UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 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
17,121,409 at March 31, 1998.
NETWORK COMPUTING DEVICES, INC.
INDEX
DESCRIPTION PAGE NUMBER
- ---------------------------------------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March
31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations for
the Three-Month Periods Ended March 31, 1998 and
1997 4
Condensed Consolidated Statements of Cash Flows for
the Three-Month Periods Ended March 31, 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 13
Signature 14
NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
March 31, December 31,
1998 1997
---------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 28,870 $ 21,240
Short-term investments 10,732 10,240
Accounts receivable, net 23,282 25,148
Inventories 13,761 15,412
Refundable and deferred income tax assets 5,009 4,763
Other current assets 3,178 2,843
------------ -----------
Total current assets 84,832 79,646
Property and equipment, net 3,863 4,424
Other assets 1,559 2,444
------------ -----------
Total assets $ 90,254 $ 86,514
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,841 $ 11,211
Accrued expenses 7,869 8,955
Income taxes payable 485 597
Current portion of capital lease obligations 116 154
Deferred revenue 4,369 4,918
------------ -----------
Total current liabilities 22,680 25,835
Long-term portion of capital lease obligations 137 160
Shareholders' equity:
Undesignated preferred stock - -
Common stock 66,037 58,630
Retained earnings (accumulated deficit) 1,400 1,889
------------ -----------
Total shareholders' equity 67,437 60,519
------------ -----------
Total liabilities and shareholders' equity $ 90,254 $ 86,514
------------ -----------
------------ -----------
See accompanying notes
3
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31,
-----------------------------
1998 1997
------------ -----------
Net revenues:
Hardware products and services $ 22,573 $ 22,927
Software licenses and services 8,091 8,137
------------ -----------
Total net revenues 30,664 31,064
Cost of revenues:
Hardware products and services 17,344 15,069
Software licenses and services 2,466 2,992
------------ -----------
Total cost of revenues 19,810 18,061
------------ -----------
Gross margin 10,854 13,003
Operating expenses:
Research and development 3,471 3,444
Marketing and selling 7,505 7,141
General and administrative 1,041 1,665
------------ -----------
Total operating expenses 12,017 12,250
------------ -----------
Operating income (loss) (1,163) 753
Interest income, net 411 468
Other income - 200
------------ -----------
Income (loss) before income taxes (752) 1,421
Provision for income taxes (income tax benefit) (263) 569
------------ -----------
Net income (loss) $ (489) $ 852
------------ -----------
------------ -----------
Net income (loss) per share
Basic $ (0.03) $ 0.05
------------ -----------
------------ -----------
Diluted $ (0.03) $ 0.05
------------ -----------
------------ -----------
Shares used in per share computations
Basic 16,612 17,089
------------ -----------
------------ -----------
Diluted 16,612 18,889
------------ -----------
------------ -----------
See accompanying notes.
4
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
Cash flows from operations:
Net income (loss) $ (489) $ 852
Reconciliation to cash provided by (used in) operations:
Depreciation and amortization 830 776
Changes in:
Accounts receivable, net 1,866 1,066
Inventories 1,651 (1,461)
Refundable and deferred income taxes (246) 797
Other current assets (335) (1,286)
Accounts payable (1,370) 2,858
Income taxes payable (112) (324)
Accrued expenses (1,086) 858
Deferred revenue (549) (243)
------------ ----------
Cash provided by operations 160 3,893
Cash flows from investing activities:
Short-term investments, net (492) (1,015)
Changes in other assets 885 (103)
Property and equipment purchases, net (269) (1,174)
------------ -----------
Cash provided by (used in) investing activities 124 (2,292)
Cash flows from financing activities:
Principal payments on capital lease obligations (61) (228)
Proceeds from issuance of stock, net 7,407 391
------------ -----------
Cash provided by financing activities 7,346 163
------------ -----------
Increase in cash and equivalents 7,630 1,764
Cash and equivalents:
Beginning of period 21,240 23,832
------------ -----------
End of period $28,870 $ 25,596
------------ -----------
------------ -----------
See accompanying notes.
5
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network
Computing Devices, Inc. (the "Company") furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. This Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1997 Annual Report on Form 10-K. The consolidated
results of operations for the three-month period ended March 31, 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 (1,799,720 in the
first quarter of 1997) outstanding, when dilutive, using the treasury stock
method. In the first quarter of 1998 there were 3,471,402 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 those years.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
March 31, December 31,
1998 1997
---- ----
Purchased components and sub-assemblies $11,736 $13,178
Work in process 636 545
Finished goods 1,389 1,689
----- -----
$13,761 $15,412
------- -------
------- -------
INTEREST AND TAX PAYMENTS
Interest payments, primarily related to interest on capital lease
liabilities, were $5,300 and $22,000 for the first three months of 1998 and
1997, respectively. Income tax payments were $40,200 and $53,600 for the
first three months of 1998 and 1997, respectively.
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 ending April 30, 1998. Repurchases were made under the
program using the Company's cash resources. Shares repurchased are available
for the issuance under the Company's stock plans and for other
6
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
corporate purposes. In September 1997, the repurchase program was completed
with an aggregate of 1,000,000 shares repurchased at prices ranging from
$8.38 to $12.00 per share for a total purchase price of $10.7 million. In
November 1997, the Company's Board of Directors adopted an additional program
to repurchase up to 1,000,000 shares of the Company's common stock during the
12-month period ending October 31, 1998. Repurchases of 191,400 shares were
made in 1997 under the second program at prices ranging from $7.19 to $8.75
at a total aggregate price of $1.5 million. Total repurchases of 1,191,400
shares were made in 1997 at prices ranging from $7.19 to $12.00 per share for
a total purchase price of $12.2 million. No repurchases were made in the
first quarter of 1998.
MAJOR CUSTOMERS AND RELATED ACCOUNTS RECEIVABLE
International Business Machines Corporation ("IBM") accounted for
approximately 24% and 17% of the Company's revenues for the first three
months of 1998 and 1997, respectively. At March 31, 1998, related accounts
receivable due from IBM were approximately $6.3 million.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO THE COMPANY'S FUTURE FINANCIAL
PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY
OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE
PERFORMANCE AND RISK FACTORS."
THE FOLLOWING DISCUSSION SHOULD BE READ ONLY IN CONJUNCTION WITH THE
UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q,
AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 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 EXPLORA and family of thin clients, WINCENTER PRO-TM-
multi-user WINDOWS NT-Registered Tradmark- application server software, and
PC-XWARE-Registered Tradmark- software that delivers PC access to UNIX and
multi-user WINDOWS NT PCs.
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.
Additionally, Intel has agreed to provide the Company with chipset and CPU
product pricing consistent with pricing offered to other market makers or
market leaders shipping the largest volume of units in a given market
segment. 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.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the first three months of 1998 were $30.7 million, a
decrease of 1% from 1997 net revenues of $31.1 million. Sales related to the
IBM Agreement accounted for approximately 24% and 17% of revenues in the
first three 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 $22.6 million for the first three
months of 1998, essentially unchanged from revenues of $22.9 million in the
first three months of 1997. The mix in revenues changed, however, as
increased shipments to IBM and increased shipments of monitors offset the
combined impact of lower volume and lower average selling prices to other
customers.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Current software products
that are generating revenue include WINCENTER-TM-, the Company's multi-user
WINDOWS NT application server
8
software, 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 $8.1 million for the first three months of both 1998
and 1997. The mix of software revenues changed slightly, reflecting higher
WINCENTER revenues and software support revenues and lower PC-XWARE revenues
in the first three months of 1998. In addition, revenues for the first three
months of 1997 reflected $797,000 related to an agreement with AT&T that
terminated in September 1997.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on Hardware revenues were 23% and 34%
for the first three months of 1998 and 1997, respectively. The decrease in
margin for the first three months of 1998 relates to increased sales of lower
margin products including lower-priced EXPLORA thin clients, monitors and
products sold to IBM on an OEM basis under the IBM Agreement. 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 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 70% and 63%
for the first three months of 1998 and 1997, respectively. The increase in
gross margin percentages for the first three months of 1998 is primarily
related to increased sales of software support, which have higher margins
than other software 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 of $3.5 million and $3.4 million
for the first three months of 1998 and 1997, respectively, were essentially
unchanged both in dollars and as a percentage of revenues.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $7.5 million and $7.1 million for the
first three months of 1998 and 1997, respectively. The increase primarily
reflects increased costs related to the Company's increased focus on
technical support. As a percentage of net revenues, marketing and selling
expenses were 24% and 23% for the first three months of 1998 and 1997,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.0 million and $1.7
million for the first three months of 1998 and 1997, respectively. The
decrease in the first three 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 3% and 5% for the first three months of 1998 and 1997,
respectively.
INTEREST INCOME, NET
Interest income, net of interest expense, was $411,000 and $468,000 for the
first three 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 in the first three months of 1997 reflects the receipt of
insurance proceeds for certain legal expenses incurred in association with
the securities litigation costs. No significant other income was produced
during 1998.
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit of $263,000 in the first three
months of 1998 compared to income tax provision of $569,000 in the first
three months of 1997. At March 31, 1998, the Company's gross deferred tax
assets are approximately $5.4 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.
9
FINANCIAL CONDITION
Total assets of $90.3 million at March 31, 1998 increased from $86.5 million
at December 31, 1997. The change in total assets reflects increases in cash
and short-term investments and income tax assets of $8.1 million and $1.0
million, respectively, partially offset by decreases in accounts receivable
and inventories of $1.9 million and $1.7 million, respectively. Cash and
short-term investments increased primarily from cash received from equity
investment by Intel. Total liabilities as of March 31, 1998 decreased by
$3.2 million, or 12%, from December 31, 1997. The decrease was primarily
related to decreases in accounts payable and accrued expenses of $1.4 million
and $1.1 million, respectively.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 1998 are estimated at
approximately $3.0 million. At March 31, 1998, the Company had commitments
for capital expenditures of approximately $220,000, primarily related to
manufacturing tooling and facilities.
LIQUIDITY
As of March 31, 1998, the Company had combined cash and equivalents and
short-term investments totaling $39.6 million, with no significant debt.
Cash provided by operations was $1.0 million in the first three months of
1998 compared to $3.9 million in the first three months of 1997. In 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. In the first three months
of 1997, increases in accounts payable of $2.9 million, decreases in accounts
receivable of $1.1 million, net income of $852,000 and depreciation of
$776,000 were only partially offset by an increase in inventories of $1.5
million and a decrease in other current assets and other of $1.3 million.
Cash flows provided by financing activities in 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.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING THIN CLIENT COMPUTING MARKET
The Company derives a majority of its revenues from the sale of thin client
computing products and related software. During the past several years, the
Company and other manufacturers of network computing systems and products
have experienced intense competition from alternative desktop computing
products, particularly personal computers, which has slowed the growth and
development of the network computing market. Until recently, the absence of
X protocol support from Microsoft, combined with the proliferation of
off-the-shelf Windows-based application software, constituted an obstacle to
the expansion of the network computing model into Windows-based environments.
The introduction of the Company's WINCENTER multi-user WINDOWS NT
application server software and new, lower-priced thin client computing
products have allowed the Company to offer thin client computing systems that
provide users with access to Windows applications, although sales of these
new products have been limited to date. The Company's future success will
depend in substantial part upon increased acceptance of the thin client
computing model and the successful marketing of the Company's new thin
client computing products. There can be no assurance that the Company's new
thin client computing products will compete successfully with alternative
desktop solutions or that the thin client computing model will be widely
adopted in the rapidly evolving desktop computer market. The failure of new
markets to develop for the Company's thin client computing products would
have a material, adverse effect on the Company's business, operating results
and financial condition.
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
10
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 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.
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. 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, for the marketing and distribution of its
products, particularly its software products. In early 1996, the Company
experienced significant returns of its software products from its
distributors. There can be no assurance that the Company will not experience
some level of returns in the future. In addition, there can be no assurance
that the Company's distributors and resellers will continue their current
relationships with the Company or that they will not give higher priority to
the sale of other products, which could include products of the Company's
competitors. A reduction in sales effort or discontinuance of sales of the
Company's products by its distributors and resellers could lead to reduced
sales and could adversely affect the Company's operating results. In
addition, there can be no assurance as to the continued viability or the
financial stability of
11
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 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.
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.
12
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
*Exhibit 10.47 Development and License Agreement dated March 6,
1998 between Registrant and Intel Corporation.
Exhibit 27 Financial Data Schedule.
Exhibit 27.1 Restated March 31, 1997 Financial Data Schedule.
* Confidential treatment has been requested as to a portion of this
exhibit.
(b) The Company filed no reports on Form 8-K during the three-month period
ended March 31, 1998.
13
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 8, 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)
14