-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mykk7/X3azyKkvwDYKIOK/nWmNEU2EP3iI3ldRAZYKP94ZYp/XDUbpoEW26w3XcA t5wO4fQjAAdIdpIE8jYICg== /in/edgar/work/20000814/0000912057-00-037412/0000912057-00-037412.txt : 20000921 0000912057-00-037412.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037412 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK COMPUTING DEVICES INC CENTRAL INDEX KEY: 0000886138 STANDARD INDUSTRIAL CLASSIFICATION: [3575 ] IRS NUMBER: 770177255 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20124 FILM NUMBER: 699983 BUSINESS ADDRESS: STREET 1: 350 N BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4156940650 MAIL ADDRESS: STREET 1: 350 NORTH BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 a10-q.txt FORM 10-Q 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, 2000 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.) 301 Ravendale 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 16,710,509 at June 30, 2000 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 June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations for the Three-and Six-Month Periods Ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2000 and 1999 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 15 Part II: Other Information Item 4: Submission of Matters to a Vote of Security Holders 16 Item 6: Exhibits and Reports on Form 8-K and S-8 16 Signature 17
2 NETWORK COMPUTING DEVICES, INC. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
ASSETS June 30, December 31, 2000 1999 -------- ------------ Current assets: Cash and cash equivalents $ 1,928 $ 4,781 Short-term investments 334 3,558 Accounts receivable, net 12,634 21,987 Inventories 11,654 15,082 Other current assets 3,974 4,532 -------- -------- Total current assets 30,524 49,940 Property and equipment, net 2,855 3,651 Other assets 3,085 3,173 -------- -------- Total assets $ 36,464 $ 56,764 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,613 $ 10,419 Accrued expenses 5,738 4,739 Deferred revenue 2,741 3,384 Notes payable 5,092 -- Other current liabilities 419 346 -------- -------- Total current liabilities 22,603 18,888 Shareholders' equity: Common stock 17 16 Capital in excess of par 62,130 61,333 Accumulated deficit (48,286) (23,473) -------- -------- Total shareholders' equity 13,861 37,876 -------- -------- Total liabilities and shareholders' equity $ 36,464 $ 56,764 ======== ========
See accompanying notes. 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- --------- Net revenues: Hardware products and services $ 12,036 $ 25,341 $ 24,856 $ 48,126 Software licenses and services 1,117 2,533 2,044 6,172 -------- -------- -------- -------- Total net revenues 13,153 27,874 26,900 54,298 Cost of revenues: Hardware products and services 9,696 15,725 22,185 29,789 Software licenses and services 165 636 255 1,746 -------- -------- -------- -------- Total cost of revenues 9,861 16,361 22,440 31,535 -------- -------- -------- -------- Gross margin 3,292 11,513 4,460 22,763 Operating expenses: Research and development 2,866 3,272 6,115 6,711 Marketing and selling 5,892 8,622 13,869 16,980 General and administrative 1,913 1,498 4,454 3,183 Business restructuring -- -- 2,561 -- Acquired in-process research and development -- -- 1,800 -- -------- -------- -------- -------- Total operating expenses 10,671 13,392 28,799 26,874 -------- -------- -------- -------- Operating loss (7,379) (1,879) (24,339) (4,111) Interest income (expense), net (132) 96 (123) 340 -------- -------- -------- -------- Loss before income taxes (7,511) (1,783) (24,462) (3,771) Provision for income taxes 108 -- 351 -- -------- -------- -------- -------- Net loss $ (7,619) $ (1,783) $(24,813) $ (3,771) ======== ======== ======== ======== Net loss per share Basic and diluted $ (0.46) $ (0.11) $ (1.50) $ (0.23) ======== ======== ======== ======== Shares used in per share computations Basic and diluted 16,667 16,135 16,586 16,095 ======== ======== ======== ========
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, ------------------------- 2000 1999 --------- ---------- Cash flows from operations: Net loss $(24,813) $ (3,771) Reconciliation of net loss to cash used in operations: In process research and development charge 1,800 -- Depreciation 1,239 1,622 Amortization of goodwill 272 202 Changes in: Accounts receivable, net 9,353 188 Inventories 3,428 (1,623) Other current assets 358 (272) Accounts payable (1,806) 3,156 Accrued expenses 999 (362) Deferred revenue (643) (170) Other current liabilities 119 (1,655) -------- -------- Cash used in operations (9,694) (2,685) Cash flows from investing activities: Acquisition of business (2,224) -- Purchases of short-term investments (665) (8,115) Sales and maturities of short-term investments 3,889 18,545 Changes in other assets 440 (350) Property and equipment purchases (443) (1,487) -------- -------- Cash provided by investing activities 997 8,593 Cash flows from financing activities: Principal payments on capital lease obligations (46) (46) Proceeds from short-term debt 12,250 -- Principal payments on short-term debt (7,158) -- Repurchases of common stock -- (148) Proceeds from issuance of stock, net 798 610 -------- -------- Cash provided by financing activities 5,844 416 -------- -------- Increase (decrease) in cash and equivalents (2,853) 6,324 Cash and equivalents: Beginning of period 4,781 8,553 -------- -------- End of period $ 1,928 $ 14,877 ======== ========
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 entries, which in the opinion of management are necessary to fairly state our 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 our 1999 Annual Report on Form 10-K. The consolidated results of operations for the three- and six-month periods ended June 30, 2000 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2000. NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net 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, 2000 and 1999 there were 4,108,648 and 4,863,307 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):
June 30, December 31, 2000 1999 ------- ------------ Purchased components and sub-assemblies $ 7,691 $ 9,825 Work in process 681 826 Finished goods 3,282 4,431 ------- ------- $11,654 $15,082 ------- -------
INTEREST AND TAX PAYMENTS Interest payments, primarily interest on notes payable, were $139,800 and $3,100 for the three months ended June 30, 2000 and 1999, respectively, and $147,800 and $7,400 for the first six months of 2000 and 1999, respectively. Income tax payments, primarily foreign, were $114,800 and $49,300 for the three months ended June 30, 2000 and 1999, respectively, and $182,400 and $94,500 for the first six months of 2000 and 1999, respectively. MAJOR CUSTOMERS AND OPERATING SEGMENTS The Company has one operating segment, sales of thin client hardware and software. The percentages of total net revenues represented by sales to major customers are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Adtcom 27% 15% 21% 14% Tech Data 18% 12% 19% 15% UCSI Distribution 21% 3% 13% 3%
6 Gross accounts receivable as a percentage of total gross accounts receivable for these major customers are as follows:
June 30, 2000, December 31, 1999 -------------- ----------------- Adtcom 32% 31% Tech Data 24% 17% UCSI Distribution 16% 7% Ingram Micro 5% 14%
RESTRUCTURING CHARGE On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce of employees affecting all classes and exiting certain leased facilities. In connection with the plan, we recorded a restructuring charge of $2.6 million consisting of $2.4 million for employee separation costs and $0.2 million for facility exit costs. During the three months ended June 30, 2000, we paid $1.0 million of the accrued restructuring liability leaving unpaid cash charges of $1.3 million included in accrued liabilities as of June 30, 2000. The restructuring plan is expected to be completed by the end of the first quarter of 2001. 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 OUR 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, 1999, CONTAINED IN OUR 1999 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. Our product lines include the NCD THINSTAR line of Windows-based terminals, NCD EXPLORA network terminals, and NCD NC200, NC400 AND NC900 network computers. On the software side, our products include 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 Windows Servers. We also market PCXware, NCDware, and NC software. Our products are sold through distributor/VAR channels, and system integrators worldwide. In January 2000, we acquired the assets of Multiplicity LLC, a privately held developer of advanced server management software for Microsoft's Windows NT and Windows 2000 operating systems. The acquisition has been accounted for using the purchase method. The purchase price was $2.2 million plus a stream of future payments based on revenue for the four year period following the acquisition. $1.8 million of the purchase price was allocated to purchased in-process research and development and $0.4 million was allocated to other intangible assets. Multiplicity LLC provides strategic performance analysis and capacity planning solutions for networked Windows NT and Windows 2000 servers. These solutions give customers system measurement and management that enable troubleshooting, analysis, administration and planning to help IT organizations improve end-user service levels. In February 2000, we entered into an OEM agreement with Hitachi Ltd. of Japan to develop and manufacture customized NCD thin client terminals under the Hitachi name. Hitachi's OEM thin client brand will be called FLORANET 130 and is based on our THINSTAR 400 Windows-based terminal. In April 2000, we finalized an alliance agreement with Hewlett-Packard Company whereby HP will sell our products through its indirect sales channel and direct sales force worldwide. HP will market our NC200 and NC400 network computers, our THINSTAR line of Windows-based terminals and our THINPATH software. We continue to sell network application terminals to IBM for resale pursuant to a joint development agreement dated June 27, 1996 (the "IBM Agreement"). The IBM Agreement provides for IBM to purchase a substantial portion of its requirements for such products from us through December 31, 2000. At June 30, 2000 we had cash and short-term investments of approximately $2.3 million. During the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000, we incurred losses of approximately $9.1 million, $16.3 million, and $24.8 million, respectively, and during those periods our cash and equivalents decreased by approximately $11.2 million, $5.3 million and $2.9 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we announced a 20% across-the-board reduction in our workforce. Additionally on March 30, 2000 we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary. Our line of credit is secured by substantially all of our assets. Under the terms of the agreement borrowings bear interest at a rate of 8 prime plus 0.75%. The amount that can be borrowed at any given time is determined by the balance of our accounts receivable as well as our compliance with specified financial covenants. As of August 12, 2000 we owed Foothill Capital approximately $4.0 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. We have continued to explore strategic alternatives intended to enhance shareholder value. We have not entered into any agreement or commitment with respect to any such strategic transaction, and no assurance can be given that any such transaction will result from these activities. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenues for the second quarters of 2000 and 1999 were $13.2 million and $27.9 million, respectively, representing a decrease of 53%, and $26.9 million and $54.3 million for the first six months of 2000 and 1999, respectively, representing a decrease of 50%. During the second quarter of 2000 we experienced a 47% decline in our international revenues and a 57% decline in revenue generated in North America when compared to the second quarter of 1999. Our principal customers in the second quarter of 2000 included Tech Data, Adtcom, and UCSI Distribution which accounted for 18%, 27% and 21% of our revenues, respectively. In the second quarter of 1999 Tech Data, Adtcom, and IBM accounted for 12%, 15% and 12% of our revenues, respectively. For the first six months of 2000 Adtcom, Tech Data and UCSI Distribution accounted for 21%, 19% and 13% of our revenue, respectively, while in the first six months of 1999 Adtcom, Tech Data and IBM accounted for 14%, 15% and 11% of our revenue, respectively. HARDWARE REVENUES Hardware revenues are primarily from the sale of thin client products, and to a lesser extent, related service activities. Revenues were $12.0 million and $25.3 million for the second quarters of 2000 and 1999, respectively, and $24.9 million and $48.1 million for the first six months of 2000 and 1999, respectively. Hardware revenues declined across all product lines. This revenue decline is due in part to a continued drop in demand for our EXPLORA and NC200 and NC400 network computers and continued declines in sales to IBM. SOFTWARE REVENUES Software revenues are primarily from the sale and licensing of THINPATH and other software products and related support services. Revenues from software and related services were $1.1 million and $2.5 million for the second quarters of 2000 and 1999, respectively, and $2.0 million and $6.2 million for the first six months of 2000 and 1999, respectively. This decrease primarily reflects the transition from the sale of the Citrix-based Wincenter software to the sale of software developed in-house. GROSS MARGIN ON HARDWARE REVENUES Gross margin on hardware revenues was $2.3 million and $9.6 million for the second quarters of 2000 and 1999, respectively, and $2.7 million and $18.3 million for the first six months of 2000 and 1999, respectively. Most of the decline in margin was due to the lower revenues for the quarter. Continued pricing pressures on our Windows-based terminals and lower overhead absorption due to the lower volumes this quarter also contributed. Our gross margin percentages on hardware revenues were 19% and 38% for the second quarters of 2000 and 1999, respectively, and 11% and 38% for the first six months of 2000 and 1999, respectively. GROSS MARGIN ON SOFTWARE REVENUES Gross margin on software revenues was $1.0 million and $1.9 million for the second quarters of 2000 and 1999, respectively, and $1.8 million and $4.4 million for the first six months of 2000 and 1999, respectively. This decline was across all product lines. Our gross margin percentages on software revenues were 85% and 75% for the second quarters of 2000 and 1999, respectively, and 88% and 72% for the first six months of 2000 and 1999, respectively. The improvement in gross margin percentage reflects the move from the sale of licensed software to the sale of our branded software which sell at higher margins than the Citrix-based products. 9 RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses were $2.9 million and $3.3 million for the second quarters of 2000 and 1999, respectively, and $6.1 million and $6.7 million for the first six months of 2000 and 1999, respectively. The decreases in spending for R&D is the result of decreased headcount. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $5.9 million and $8.6 million for the second quarters of 2000 and 1999, respectively, and $13.9 million and $17.0 million for the first six months of 2000 and 1999, respectively. The decrease in marketing and selling expenses relates to decreasing headcount and lower revenue. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $1.9 million and $1.5 million for the second quarters of 2000 and 1999, respectively, and $4.5 million and $3.2 million for the first six months of 2000 and 1999, respectively. Bad debt expense of $0.5 million contributed to the increase in spending during the first six months of 2000, when compared to the first six months of 1999. Goodwill amortization expense, related to the acquisition of the Tektronix Inc.'s Network Displays business in December 1998 and Multiplicity LLC in January 2000, was $0.1 million for the second quarters of 2000 and 1999 respectively, and $0.3 million and $0.2 million for the first six months of 2000 and 1999, respectively. CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with our acquisition of Multiplicity LLC on January 7, 2000, approximately $1.8 million of the total purchase consideration was allocated to the value of in-process research and development. The amounts allocated were determined through established valuation techniques in the high-technology industry and were expensed upon acquisition because technological feasibility had not been established and no alternative uses exist. Research and development cost to bring the products to technological feasibility are not expected to have a material impact on our future operating results. The in-process research and development project acquired in the acquisition of Multiplicity LLC consisted of development of a line of advanced server management software for Microsoft's Windows NT and Windows 2000 operating systems. The fair value of the in-process technology was based on projected cash flows which were discounted based on the risks associated with achieving such projected cash flows upon successful completion of the acquired projects. Associated risks include the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and risks related to the impact of potential changes in market conditions and technology. In developing cash flow projections, revenues were forecast based upon relevant factors, including aggregate revenue growth rates for the business as a whole, characteristics of the potential market for the technology and the anticipated life of the underlying technology. Operating expenses and resulting profit margins were forecast based on the characteristics and cash flow generating potential of the acquired in-process technology. The fair value of the in-process research and development was $1.8 million. Projected annual revenues for the in-process project was assumed to increase from product release through 2003. Gross profit was assumed to be 75%. The projected gross profit percent was based on an estimated cost of revenue which included duplication, manuals, packaging materials and third party order fulfillment costs. Gross profit projections were based on our experience with other similar products. Estimated operating expenses, income taxes and capital charges to provide a return on other acquired assets were deducted from gross profit to arrive at net operating income for the in-process development projects. Operating expenses were estimated as a percentage of revenue and included sales and marketing expenses and development costs to maintain the technology once it has achieved technological feasibility. 10 We discounted the net cash flows of the in-process research and development projects to their present values using a discount rate of 35%. This discount rate approximates the overall rate of return for the acquisition as a whole and reflects the inherent uncertainties surrounding the successful development of the in-process research and development projects. INTEREST INCOME (EXPENSE), NET Interest income (expense), net was ($132,000) and $96,000 for the second quarters of 2000 and 1999, respectively, and ($123,000) and $340,000 for the first six months of 2000 and 1999, respectively. The decrease was due to lower average balances in interest-bearing accounts and interest payments on the line of credit with Foothill Capital. INCOME TAXES AND INCOME TAX BENEFIT The provision for income taxes in the second quarter of 2000 is for foreign income taxes. Deferred tax assets at June 30, 2000 include operating loss carryforwards for federal and state income tax purposes of approximately $15.5 million and $1.9 million respectively. These carryforwards are available to offset future taxable income, if any, thru 2020 and 2005 respectively, however no asset has been recognized in respect of these losses because continued losses have led to uncertainty about our ability to generate sufficient taxable income to be able to utilize the tax benefit losses provide. FINANCIAL CONDITION Total assets of $36.5 million at June 30, 2000 decreased from $56.8 million at December 31, 1999. The change in total assets primarily reflects decreases in cash and short-term investments of $6.1 million, accounts receivable of $9.4 million, and inventory of $3.4 million. Total current liabilities as of June 30, 2000 increased by $3.7 million, or 20%, from $18.9 million at December 31, 1999. The change was primarily related to increases in accrued expenses of $1.0 million related to the unpaid portion of the restructuring charge and notes payable of $5.1 million related to the line of credit with Foothill Capital, offset by a decrease in accounts payable of $1.8 million. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 2000 are estimated at approximately $0.3 million. LIQUIDITY As of June 30, 2000, we had combined cash, cash equivalents and short-term investments totaling $2.3 million, with debt of $5.1 million under our line of credit with Foothill Capital. Cash used in operations was $9.7 million in the first six months of 2000 compared to $2.7 million in the first six months of 1999. In the first six months of 2000, a decrease in accounts payable of $1.8 million and a net loss of $24.8 million were only partially offset by a decrease in accounts receivable and inventory of $9.4 million and $3.4 million, respectively, and an increase in accrued expenses of $1.0 million. 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. Cash flows provided from investing activities in the first six months of 2000 of $1.0 million are the result of sales and maturities of short-term investments of $3.9 million offset by the cash used to acquire Multiplicity LLC of $2.2 million, and purchases of short-term investments of $0.7 million. Cash provided by investing activities for the first six months of 1999 of $8.6 million is primarily the result of sales and maturities of short-term investments of $18.5 million offset by purchases of capital equipment of $1.5 million and purchases of short-term investments of $8.1 million. Cash flows provided by financing activities of $5.8 million in the first six months of 2000 primarily reflects the proceeds from the line of credit, net of repayments, and the sales of stock under our employee stock option and stock purchase plans, of $5.1 million and $0.8 million, respectively. Based on the factors discussed above, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. 11 On March 30, 2000, we obtained a working capital line of credit from Foothill Capital, which provides us with up to $15.0 million of available credit subject to the conditions described below. Our line of credit is secured by substantially all of our assets. Under the terms of the agreement borrowings bear interest at a rate of prime plus 0.75%. The amount that can be borrowed at any given time is determined by the balance of our qualifying accounts receivable. Based on our qualifying accounts receivable as of June 30, 2000, we had no excess availability under the line of credit. As of August 12, 2000, we owed Foothill Capital approximately $4.0 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. Our capital requirements will depend on many factors, including but not limited to the market acceptance of our product, the response of our competitors to our product and our ability to grow software revenue. We will be required to seek additional financing before we achieve positive cash flow or in order to comply with covenants under the line of credit. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. No assurance can be given that additional financing will be available, or that if available, it will be available on terms acceptable to us, or our shareholders. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133," establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. We will adopt the standard no later than the first quarter of fiscal year 2001 and we are in the process of determining the impact that adoption will have on our consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (FIN 44)." The provisions of FIN 44 are effective July 1, 2000. We do not expect the adoption of this standard to impact the accounting for any stock-based awards granted to date. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In June 2000, the SEC issued SAB 101B that delayed the implementation date of SAB 101. We must adopt SAB 101 no later than in the fourth quarter of 2000. We have not determined the impact that SAB 101 will have on our financial statements and believe that such determination will not be meaningful until closer to the date of initial adoption. FUTURE PERFORMANCE AND RISK FACTORS Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below. LIQUIDITY At June 30, 2000 we had cash and equivalents and short-term investments of approximately $2.3 million. During the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000, we incurred losses of approximately $9.1 million, $16.3 million and $24.8 million, respectively, and during those periods our cash and equivalents decreased by approximately $11.2 million, $5.3 million and $2.9 million, respectively, while our short-term debt increased -0-, -0- and $5.1 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing in the near term and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we implemented a 20% across-the-board reduction in our workforce. Subsequently we reduced our headcount further. 12 Additionally, we obtained a line of credit with Foothill Capital. However, the continued availability of this line of credit is subject to conditions that we may not be able to satisfy. Other sources of financing may not be available in the near future, or may be available only on terms that are highly dilutive to our stockholders. As of August 12, 2000, we owed Foothill Capital approximately $4.0 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line of credit should Foothill Capital demand repayment. EVOLVING THIN CLIENT COMPUTING MARKET We derive substantially all of our revenues from the sale of thin client network computing products. Our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of our thin client computing hardware and software products. There can be no assurance that our 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. To date, the market for thin client computing products has not lived up to industry expectations, due in part to competition from low-cost PC's. If new markets fail to develop for our thin client computing products our business could fail. OTHER RISK FACTORS The market for thin client products and similar products that facilitate access to data over networks is highly competitive. We experience 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. We expect this intense competition to continue, and there can be no assurance that we will be able to continue to compete successfully against current and future competitors as the desktop computer market evolves and competition increases. There is the possibility that competition in the future could come from companies not currently in the market or with greater resources than ours which could adversely effect our operating results. Our long-term viability could effect potential customers willingness to purchase from us which would adversely effect our operating results. Our 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 us and our 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. Our operating results may fluctuate in the future as a result of these and other factors, including our success in developing and introducing new products, our product and customer mix, licensing costs, the level of competition which we experience and our ability to develop and maintain strategic business alliances. We operate 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. Our expense levels are based in part on our forecast of future revenues. If revenues are below expectations, our operating results may be adversely affected. We have experienced a disproportionate amount of shipments occurring in the 13 last month of our fiscal quarters. This trend increases the risk of material quarter-to-quarter fluctuations in our revenues and operating results. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future results will depend to a considerable extent on our ability to continuously develop, introduce and deliver in quantity new hardware and software products that offer our customers enhanced performance at competitive prices. The development and introduction of new products is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and timely completion of product development. Once a hardware product is developed, we must rapidly bring it into volume production, a process that requires accurate forecasting of customer requirements in order to achieve acceptable manufacturing costs. The introduction of new or enhanced products also requires us 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 we are continuously engaged in this product development and transition process, our 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 our operating results. We rely increasingly on independent distributors and resellers for the distribution of our products. In early 1996, we experienced significant returns of our software products from our distributors. Although controls have since been improved, there can be no assurance that we will not experience some level of returns in the future. In addition, there can be no assurance that our distributors and resellers will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of our competitors. A reduction in sales effort or discontinuance of sales of our products by our distributors and resellers could lead to reduced sales and could adversely affect our operating results. In addition, there can be no assurance as to the continued viability or the financial stability of our distributors and resellers, our ability to retain our existing distributors and resellers or our ability to add distributors and resellers in the future. An increasing percentage of our revenue and accounts receivable are concentrated in a relatively small number of these distributors. We rely on contract manufacturers for virtually all of the manufacture of our thin client computing products. Our reliance on these contract manufacturers limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our suppliers are located abroad. Our reliance on these foreign suppliers subjects us to risks such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. We currently obtain all of the sub-assemblies used for our thin client computing products from a single supplier located in Thailand. Any significant interruption in the supply of products from this contractor would have a material, adverse effect on our business and operating results. Disruptions in the provision of components by our other suppliers, or other events that would require that we seek alternate sources of supply, could also lead to supply constraints or delays in delivery of our products and adversely affect its operating results. A number of components and parts used in our products, including certain semiconductor components, also are currently available from single or limited sources of supply. We have no long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components. We have generally been able to obtain adequate supplies of parts and components in a timely manner from existing sources under purchase orders and we endeavor to maintain inventory levels adequate to guard against interruptions in supplies. However, our inability to obtain sufficient supplies of these parts and components from existing suppliers or to develop alternate supply sources would adversely affect our operating results. A majority of our international sales are denominated in Euros. These sales are subject to exchange rate fluctuations which could affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. 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 14 certain countries do not protect our 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 our future international sales and, consequently, on our operating results. Our success depends to a significant degree upon the continuing contributions of our senior management and other key employees. We believe that our future success will depend in large part on our 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 we will be successful in attracting, integrating and retaining such personnel. We believe that concerns about our current financial strength could deter potential hires from seeking employment with us and has resulted in the loss of a number of employees over the past several months. Failure to attract and retain key personnel could have a material, adverse effect on our business, operating results or financial condition. The market price of our common stock has fluctuated significantly over the past several years and is subject to material fluctuations in the future in response to announcements concerning us or our competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by us or our competitors, general conditions in the computer industry, developments in the financial markets and other factors. In particular, shortfalls in our 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. We 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 our common stock. We have announced that we have become engaged in exploring several strategic alternatives intended to enhance shareholder value. We have not entered into any agreement or commitment with respect to any such strategic alternatives and may be unsuccessful in our efforts to do so. Any failure to successfully conclude a strategic transaction could diminish our reputation in the marketplace and leave us vulnerable to continuing deterioration in our financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our market risk sensitive instruments as of June 30, 2000 are primarily exposed to interest rate risks. Because of the short-term maturity of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value. Effective January 2000 a majority of our international sales are denominated in Euros. These sales are subject to exchange rate fluctuations which could affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. 15 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 31, 2000. (a) The following four persons nominated by management were elected as directors at the meeting: Robert G. Gilbertson Douglas H. Klein Stephen A. MacDonald Rudolph G. Morin (b) A proposal to increase the number of shares of Common Stock reserved for issuance under the Company's 1999 Stock Option Plan by 500,000 shares was approved by a vote of 13,184,098 shares for, 1,592,514 shares against and 65,622 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 14,247,049 shares for, 524,408 shares against and 70,777 shares abstaining. (d) 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 14,694,216 shares for, 125,499 shares against, and 22,519 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, 2000. 16 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 14, 2000 By: /s/ Gregory S. Wood ---------------------- Gregory S. Wood Vice President, Chief Financial Officer and Secretary (Duly Authorized and Principal Financial and Accounting Officer) 17 EX-27 2 ex-27.txt EXHIBIT 27
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1,928 334 18,330 5,696 11,654 30,524 20,867 18,012 36,464 22,603 0 0 0 62,147 (48,286) 36,464 26,900 26,900 22,440 22,440 28,799 587 145 (24,462) 351 (24,813) 0 0 0 (24,813) (1.50) (1.50) INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT SERVICES
-----END PRIVACY-ENHANCED MESSAGE-----