1999 regarding the Company's
reincorporation in Delaware.
(ii) Form 8-K/A filed January 14, 1999 regarding the Company's amendment
of its Rights Plan.
14
<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: May 12, 1999
By: /s/ Rudolph G. Morin
--------------------------
Rudolph G. Morin
Executive Vice President, Operations
& Finance and Chief Financial Officer
(Duly Authorized and Principal
Financial and Accounting Officer)
15
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