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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2001 |
/ / | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission File Number0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0177255 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
301 Ravendale Drive, Mountain View, California | 94043 | |
(Address of principal executive offices) | (Zip Code) |
(650) 694-0650
(Registrant's telephone number, including area code)
Common Stock, $0.001 par value
(Title of class)
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 / /
As of June 30, 2001, 17,613,237 shares of the registrant's Common Stock were outstanding.
NETWORK COMPUTING DEVICES, INC.
Description | Page Number | |||
---|---|---|---|---|
Cover Page | 1 | |||
Index | 2 | |||
Part I: Financial Information | ||||
Item 1: Financial Statements | ||||
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 | 3 | |||
Condensed Consolidated Statements of Operations for the Six-Month Periods Ended June 30, 2001 and 2000 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2001 and 2000 | 5 | |||
Notes to Condensed Consolidated Financial Statements | 6 | |||
Item 2: Management's Discussion and Analysis of Financial Condition And Results of Operations | 9 | |||
Item 3: Quantitative and Qualitative Disclosure About Market Risk | 18 | |||
Part II: Other Information | ||||
Item 3: Defaults Upon Senior Securities | 19 | |||
Item 4: Submission of Matters to a Vote of Security Holders | 19 | |||
Item 6: Exhibits and Reports on Form 8-K | 19 | |||
Signature | 20 |
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NETWORK COMPUTING DEVICES, INC.
Part I: Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
| June 30, 2001 | December 31, 2000 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,517 | $ | 1,419 | ||||
Short-term investments | — | 339 | ||||||
Accounts receivable, net of allowances of $2,516 and $5,629 as of June 30, 2001 and December 31, 2000, respectively | 8,399 | 9,160 | ||||||
Inventories | 6,866 | 7,635 | ||||||
Prepaid assets | 1,169 | 2,667 | ||||||
Other current assets | — | 1,500 | ||||||
Total current assets | 17,951 | 22,720 | ||||||
Property and equipment, net | 963 | 1,530 | ||||||
Other assets | 2,164 | 2,602 | ||||||
Total assets | $ | 21,078 | $ | 26,852 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 6,057 | $ | 5,545 | ||||
Accrued expenses | 3,339 | 4,047 | ||||||
Deferred revenue | 506 | 1,297 | ||||||
Notes payable | 6,632 | 7,947 | ||||||
Other current liabilities | 93 | 243 | ||||||
Total current liabilities | 16,627 | 19,079 | ||||||
Shareholders' equity: | ||||||||
Preferred stock | 1,500 | 1,500 | ||||||
Common stock | 18 | 18 | ||||||
Capital in excess of par | 62,380 | 62,380 | ||||||
Accumulated deficit | (59,447 | ) | (56,125 | ) | ||||
Total shareholders' equity | 4,451 | 7,773 | ||||||
Total liabilities and shareholders' equity | $ | 21,078 | $ | 26,852 | ||||
See accompanying notes.
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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, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
Net revenues: | ||||||||||||||
Hardware products and services | $ | 10,456 | $ | 12,036 | $ | 20,029 | $ | 24,856 | ||||||
Software licenses and services | 790 | 1,117 | 1,696 | 2,044 | ||||||||||
Total net revenues | 11,246 | 13,153 | 21,725 | 26,900 | ||||||||||
Cost of revenues: | ||||||||||||||
Hardware products and services | 7,054 | 9,546 | 13,916 | 21,885 | ||||||||||
Software licenses and services | 271 | 315 | 544 | 555 | ||||||||||
Total cost of revenues | 7,325 | 9,861 | 14,460 | 22,440 | ||||||||||
Gross Margin | 3,921 | 3,292 | 7,265 | 4,460 | ||||||||||
Operating expenses: | ||||||||||||||
Research and development | 764 | 2,866 | 1,376 | 6,115 | ||||||||||
Marketing and selling | 3,294 | 5,892 | 6,591 | 13,869 | ||||||||||
General and administrative | 1,129 | 1,913 | 2,241 | 4,454 | ||||||||||
Business restructuring | — | — | — | 2,561 | ||||||||||
Acquired in-process research and development | — | — | — | 1,800 | ||||||||||
Total operating expenses | 5,187 | 10,671 | 10,208 | 28,799 | ||||||||||
Operating loss | (1,266 | ) | (7,379 | ) | (2,943 | ) | (24,339 | ) | ||||||
Interest (expense), net | (181 | ) | (132 | ) | (325 | ) | (123 | ) | ||||||
Loss before income taxes | (1,447 | ) | (7,511 | ) | (3,268 | ) | (24,462 | ) | ||||||
Provision for income taxes | 47 | 108 | 54 | 351 | ||||||||||
Net loss | $ | (1,494 | ) | $ | (7,619 | ) | $ | (3,322 | ) | $ | (24,813 | ) | ||
Net loss per share | ||||||||||||||
Basic and diluted | $ | (0.08 | ) | $ | (0.46 | ) | $ | (0.19 | ) | $ | (1.50 | ) | ||
Shares used in per share computations | ||||||||||||||
Basic and diluted | 17,613 | 16,667 | 17,613 | 16,586 | ||||||||||
See accompanying notes.
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | ||||||||
Cash flow from operations: | ||||||||||
Net loss | $ | (3,322 | ) | $ | (24,813 | ) | ||||
Reconciliation of net loss to cash used in operations: | ||||||||||
In process research and development charge | — | 1,800 | ||||||||
Depreciation | 599 | 1,239 | ||||||||
Amortization of goodwill | 202 | 272 | ||||||||
Changes in: | ||||||||||
Accounts receivable, net | 761 | 9,353 | ||||||||
Inventories | 769 | 3,428 | ||||||||
Other current assets | 1,498 | 358 | ||||||||
Accounts payable | 512 | (1,806 | ) | |||||||
Accrued expenses | (708 | ) | 999 | |||||||
Deferred revenue | (791 | ) | (643 | ) | ||||||
Other current liabilities | (150 | ) | 119 | |||||||
Cash used in operations | (630 | ) | (9,694 | ) | ||||||
Cash flows from investing activities: | ||||||||||
Acquisition of business | — | (2,224 | ) | |||||||
Purchases of short-term investments | — | (665 | ) | |||||||
Sales and maturities of short-term investments | 339 | 3,889 | ||||||||
Changes in other assets | 236 | 440 | ||||||||
Property and equipment purchases | (32 | ) | (443 | ) | ||||||
Cash provided by investing activities | 543 | 997 | ||||||||
Cash flows from financing activities: | ||||||||||
Principal payments on capital lease obligations | — | (46 | ) | |||||||
Proceeds from short-term debt | 20,687 | 12,250 | ||||||||
Principal payments on short-term debt | (22,002 | ) | (7,158 | ) | ||||||
Proceeds from issuance of stock, net | 1,500 | 798 | ||||||||
Cash provided by financing activities | 185 | 5,844 | ||||||||
Increase (decrease) in cash and equivalents | 98 | (2,853 | ) | |||||||
Cash and equivalents: | ||||||||||
Beginning of period | 1,419 | 4,781 | ||||||||
End of period | $ | 1,517 | $ | 1,928 | ||||||
See accompanying notes.
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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. and its wholly-owned subsidiaries (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. The functional currency for the Company is the U.S. dollar. All significant inter company balances and transactions have been eliminated in consolidation. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our 2000 Annual Report on Form 10-K. The consolidated results of operations for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2001. Certain reclassifications have been made to prior period amounts to conform to current presentation. No changes adjusted net income or equity.
Going Concern Uncertainty
The Company has incurred losses from continuing operations for the year ended December 31, 2000 of approximately $32.7 million and for the three- and six-month periods ended June 30, 2001 of approximately $1.5 million and $3.3 million, respectively. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or refinancing as may be required and ultimately to attain profitability. The Company is actively marketing its existing and new products, which it believes will ultimately lead to profitable operations. However, no assurance can be given that these available funds will meet the Company's cash requirements in the future. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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, 2001 and 2000 there were 4,619,808 and 4,108,648 options and warrants outstanding, respectively. There were also 220,000 shares of convertible preferred stock (convertible into 2,200,000 shares of common stock) outstanding at June 30, 2001. Such options, warrants and convertible preferred shares could potentially dilute earnings per share ("EPS") in the future, but they were not included in the computation of diluted EPS because to do so would have been antidilutive for those periods.
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Inventories
Inventories stated at the lower of standard costs, which approximates actual cost on a first-in, first-out basis, or market, consisted of (in thousands):
| June 30, 2001 | December 31, 2000 | |||||
---|---|---|---|---|---|---|---|
Purchased components and sub-assemblies | $ | 5,894 | $ | 10,367 | |||
Work in process | 335 | 776 | |||||
Finished goods | 5,766 | 4,363 | |||||
Total inventories | 11,995 | 15,506 | |||||
Less reserves | (5,129 | ) | (7,871 | ) | |||
Net inventories | $ | 6,866 | $ | 7,635 | |||
Interest and tax payments
Interest payments, primarily interest on notes payable, were $119,800 and $139,800 for the three months ended June 30, 2001 and 2000, respectively and $238,700 and $147,800 for the first six months of 2001 and 2000, respectively. Income tax payments, primarily foreign, were $37,800 and $114,800 for the three months ended June 30, 2001 and 2000, respectively, and $73,400 and $182,400 for the first six months of 2001 and 2000, respectively.
Operating Segments and Major Customers
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 | |||||||
---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | |||||
Adtcom (Europe) | 15 | % | 27 | % | 17 | % | 21 | % | |
Tech Data (U.S. & Europe) | 6 | % | 18 | % | 13 | % | 19 | % |
Business Acquisition
On January 7, 2000, we acquired the net assets of Multiplicity LLC ("Multiplicity") in a purchase business combination with a total purchase price of $2.2 million. Subsequent to this acquisition, a substantial portion of the acquired assets and goodwill were written off in a restructuring. The purchase price was allocated as follows:
In-process research and development | $ | 1,800 | |
Other intangible assets | 200 | ||
Goodwill | 160 | ||
Tangible assets | 40 |
Restructuring Charges
On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce affecting all classes of employees 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.
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During the third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded a restructuring charge of $1.6 million consisting of cash charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non-cash charges of $0.4 million related to the discontinued product lines, including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity. Approximately $0.3 million remains unpaid and is included in accrued liabilities as of June 30, 2001. The restructuing plan is expected to be completed by the fourth quarter of 2001.
Notes Payable
In August 2000, we concluded an agreement with SCI Technology, Inc. ("SCI"), a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. The note was issued in September 2000. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our Common Stock at the option of SCI anytime during the note period. The conversion price is $1.00 per share.
On March 30, 2000, we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill Capital"). 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% (8.00% at June 30, 2001). 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. Accordingly, this line of credit may not be sufficient to enable us to continue as a going concern. As of June 30, 2001, the total amount outstanding to Foothill Capital was approximately $3.3 million.
In May 2001, the line of credit with Foothill Capital was amended to establish new financial covenants and eliminate the maximum ratio of borrowings against foreign accounts receivable. Additionally, in May 2001, the line of credit with Foothill Capital was amended to modify the maturity date of the loan from March 30, 2003 to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus 2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) covenant of $38,000 for the three month period ended June 30, 2001. In July 2001, the line of credit with Foothill Capital was further amended to reduce the maximum amount of the credit line from $15.0 million to $3.5 million. In August 2001, the maximum amount of the credit line was reduced to $3.25 million from $3.5 million and the maturity date of the line of credit with Foothill Capital was extended to September 15, 2001 to provide additional time for another lender to complete its due diligence work and make a final determination regarding its preliminary proposal to extend a new revolving credit facility to us.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
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, 2000, contained in our 2000 Annual Report on Form 10-K.
Network Computing Devices, Inc. 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. Our product line includesthe NCD ThinSTAR line of Windows-based terminals, theNCD Explora network terminals andNCD NC900 network computers. On the software side, our products are theNCD 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. These products are sold through OEMs, system integrators and distributor/VAR channels worldwide.
Recent Developments
At June 30, 2001, we had cash and short-term investments of approximately $1,517,000. During the year ended December 31, 2000 and the quarter ended June 30, 2001, we incurred losses of $32.7 million and $1.5 million, respectively, and during those periods our cash and cash equivalents decreased by approximately $6.6 million and $0.2 million, respectively. Based on these factors, among others, there is 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 financing and ultimately to achieve profitability and positive cash flow.
In May 2001, our working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill Capital") was amended to establish new financial covenants and eliminate the maximum ratio of borrowings against foreign accounts receivable. Additionally, in May 2001, the line of credit with Foothill Capital was amended to modify the maturity date of the loan from March 30, 2003 to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus 2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) covenant of $38,000 for the three month period ended June 30, 2001. In July 2001, the line of credit with Foothill Capital was further amended to reduce the maximum amount of the credit line from $15.0 million to $3.5 million. In August 2001, the maximum credit line was reduced to $3.25 million from $3.5 million and the maturity date of the line of credit with Foothill Capital was extended to September 15, 2001 to provide additional time for another lender to complete its due diligence work and make a final determination regarding its preliminary proposal to extend a new revolving credit facility to us.
On March 20, 2001, our Common Stock was delisted from the Nasdaq National Market due to the failure to maintain a minimum bid price of $1.00 per share. Our Common Stock is now trading on the OTC Bulletin Board, which is considered to be less liquid and more volatile than the Nasdaq National Market.
In December 2000, we raised $1,500,000 in capital through a private placement of 220,000 shares of Series B Convertible Preferred Stock with an investor who was elected a member of the Company's
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board of directors on January 11, 2001. The Preferred shares are entitled to dividends of $.41 per annum, which accrue semi-annually if not paid. Each share of Preferred Stock is convertible into ten shares of Common Stock at the election of the holder. In connection with this private placement, the purchaser also received warrants to purchase 600,000 shares of Common Stock at $.75 per share. The warrants expire on December 28, 2005.
In December 2000, we entered into a mutual settlement of all claims with Tektronix. The claims represented unpaid commitments for both parties. As part of the settlement, we issued 750,000 shares of Common Stock to Tektronix (as a vendor). A gain on the settlement of $821,000 was recorded in December 2000.
On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce affecting all classes of employees 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 third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded a restructuring charge of $1.6 million consisting of cash charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non cash charges of $0.4 million related to the discontinued product lines, including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity LLC ("Multiplicity"). Approximately $0.3 million remains unpaid and is included in accrued liabilities as of June 30, 2001. The restructuring plan is expected to be completed by the fourth quarter of 2001.
Results of Operations
Total Net Revenues
Total net revenues for the second quarters of 2001 and 2000 were $11.2 million and $13.2 million, respectively, representing a decrease of 15%, and $21.7 million and $26.9 million for first six months of 2001 and 2000, respectively, representing a decrease of 19%. Sales to Adtcom and Tech Data accounted for 15% and 6%, respectively, of net revenues in the second quarter of 2001 and 21% and 19%, respectively, of net revenues in the second quarter of 2000. Sales to Adtcom and Tech Data accounted for 17% and 13%, respectively, of net revenues for the first six months of 2001 and 21% and 19%, respectively, of net revenues for the first six months of 2000.
Hardware Revenues
Hardware revenues consist primarily of revenues from the sale of thin client products, related hardware, and to a lesser extent, fees for related hardware service activities. Hardware revenues were $10.5 million and $12 million for the second quarters of 2001 and 2000, respectively, representing a decrease of 17%, and $20 million and $24.9 million for the first six months of 2001 and 2000, respectively, representing a decrease of 20%. The decrease in hardware revenues is due to fewer thin client unit sales, a decline in service revenue, and the loss of sales to IBM, whose agreement with us terminated on December 31, 2000.
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, (ii) NCD Wincenter, our multi-user Windows NT application server software, (iii) NCD PC-Xware, our thin client software for PCs, and (iv) NCDware, our proprietary thin client software.
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Revenues from software and related services were $0.8 million and $1.1 million for the second quarters of 2001 and 2000, respectively, representing a decrease of 27% and $1.7 million and $2.0 million for the first six months of 2001 and 2000, respectively, representing a decrease of 15%. The decrease in software revenues was in line with the decrease in related hardware revenues resulting from reduced thin client unit sales.
Gross Margin on Hardware Revenues
Our gross margins on hardware revenues were $3.4 million and $2.3 million for the second quarters of 2001 and 2000, respectively, and $6.1 million and $3.0 million for the first six months of 2001 and 2000, respectively. Our gross margin percentages on hardware revenues were 32% and 21% for the second quarters of 2001 and 2000, respectively, and 31% and 12% for the first six months of 2001 and 2000, respectively. The increase in gross margins was attributable primarily to a significant write off of certain inventory during the first six months of 2000.
Gross Margin on Software Revenues
Our gross margins on software revenues were $0.5 million and $0.8 million for the second quarters of 2001 and 2000, respectively, and $1.2 million and $1.5 million for the first six months of 2001 and 2000, respectively. This modest decrease was across all product lines. Our gross margin percentages on software revenues were 66% and 72% for the second quarters of 2001 and 2000, respectively, and 68% and 73% for the first six months of 2001 and 2000, respectively. The reduction on gross margin percentages resulted from higher discounts to customers during 2001.
Research and Development Expenses
Research and development ("R&D") expenses were $0.8 million and $2.9 million for the second quarters of 2001 and 2000, respectively, and $1.4 million and $6.1 million for the first six months of 2001 and 2000, respectively. The decrease in R&D spending was the result of reduced salary and employee benefit expenses associated with the reduction in our R&D personnel as part of our restructuring.
Marketing and Selling Expenses
Marketing and selling expenses were $3.3 million and $5.9 million for the second quarters of 2001 and 2000, respectively, and $5.9 million and $13.9 million for the first six months of 2001 and 2000, respectively. The decrease in 2001 resulted from the implementation of our cost reduction plans, including the closure of a number of our U.S. and foreign sales offices and a significant reduction in our marketing programs.
General and Administrative Expenses
General and administrative expenses were $1.1 million and $1.9 million for the second quarters of 2001 and 2000, respectively, and $2.2 million and $4.5 million for the first six months of 2001 and 2000, respectively. The decrease of $0.8 million between the second quarter of 2001 and the second quarter of 2000 as well as the decrease of $2.3 million between the first six months of 2001 and the first six months of 2000, is due primarily to a reduction in our workforce, cost reduction programs and a reduction in foreign currency translation losses.
Charge For Acquired In-Process Research and Development
During the first quarter of 2000, we incurred a charge of $1.8 million of in-process research and development associated with the acquisition of Multiplicity in January 2000. The amount allocated to
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in-process research and development was determined by a third party assessment using established techniques for the high-technology industry.
Interest (Expense), Net
Interest (expense), net, was $181,000 and $132,000 for the second quarters of 2001 and 2000, respectively, and $325,000 and $123,000 for the first six months of 2001 and 2000, respectively. The change reflects a $17,000 decrease in interest income, due primarily to decreased average balances in interest- earning accounts, and a $32,000 increase in interest expense due to the line of credit we secured on March 30, 2000, our issuance of a $3.3 million convertible note payable in September 2000 and dividends accrued on our Series B Convertible Preferred Stock.
Income Taxes
The provision for income taxes for the first six months of 2001 is for foreign income taxes. We continue to generate tax net operating loss carryforwards for the United States federal and state jurisdictions. However, no deferred tax assets have been recognized in respect of these carryforwards because continued losses create uncertainty about our ability to generate sufficient taxable income to realize the related benefits.
Financial Condition
At June 30, 2001, we had total assets of $21.1 million, representing a decrease from $26.9 million at December 31, 2000. The change in total assets reflects decreases in cash and equivalents of $0.6 million, short-term investments of $0.3 million, inventory of $1.3 million, prepaid assets of $1.1 million, and accounts receivable and property and equipment of $0.3 million. In the second quarter of 2001, accounts receivable increased by $0.1 million while accounts payable, accrued expenses and deferred revenue decreased by $1.0 million, $0.6 million and $0.7 million, respectively.
Capital Requirements
Capital spending requirements for the remainder of 2001 are estimated at approximately $0.3 million.
Liquidity
As of June 30, 2001, we had combined cash and equivalents and short-term investments totaling $1.5 million, and $6.6 million in notes payable, consisting of $3.3 million in bank indebtedness and $3.3 million outstanding on SCI's convertible note. Cash used in operations was $0.6 million in the first six months of 2001 compared to cash used in operations of $9.7 million for the first six months of 2000. In the first six months of 2001, a net loss of $3.3 million was offset by a decrease in inventories of $1.3 million, prepaid expenses of $1.1 million, accounts payable of $1.0 million, accrued expenses of $0.6 million and deferred revenue of $0.7 million. In the first six months of 2000, a net loss of $24.8 million and a decrease in accounts payable of $1.8 million were only partially offset by a decrease in accounts receivable and inventories of $9.4 million and $3.4 million, respectively, and an increase in accrued expenses of $1.0 million.
Cash provided by investing activities of $0.5 million in the first six months of 2001 resulted from the maturity of short-term investments of $0.3 million and a reduction in other assets of $0.2 million. Cash provided by investing activities of $1.0 million in the first six months of 2000 is the result of sales and maturities of short-term investments of $3.9 million offset by the cash used to acquire Multiplicity of $2.2 million and purchases of short-term investments of $0.7 million.
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Cash provided by financing activities of $0.2 million in the first six months of 2001 resulted from the receipt of $1.5 million for the sale of convertible preferred stock offset by the net reduction of the outstanding balance under our line of credit of $1.3 million. Cash provided by financing activities of $5.9 million in the first six months of 2000 reflects the proceeds of $5.1 million from borrowings under the line of credit and proceeds of $0.8 million from the issuance of common stock.
On March 30, 2000, we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill Capital"). 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% (8.00% at June 30, 2001). The amount that can be borrowed at any given time is determined by the balance of our aging, location and other factors of accounts receivable. The outstanding loan was approximately $3.3 million at June 30, 2001.
In May 2001, the line of credit with Foothill Capital was amended to establish new financial covenants and eliminate the maximum ratio of borrowings against foreign accounts receivable. Additionally, in May 2001, the line of credit with Foothill Capital was amended to modify the maturity date of the loan from March 30, 2003 to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus 2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) covenant of $38,000 for the three month period ended June 30, 2001. In July 2001, the line of credit with Foothill Capital was further amended to reduce the maximum amount of the credit line from $15.0 million to $3.5 million. In August 2001, the maximum credit line was reduced to $3.25 million from $3.5 million and the maturity date of the line of credit with Foothill Capital was extended to September 15, 2001 to provide additional time for another lender to complete its due diligence work and make a final determination regarding its preliminary proposal to extend a new revolving credit facility to us.
We have received an indication from SCI that they intend to extend the maturity date on our $3.3 million note payable, which currently matures on September 30, 2001.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB Statement No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.
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The Company's previous business combinations were accounted for using the purchase method. As of June 30, 2001, the net carrying amount of goodwill remaining after the purchase of the Network Displays Business unit of Tektronix in December 1998 is $1.8 million and there are no intangible assets relating to the purchase of Multiplicity in January 2000. Amortization expense during the three- and six-month periods ended June 30, 2001 was $101,000 and $202,000, respectively. At present, the Company is currently assessing, but has not yet determined the impact the adoption of SFAS 141 and SFAS 142 will have on its financial position and results of operations.
Future Performance and Risk Factors
Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below.
Evolving Thin Client Computing Market
We derive substantially all of our revenues from the sale of thin client network computing products and related software. Initially, our thin client product offerings primarily focused on the UNIX marketplace using the X.11 display protocol in X-terminal thin client devices and X server software for personal computers. Following our March 1996 OEM agreement with Citrix Systems, Inc. ("Citrix") we were able to offerWinCenter multi-user Windows NT application server software, which provided Windows applications to our own as well as other devices that relied on the X.11 display protocol. We also moved to offer the Citrix ICA protocol on our X-terminal thin clients. Sales of network computers to traditional X.11 customers remains an important part of our business. In June 1998 we entered into a licensing agreement with Microsoft which enabled us to offer new, lower-priced thin client network computing devices known as Windows-based terminals. Recently, we have seen intense competition from alternative desktop systems, particularly personal computers, whose selling prices are at historic lows for relatively high performance configurations, and which can be configured to work in the same manner as Windows-based terminals. Despite the lower total cost of ownership of thin client devices, our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of our new thin client computing hardware and software products into the server and web-based computing markets. There can be no assurance that our 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 our thin client computing products would have a material, adverse effect on our business, operating results and financial condition.
Competition
The market for thin client products and similar products that facilitate access to data over networks are characterized by rapidly changing technology and evolving industry standards. 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 quarters, resulting in price reductions and reduced profit margins. We expect this intense competition and pricing pressure 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 would adversely affect our operating results.
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Fluctuations in 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. 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. Like others in our industry, we experience a disproportionate amount of shipments occurring in the last month of our fiscal quarters. This increases the risk of material quarter-to-quarter fluctuations in our revenues and operating results.
New Product Development and Timely Introduction of New and Enhanced Products
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.
Reliance on Independent Distributors and Resellers
We rely significantly on independent distributors and resellers for the distribution of our products. However, 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.
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Reliance on Independent Contractors
We rely on independent contractors for virtually all of the manufacture of our thin client computing products and accessories. Our reliance on these independent contractors limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our independent 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 our thin client computing products from SCI, which has locations in Thailand as well as various other countries throughout the world. Although we believe that the manufacture of our products could be relocated to one of SCI's other facilities if necessary within a few weeks, any significant interruption in the supply of products from this contractor would have a material, adverse effect on our business and operating results. On July 16, 2001, SCI and Sanmina announced their intention to merge the two companies. As a result of this pending merger, any potential change in strategic direction by the new entity, could have a significant impact on our operations.
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 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.
International Sales
International sales and operations may 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 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.
Dependence on Key Personnel
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. Failure to attract and retain key personnel could have a material, adverse effect on our business, operating results or financial condition.
Volatility of Stock Price
On March 20, 2001, our Common Stock was delisted from the Nasdaq National Market due to the failure to maintain a minimum bid price of $1.00 per share. Our Common Stock is now trading on the OTC Bulletin Board, which is considered to be less liquid and more volatile than the Nasdaq National Market.
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
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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.
Liquidity
As of June 30, 2001, we had combined cash and equivalents totaling $1.5 million, and $6.6 million in notes payable, consisting of $3.3 million in bank indebtedness and $3.3 million in other debt.
On March 30, 2000, we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill"). 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% (8.00% at June 30, 2001). The amount that can be borrowed at any given time is determined by the balance of our aging, location and other factors of accounts receivable. The outstanding loan was approximately $3.3 million at June 30, 2001.
In May 2001, the line of credit with Foothill Capital was amended to establish new financial covenants and eliminate the maximum ratio of borrowings against foreign accounts receivable. Additionally, in May 2001, the line of credit with Foothill Capital was amended to modify the maturity date of the loan from March 30, 2003 to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus 2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) covenant of $38,000 for the three month period ended June 30, 2001. In July 2001, the line of credit with Foothill Capital was further amended to reduce the maximum amount of the credit line from $15.0 million to $3.5 million. In August 2001, the maximum credit line was reduced to $3.25 million from $3.5 million and the maturity date of the line of credit with Foothill Capital, was extended to September 15, 2001 to provide additional time for another lender to complete its due diligence work and make a final determination regarding its preliminary proposal to extend a new revolving credit facility to us.
We have received an indication from SCI that they intend to extend the maturity date on our $3.3 million note payable, which currently matures on September 30, 2001.
Going Concern Uncertainty
The Company has incurred losses from continuing operations for the year ended December 31, 2000 of approximately $32.7 million and for the three- and six-month periods ended June 30, 2001 of approximately $1.5 million and $3.3 million, respectively. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or refinancing as may be required and ultimately to attain profitability. The Company is actively marketing its existing and new products, which it believes will ultimately lead to profitable operations. However, no assurance can be given that these available funds will meet the Company's cash requirements in the future. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
All of our international sales are now denominated in U.S. dollars. We still have a few small accounts receivable denominated in Euros as of June 30, 2001, which are subject to exchange rate fluctuations. This will affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro, although the effect on our results of operation is not expected to be material.
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NETWORK COMPUTING DEVICES, INC.
Item 3. Defaults Upon Senior Securities
In May 2001, our working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary ("Foothill Capital") was amended to establish new financial covenants and eliminate the maximum ratio of borrowings against foreign accounts receivable. Additionally, in May 2001, the line of credit with Foothill Capital was amended to modify the maturity date of the loan from March 30, 2003 to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus 2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) covenant of $38,000 for the three month period ended June 30, 2001. Such technical default could potentially result in Foothill Capital calling our loan. In July 2001, the line of credit with Foothill Capital was further amended to reduce the maximum amount of the credit line from $15.0 million to $3.5 million. In August 2001, the maximum credit line was reduced to $3.25 million from $3.5 million and the maturity date of the line of credit with Foothill Capital was extended to September 15, 2001 to provide additional time for another lender to complete its due diligence work and make a final determination regarding its preliminary proposal to extend a new revolving credit facility to us.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 30, 2001.
- (a)
- The following four persons nominated by management were elected as directors at the meeting:
Nominee | Shares Voted For | Withheld | ||
---|---|---|---|---|
Robert G. Gilbertson | 13,220,609 | 974,064 | ||
Rudolph G. Morin | 13,222,067 | 972,606 | ||
Douglas H. Klein | 13,237,576 | 957,097 | ||
Michael Ledbetter | 12,826,135 | 1,368,538 |
- (b)
- A proposal to ratify the selection of BDO Seidman, LLP as independent auditors of the Company for the current fiscal year was approved by a vote of 14,149,022 shares for, 25,983 shares against, and 19,668 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K.
- (a)
- The following exhibits are filed herewith:
Exhibit 10.61 | Amendment No. 1 to the Loan and Security Agreement, dated January 2001, by and between Network Computing Devices, Inc. and Foothill Capital Corporation. | |
Exhibit 10.62 | Amendment No. 2 to the Loan and Security Agreement, dated May 2001, by and between Network Computing Devices, Inc. and Foothill Capital Corporation. | |
Exhibit 10.63 | Amendment No. 3 to the Loan and Security Agreement, dated May 31, 2001, by and between Network Computing Devices, Inc. and Foothill Capital Corporation. | |
Exhibit 10.64 | Amendment No. 4 to the Loan and Security Agreement, dated July 2001, by and between Network Computing Devices, Inc. and Foothill Capital Corporation. | |
Exhibit 10.65 | Amendment No. 5 to the Loan and Security Agreement, dated August 9, 2001, by and between Network Computing Devices, Inc. and Foothill Capital Corporation. |
- (b)
- The Company filed no reports on Form 8-K during the three-month period ended June 30, 2001.
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NETWORK COMPUTING DEVICES, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Network Computing Devices, Inc. (Registrant) | ||||
Date: August 14, 2001 | ||||
By: | /s/ Michael A. Garner Michael A. Garner Chief Financial Officer and Secretary (Duly Authorized and Principal Financial and Accounting Officer) |
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INDEX
Part I: Financial Information Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
PART II—OTHER INFORMATION
SIGNATURE