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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
/ / 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
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NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, 94043
CALIFORNIA (Zip Code)
(Address of principal executive offices)
(650) 694-0650
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. Yes / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on
February 29, 2000, as reported on the Nasdaq Stock Market, was approximately
$104,695,266. Shares of Common Stock held by each officer, director and holder
of 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 29, 2000, 16,491,011 shares of the registrant's Common Stock
were outstanding.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS, WHICH REFLECT
OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK
FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED. IN THIS
REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF.
ITEM 1. BUSINESS.
GENERAL
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 includes the NCD THINSTAR
line of Windows-based terminals, the NCD EXPLORA network terminals and the NCD
NC200 and NCD NC400 network computers. On the software side we offer 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. Some of the software
products were part of the NCD THINSTAR software family in 1998; they have been
re-named and were announced in March 1999 as part of the NCD THINPATH software
family. Our thin clients, THINPATH software, and installation and support
services are a combination that delivers a fully integrated desktop solution to
companies seeking a low-cost, easy to manage, simple to use, high performance
user experience. Since introducing our first product in 1989, we have installed
over 1,000,000 thin clients worldwide.
Network Computing Devices, Inc. is a Delaware corporation. We were
originally incorporated in California in February 1988 and were reincorporated
in Delaware in October 1998. Unless the context otherwise requires, the terms
"the Company" and "NCD" refer to Network Computing Devices, Inc. and its
consolidated subsidiaries.
INDUSTRY BACKGROUND
THIN CLIENT COMPUTING
Computing environments made a pendulum-like swing from the highly
centralized mainframe and minicomputer systems of the 1970s to the fully
distributed personal computer- and workstation-based systems of the 1980s. While
the earlier approach benefited from centralized system administration and
security, users had to compete for under-powered, centralized processors on a
timesharing basis, using low-performance, character-based "dumb" terminals.
During the 1980s, microprocessor-based systems improved in price and
performance, and graphical user interfaces ("GUIs") with easy-to-use windows,
menus, and icons, became widely available. User groups within large
organizations began implementing their own solutions, using personal computers
and workstations on the desktop to give each individual user a dedicated
computing resource. The need to interconnect these computing resources led to
the development of local area networks ("LANs"), which resulted in processing,
data and applications being spread across many desktops. This approach brought
with it new problems: the high cost of installing, maintaining and upgrading a
computer on every desktop; under-utilization of individual computing resources;
and complex system management requiring large IT staffs.
As the 1990s approached, businesses developed networks and highly efficient
networked servers that could provide the information required to remain
competitive. Since this data was being accessed and used
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by unsophisticated non-technical individuals, it became important to provide
simple, high-performance graphics devices to access the data, and the tools that
made it easy to manage the information and the devices that accessed it. A new
computing environment evolved and came to be referred to as "thin client
computing" which combines the cost-effectiveness, manageability and security of
the original centralized model with the performance, GUIs and network
accessibility of the later distributed model.
The original development of thin client computing came in the UNIX
environment using the X Windows System (often simply called X). It was followed
in the Microsoft Windows environment by Citrix's Independent Computing
Architecture ("ICA") and then by Microsoft's Remote Desktop Protocol ("RDP").
All three technologies allow applications to run on centrally-administered
servers, taking advantage of enterprise-level resources. The applications'
graphical user interface ("GUI") is then sent over the network to the user's
desktop or viewing appliance. This separation of the display of applications
from the computing they require enables organizations to deploy, manage and
upgrade one or a small number of servers instead of hundreds or thousands of
individual personal computers. The result is faster access to new technology,
higher productivity, longer use of both client and server capital investments,
and greatly improved use of information technology staff resources.
Over the last several years, a number of important developments occurred
which expanded the potential markets for network computing systems. First, the
availability of the powerful Pentium microprocessor enabled the development of
complex Windows-based systems. The thin client model was solidified by the
introduction of the "lean client" initiative, Intel's thin client architecture,
demonstrating its support for thin clients and its investment in us to work on
the realization of the lean client initiative. Second, Microsoft NT Server
software, combined with Microsoft-authorized multi-user software such as Citrix
MetaFrame and NCD THINPATH, became available to support multi-user Windows
applications. In September 1998, Microsoft demonstrated its support of the thin
client computing model with its introduction of Windows NT 4.0 server, Terminal
Server Edition and its support of the development of Windows CE-based thin
clients to access these servers. This has been followed and significantly
enhanced by their subsequent integration of Terminal Services into Windows 2000,
enabling thin clients to more easily access Windows applications from any
Windows server. Third, the rapid growth of the Internet and Internet-based
computing has popularized the concept of remote computing and created new
interest in the thin client computing model.
With the centralization of applications in this client computing model, much
greater emphasis is placed on the management of servers that support increasing
numbers of users for their mission critical applications. This has created new
market opportunities for server monitoring and management software products.
With the rapid evolution of the internet, more companies are looking at
deploying thin client applications through web-based interfaces which is driving
the deployment of distributed web servers based on various technologies such as
Intel microprocessors, operating systems from Microsoft and Sun, as well as the
Linux operating system.
With the move of applications to the server in thin client computing, there
has been a rapid rise in the interest in Application Service Providers ("ASPs"),
companies that rent application time to end users to save them the
administrative costs of running their own IT department.
INFORMATION ACCESS AND INFRASTRUCTURE MANAGEMENT SOFTWARE
Software is key to information access and infrastructure management. The
physical connection to the intranet or Internet is relatively simple; but the
simple, well managed, cost-effective operation of network-wide computing
resources requires sophisticated software.
The market for enterprise information access and infrastructure management
software is large and comprised of a number of segments, many of which are
expanding rapidly. Segments of the information
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access market include: PC software for accessing remote UNIX and Windows
applications and Internet integration software. The server management software
market is also large, with the Windows server management segment experiencing
the highest rate of growth.
With the continuing proliferation of increasingly powerful and low-cost PCs
in large organizations, we identified a demand for software products to enable
DOS-based and Windows-based PCs to emulate X terminals for use in predominantly
UNIX environments. In order to address this market, in 1992 we acquired Graphic
Software Systems, a pioneer in the development of X software for PCs. In 1993,
we introduced PC-XWARE, its initial PC-UNIX integration software product.
PC-XWARE is based on our NCDWARE X terminal operating environment and provides
network connectivity using an NCD-developed TCP/IP software stack. NCD now
offers versions of PC-XWARE for WINDOWS 3.1, WINDOWS 95 and WINDOWS NT users in
addition to its new version, NCD THINPATH X-WARE, a part of its new NCD THINPATH
software family.
In 1995, we introduced NCD WINCENTER software that included Microsoft
Windows NT as its basic operating system and WinFrame, Microsoft-authorized
multi-user software that we licensed from Citrix Systems, Inc. ("Citrix"). NCD
WINCENTER also included NCD-developed graphics and network features that make it
compatible with the X Windows protocol supported by our thin clients and UNIX
workstations. NCD WINCENTER allowed a single server to provide Windows
applications to many users simultaneously. In September of 1998, the licensing
agreement with Citrix was terminated.
Building on this core competency, in 1999 we introduced the NCD THINPATH
family of software that includes three types of functionality--connectivity,
management and desktop support. The software includes emulators that allow any
desktop to access virtually any host environment, management tools to remotely
administer desktops and to optimize server performance and support of local
printers, peripheral devices and audio input/output. These products deliver
features that enhance the performance of Microsoft's Windows Terminal Server
without adding a layer of protocol software.
In January 2000, we acquired Multiplicity LLC, a provider of strategic
performance, capacity and service level management software for Windows NT
server environments. The Multiplicity product continuously collects data from
participating servers to catalog what people and applications are using which
servers. The data can be used for real-time monitoring or can be collected in a
database for later analysis, reporting, and billing.
MARKETS AND APPLICATIONS
Our thin clients are used in a broad range of industries for a wide variety
of applications. Thin clients are widely used in task-based applications like
order-entry and point-of-sale. Our main target industries are healthcare,
retail, finance and education.
Initially, our X-terminal systems were sold as alternatives to high-priced
UNIX workstations required to access applications on UNIX servers. Later,
emulators were added to give them the additional functionality of an ASCII
terminal or IBM 3270 terminal replacement. By mid-1996, server software existed
that made them an enhancement of, or alternative to, personal computer networks.
X-terminals were developed to allow multiple users to access UNIX
applications on servers without the burden of expensive UNIX workstations on
their desktop. When Windows applications became a requirement, these users were
required to add a bulky and expensive PC to their desk space. We introduced NCD
WINCENTER to provide Windows NT access from the already existing X-terminal of
the UNIX users. With Microsoft Windows NT Server 4.0, Terminal Server Edition
("TSE") UNIX users can still access Windows applications through Citrix
Metaframe protocol with NCD WINCENTER for Metaframe.
Microsoft's Terminal Services in Windows 2000 includes the Remote Desktop
Protocol ("RDP") that allows Windows CE-based desktop devices to access Windows
NT applications without the addition of Citrix MetaFrame. While the integrated
RDP protocol does not include many of the features supported by
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Citrix MetaFrame (the ICA protocol), NCD THINPATH software includes enhancements
to Terminal Services with RDP that gives it the most important features required
by major implementers of Windows-based terminals in a Windows 2000 environment.
This delivers a low cost solution without the expense and complexity of adding a
non-Microsoft protocol layer of software.
TERMINAL REPLACEMENT. A principal market for X-based thin clients is
replacement of character-based terminals, such as ASCII and 3270 terminals. Many
commercial users in transaction processing applications are upgrading their
centralized systems to achieve the productivity advantages of GUIs and windowing
as well as the flexibility of "open" systems based on industry-standard
operating systems such as UNIX. Our thin client products offer such customers
the ability to have a single desktop device that gives them access to both
existing legacy applications as well as new GUI-based versions while maintaining
the central administration they have come to depend upon.
WORKSTATION ENVIRONMENTS. Many of the early buyers of X-terminals were also
early users of workstation technology and viewed X-based thin clients primarily
as a low-cost alternative for expanding their workstation networks. In these
environments, thin clients can access the excess processing power of existing
workstations, supplying users with a GUI at a considerably lower cost than a
workstation with equivalent display characteristics. Thus, organizations can
provide windowing and graphics for uses that previously could not justify the
cost of a full workstation. Many users of X-terminals in UNIX workstation or
minicomputer environments have developed an optimized configuration of
workstations and X-terminals. In these environments, rather than providing some
users with workstations and others with X-terminals, every user is given an
X-terminal, and compute servers based on high-performance workstations (without
monitors) that are shared among all users. The organization thereby realizes
cost advantages by centralizing processing, memory and disk requirements into
fewer, high-performance servers.
PERSONAL COMPUTER ENVIRONMENTS. With Microsoft's introduction of Windows NT
Server 4.0, Terminal Server Edition, we introduced the NCD THINSTAR family of
thin clients that are optimized to access Windows NT and NCD THINPATH software
that enhances the capabilities of TSE. For task-based users, like data entry
clerks and call center specialists, we believe that this integration of thin
client hardware and software is a viable alternative to PCs. With the addition
of NCD THINPATH emulators, these Windows-oriented desktops can also access
legacy systems environments like AS/400s and mainframes.
INTRANET ENVIRONMENTS. Many companies employ multiple operating
environments on their corporate network (intranet), plus connectivity to the
worldwide web. This capability facilitates employee collaboration and allows
access to the enormous information resources that exist around the company and
around the world. NCD thin clients and NCD THINPATH software are offered as a
means of providing cost-effective, easy to maintain access to all of these
resources. NCD THINSTAR Windows-based terminals are optimized to access all
resources through Microsoft Windows Terminal Server, while the NCD NC200 and NCD
NC400 network computers are optimized for browser access. The NCD EXPLORA class
of network terminals provide cost-effective access to X-based applications. The
NCD THINPATH family of software provides emulators to permit PCs and NCD
THINSTAR terminals to access virtually any server, to permit easy network
management and to provide support for local peripheral devices on NCD THINSTAR
and PC desktops.
SERVER MONITORING AND MANAGEMENT. With increased reliance on NT servers for
application provision, the real time monitoring and pre-emptive fixing of
problems before they occur will become increasingly important. The requirements
will be to ensure reliability, availability, and serviceability of thin client
networks in the way that mainframes have traditionally done, as well as to make
it possible for ASPs to provide a contractually binding service level to their
customers. NCD Multiplicity is targeted at these requirements.
5
PRODUCTS
THIN CLIENT HARDWARE PRODUCTS
We offer a broad line of thin client products that provide businesses and
other enterprises with an open systems approach to network computing based on
our Network Computing Architecture. Our thin client devices include NCD THINSTAR
Windows-based terminals, NCD NC200 and NCD NC400 network computers and NCD
EXPLORA network terminals.
THIN CLIENTS. Our thin client products are desktop devices that are used to
access information and applications residing on compute servers in a local area
network or wide area network. With our thin clients, applications can be
executed on the powerful networked servers, and the results displayed on simple,
cost-effective desktop devices. As discussed above, the thin clients were
initially introduced to access UNIX applications; later the software was added
to allow these same devices to access mainframes and other non-UNIX servers.
With the growing popularity of Windows environments, we have introduced the NCD
THINSTAR Windows-based terminals and NCD THINPATH software to optimize access to
networked Windows NT servers.
Our thin client product line includes models with various performance
characteristics, various screen sizes and a range of software extensions and
network interfaces. Hardware platforms are based on different microprocessors,
addressing a wide range of price and performance requirements. Custom ASICs used
in the design of most of our products help reduce the cost of connection logic
and provide hardware acceleration for certain graphics functions. Our thin
clients feature single-board electronics and incorporate current ergonomic
standards in monitor technology. Our thin clients come with a full line of
peripherals, including mouse and several keyboard options.
NCD THINSTAR 200, NCD THINSTAR 300 AND NCD THINSTAR 400 Windows-based
terminals were the first family of thin clients introduced with the Windows CE
operating system kernel. The NCD THINSTAR 300 is the first thin client that
employs the Intel lean client architecture that we developed under a
non-exclusive agreement with Intel. This model provides higher performance than
the NCD THINSTAR 200, and can support a greater number of peripheral devices.
NCD THINSTAR 400 is the first Windows-based terminal to provide an internal PCI
slot for expandability and offers increased performance over the NCD THINSTAR
300. The NCD THINSTAR 450 PRO will support Microsoft WBT Professional with
Windows NT Embedded.
Our NCD NC200 and NCD NC400 network computers, as well as the NCD EXPLORA
700 and HMXPRO24 devices are high-performance network computers that are
targeted at customers who want browser access to the network or who have a Java
requirement. The NCD NC200/400 are industry leading network computers acquired
in the 1998 acquisition of the Tektronix Network Displays business unit. All of
these models are based on powerful MIPS-based processors.
The NCD EXPLORA 400/450 family are our entry level network terminal product.
They target the low end UNIX workstation replacement market. They are based on
the 32-bit PowerPC RISC processor.
SOFTWARE PRODUCTS
NCDWARE AND NCD NCBRIDGE. Our UNIX based thin clients run NCDWARE and NCD
NCBRIDGE, our proprietary operating systems. These products incorporate
extensive enhancements to the basic X server software to improve performance,
system manageability and robustness.
NCD THINPATH SOFTWARE. We manufacture a family of software products that
are either client or server-based, and deliver a series of important
capabilities to enterprises deploying the emerging thin client computing model.
The series of software modules allows Windows-based terminals and PCs to emulate
virtually any desktop device so that they can access any server on the network,
regardless of its operating system. These are pieces that make centralized
management and support of the network easier,
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and that permit support of local printers and other peripheral devices on
Windows-based terminals and PCs without adding protocol software to Microsoft's
Terminal Server.
NCD PC-XWARE. NCD PC-XWARE is software for Windows PCs that provides
connectivity to X Windows applications running on UNIX host systems. There are
versions of NCD PC-XWARE for WINDOWS 3.1, WINDOWS 95 and WINDOWS NT. NCD
PC-XWARE is based on our NCDWARE network computing software and offers many of
the same local applications and network management features.
NCD MULTIPLICITY. We will shortly be shipping the Multiplicity server
monitoring and management product. Multiplicity allows the real time monitoring
of a number of key NT metrics and presents these in an easy-to-understand
graphical form to enable network administrators to monitor the health of a
distributed NT server network. The idea is to be able to have a real-time
picture of the network and an understanding of areas where problems may occur so
that they can be rectified before downtime occurs. This improves service levels
and reliability, availability and serviceability of thin client networks based
on the Microsoft NT and Windows 2000 operating systems.
PRODUCT DEVELOPMENT
We believe that we must enhance our existing line of thin client and
software products and continue developing new hardware and software products
that incorporate the latest improvements in technology in order to maintain our
position as a major supplier of thin client solutions and expand the market for
this style of computing and information access products. Accordingly, we are
committed to investing significant resources in software and hardware
development activities.
Our current development programs include:
- Server and client software for making thin client devices and PCs easy to
deploy and manage in multi-user Windows NT environments;
- Server and client software for connecting thin client devices and PCs to a
broad range of applications running on Windows NT and legacy systems;
- Additional Intel architecture-based lean client devices and other advanced
terminal platforms that incorporate increased levels of logic integration;
- Cost reductions and feature enhancements of network computer platforms
acquired from Tektronix; and,
- Delivery and enhancement of the Multiplicity Server Management product.
There can be no assurance that any of these development efforts will result
in the introduction of new products or that any such products will be
commercially successful. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Future Performance and Risk
Factors--New Product Development and Timely Introduction of New and Enhanced
Products."
During 1999, 1998 and 1997, the Company's research and development
expenditures were $12,935,000, $13,213,000, and $14,179,000, respectively.
THE FOREGOING DISCUSSION CONCERNING OUR PRODUCT DEVELOPMENT PROGRAM INCLUDES
FORWARD-LOOKING STATEMENTS. ACTUAL PRODUCT DEVELOPMENT RESULTS MAY DIFFER
SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED
UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK FACTORS."
MARKETING AND SALES
Our marketing and sales objectives are two-fold. The first is to position
thin client computing within enterprise IT architectures as an approach that is
easy-to-implement and support and meets users' performance goals and the
corporate desire for centralized management. Equally important is our aim to
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maintain our position as a recognized leader in the thin client industry and
differentiate our integrated hardware and software offerings from competitors'
products. Both of these objectives need to be addressed through our focus on
indirect channels of distribution.
A key strategy is the education of our channel partners regarding our value
proposition of making access simple and making our integrated hardware and
software solution easy to sell.
Other significant strategies are our work in cooperation with industry
leaders like Intel and Microsoft, and greater focus on vertical industries and
applications like healthcare, retail and call centers.
Our marketing team is organized around participation in trade shows,
conferences and seminars, the placement of advertising, significant press and
analyst contacts both in the technology and business areas, telemarketing
activities and an increasing focus on web-based activities, including electronic
commerce.
We have embraced an indirect sales model worldwide, including distributors
and value-added resellers (the traditional two-tier distribution model). The
acquisition of the Tektronix Network Displays business unit broadened our
network of resellers and support staff to better serve the emerging marketplace.
International sales, including sales to foreign OEM customers, represented
approximately 40%, 35% and 34% of our net revenues during 1999, 1998 and 1997,
respectively. International sales may be subject to government controls and
other risks, including export licenses, federal restrictions on the export of
critical technology, changes in demand resulting from currency exchange
fluctuations, political instability, trade restrictions and changes in tariffs.
To date, we have experienced no material difficulties due to these factors.
We also sell our products to OEMs who combine our products with computers
and peripherals, add application software and sell complete computer systems to
end-users. OEM sales represented approximately 9%, 29%, and 26% of our revenues
for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1999 Adtcom, Tech Data and IBM accounted for 18%, 15% and 9%,
respectively of our net revenue. IBM accounted for 29% and 26% of our net
revenues in 1998 and 1997, respectively.
We also sell our PC connectivity software products through an internal
telesales team that fulfills orders through our normal two tier distribution
channel.
SERVICE AND SUPPORT
We believe that our ability to provide service and support is and will
continue to be an important element in the marketing of our products. We
maintain in-house repair facilities and also provide telephone and electronic
mail access to our technical support staff. Our technical support engineers not
only provide assistance in diagnosing problems but work closely with customers
to address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. We provide system level software
support through our factory-based technical maintenance organization and field
system engineers, and also offer software update services that allow customers
to purchase subsequent releases of our software products. Teleplan & K-Litex and
MSAS Hitech Logistics, both leading European service organizations, provide
certain repair services for our European distributors and OEM customers.
Cybersource, a leading Australian service organization, provides certain repair
services for our Australian distributors and OEM customers.
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COMPETITION
The market for thin client products and similar products that facilitate
access to data over networks is characterized by rapidly changing technology and
by evolving industry standards. Although we are a major supplier of thin client
computing systems and software, we experience significant competition from other
thin client manufacturers, suppliers of personal computers and workstations and
from software developers. In recent months, a number of other companies have
announced intentions to offer Windows-based terminals, including a few of the
major personal computer companies.
In the Windows-based terminal area, our major competitor is Wyse
Technology, Inc. ("Wyse"). We believe that our principal competitive advantages
are our integrated hardware and software offerings and our networking core
competence. Server manufacturers who offer thin client products may have
advantages over independent thin client vendors, including us, based on their
ability to "bundle" their thin clients, personal computers and servers in
certain large sales opportunities. We are addressing this competitive threat by
forming marketing partnerships with suppliers of the various pieces of such
solutions not provided by us.
At the low end of the commercial segment of the computer market, we compete
with suppliers of lower cost ASCII and 3270 terminals. These products do not
offer the graphics and windowing capabilities offered by our thin client
systems, but are still appealing to certain price sensitive customers. Moreover,
PC networks offer an alternate means of upgrading from ASCII and 3270 terminal
systems in many commercial applications.
Generally speaking, competition in the thin client computing market has
intensified over the past several quarters, resulting in price reductions,
reduced profit margins and increased efforts to maintain market share, which
have adversely affected our operating results. In addition, intense competition
from alternative desktop computing products, particularly personal computers,
has slowed the growth of the thin client computing market. We expect this
intense competition to continue. 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.
NCD PC-XWARE software products face direct competition from several software
companies that offer similar products, including Hummingbird
Communications, Ltd., a Canadian company, Visionware, a subsidiary of The Santa
Cruz Operation, Inc., NetManage, Inc., and Walker, Ritchie, Quinn, a
privately-held company.
NCD THINPATH. Many functions of the NCD THINPATH technology such as
Mirroring, Load Balancing and Plus compete with functions provided in Citrix
MetaFrame software. Some functions of the NCD THINPATH MANAGER technology
compete with functions provided in Wyse Technology, Inc.'s WyseWorks software.
We have experienced, and expect to continue to experience strong competitive
pressure from Citrix and Wyse in response to the competitive threat of our
software. Other companies may chose to enter this space and compete with us for
end user and third party customers.
NCD MULTIPLICITY. Server management products are provided by a number of
companies, including Citrix and NetIQ in the NT server market. In addition,
established companies providing server monitoring and management software may
choose to enter the NT server management market as Windows NT and Windows 2000
account for an increasing number of mission-critical servers in the enterprise.
MANUFACTURING AND SUPPLIES
We conduct certain thin client production activities at our Mountain View,
California facility. These operations consist primarily of final assembly and
configuration, testing and quality control of material, components,
sub-assemblies and systems. We utilize a manufacturing control system that
includes purchasing, inventory control and cost accounting functions. We test
our thin clients in a network environment using a internally-developed, computer
integrated manufacturing ("CIM") system. In addition, we employ
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a statistical process control system ("SPC") and conduct regular on-site
inspections at our vendors' facilities to maintain quality control.
We currently obtain substantially all of our thin client products from a
single supplier located in Thailand. In addition, 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 those 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.
Our products incorporate memory components, such as video random access
memory chips ("VRAMs") that are available from multiple sources but have been
subject to substantial fluctuations in availability and price. Certain other
components, including microprocessors and ASICs, though generally available from
multiple sources, are subject to industry-wide demand that could result in
limited availability or significant fluctuations in pricing. To date, these
fluctuations have not had a material effect on our operating results and we have
been able to obtain an adequate supply of such components.
We currently outsource the reproduction and packaging of our software to
vendors located in California.
BACKLOG
We assemble our thin client products based upon our projections of near-term
demand. Orders from large end-users and OEMs are generally placed by the
customer on an as-needed basis, and we typically ship products within 45 days
after receipt of a firm purchase order. We do not generally have a significant
backlog, and our backlog at any particular time, or fluctuations in backlog from
time to time, may not be representative of actual sales for any succeeding
period.
Because of the ease of manufacturing software products, we are able to
effect the manufacture and shipment of these products quickly in response to
customer orders without maintaining significant inventories, and, as a result,
have historically had little, if any, backlog at any particular time. We do not,
therefore, consider backlog for these products to be a significant measure of
actual sales for any succeeding period.
INVENTORY
As we have moved to a channel-based model we have placed inventory of our
products into distribution. Although efforts are made to have the inventory in
distribution reflect the expected pattern of near-term demand from reseller
partners, changes in market conditions may cause the need for stock rotation and
price protection, which could affect operating results. In addition, it is
possible that the inventory mix will not be correct, causing a delay in the
shipment of products to end user customers and possible loss of orders.
PROPRIETARY RIGHTS AND LICENSES
We rely primarily on a combination of copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements and other intellectual
property protection methods to protect our proprietary technology. We hold ten
U.S. patents. Although we intend to pursue a policy of obtaining patents for
appropriate inventions, we believe that our success will depend primarily on the
innovative skills, technical competence and marketing abilities of our personnel
rather than upon the ownership of patents. There can be no assurance that
patents will issue from any pending or future patent applications or that any
claims allowed will be sufficiently broad to protect our technology. In
addition, there can be no
10
assurance that any patents issued to us will not be challenged, invalidated or
circumvented, or that any rights granted thereunder will provide adequate
protection to us.
Certain technology used in our product is licensed from third parties on a
royalty-bearing basis. The costs associated with such royalties were a
significant component of total software cost of sales through 1998. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." Generally, such licenses grant to us non-exclusive, worldwide
rights with respect to the subject technology and terminate only in the event of
material breach.
Our software products are generally licensed on a right-to-use basis. We
rely primarily on "shrink wrap" or "break the seal" licenses. Certain provisions
of such licenses, including provisions protecting against unauthorized copying
and reverse engineering, may not be enforceable under the laws of some
jurisdictions. In addition, the laws of some foreign countries in which our
software products are distributed do not protect our intellectual property
rights to the same extent as U.S. law.
There can be no assurance that third parties will not assert infringement
claims against us or our suppliers with respect to current or future products.
Although we have historically been able to resolve all asserted claims on terms
which have not had a material effect on our operations, there is no assurance
that any future claims may not require us to enter into unfavorable royalty
arrangements or result in costly litigation.
EMPLOYEES
As of December 31, 1999, we had 339 full-time employees, of whom 76 were
primarily engaged in research and development, 46 in service and technical
support, 113 in marketing and sales, 47 in manufacturing and 57 in
administration and finance. None of our employees are represented by a
collective bargaining agent. We have experienced no work stoppages and believe
that our employee relations are good.
Competition for employees in the computer and software industries is
intense. We believe that our future success will depend, in part, on our ability
to continue to attract and retain highly skilled technical, marketing and
management personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to our executive
officers, and their ages as of March 31, 2000:
NAME AGE POSITION
- ---- -------- ----------------------------------
Robert G. Gilbertson.............. 58 Chairman of the Board
Rudolph G. Morin.................. 62 President and Chief Executive
Officer
Gregory S. Wood................... 41 Vice President and Chief Financial
Officer
John P. DeSantis.................. 44 Senior Vice President, Sales and
Marketing
James L. Fulton................... 36 Chief Technical Officer
In August 1999 Mr. Gilbertson became Chairman of the Board. Prior to that
Mr. Gilbertson had served as President and Chief Executive Officer since joining
us in May 1996. Prior to joining us, Mr. Gilbertson served as Chairman of Avidia
Systems, Inc., a manufacturer of ATM switching systems, and also as President
and Chief Executive Officer of CMX Systems, Inc., a manufacturer of precision
measurement and positioning products from 1993 to 1996. Prior thereto, he served
as President and Chief Executive Officer of Data Switch Corporation.
Mr. Gilbertson holds an MBA fron the University of
11
Chicago, served as Chairman of the Board of the American Electronics
Association, and was a member of the faculty of Harvard Business School for five
years.
In August 1999 Mr. Morin was promoted to President and Chief Executive
Officer. Prior to that Mr. Morin had served as Executive Vice President,
Operations & Finance and Chief Financial Officer since joining us in May 1996.
Prior to joining us, Mr. Morin served as Senior Vice President, Finance and
Administration for Memorex Telex Corporation from 1993 to 1996. Prior thereto,
he worked at Data Switch, where he was Executive Vice President. Mr. Morin's
background also includes more than ten years with Thyssen Bornemisza Inc. as
head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Wood joined us in August 1999 after two years as CFO at Sutmyn Storage
Corp. a Santa Clara, CA data storage company. Mr. Wood had joined Sutmyn
following seven years at Memorex Telex, most recently as senior vice president
of finance. His prior experience includes serving as a principal in the
San Francisco office of Ernst & Young. A 1980 graduate of the University of
San Diego, Mr. Wood is a CPA and also holds a J.D. degree from the University of
San Francisco School of Law.
In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President International
Operations since joining us in July 1997. Mr. DeSantis came to us from
Cincinnati Bell where he held positions as Vice President of European Operations
and International Sales. Mr. DeSantis holds a degree in Philosophy and
Mathematics from Fairfield University, and has completed post graduate work at
Stanford University.
In February 2000, Mr. Fulton was promoted to Chief Technical Officer. Prior
to that, he had served as Vice President of Product Management and over the past
10 years has held a number of positions spanning engineering, marketing, and
management. Before joining us, Mr. Fulton was one of the original staff at the
MIT X Consortium which drove the X Window System to become the industry's first
thin client computing standard. Mr. Fulton holds a bachelor's degree in Computer
Science and Engineering from MIT.
ITEM 2. PROPERTIES.
Our principal administrative, marketing, manufacturing and research and
development operations are located in adjacent buildings in Mountain View,
California. These facilities consist of approximately 153,000 square feet and
are occupied under leases, which expire between June 2000 and February 2003.
Approximately 28,000 square feet in these facilities are currently being
subleased to a third party. The annual gross rent for these facilities in 1999
was approximately $1,500,000. Our software operations are located in a 44,000
square foot facility in Beaverton, Oregon, under leases expiring in
October 2000, with gross rent of approximately $430,000 for 1999. We also lease
a 20,000 square foot facility in Novato, California, under a lease expiring in
July 2001, a portion of which is currently being subleased to third parties,
with annual gross rents of approximately $530,000 in 1999. We believe that our
existing facilities are adequate for our present requirements and that suitable
additional space will be available as needed. Our field sales and service
offices worldwide consist of leased office space totaling approximately 24,000
square feet, with current aggregate gross rents of approximately $690,000 for
1999.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 1999.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE DATA
Our Common Stock has been traded on the Nasdaq Stock Market under the symbol
"NCDI" since our initial public offering in June 1992. The following table sets
forth, for the periods indicated, the high and low sale prices for the Common
Stock on such market:
HIGH LOW
---- --------
1999:
First Quarter......................................... $ 8.00 $4.50
Second Quarter........................................ 7.00 4.25
Third Quarter......................................... 5.4375 4.25
Fourth Quarter........................................ 9.00 3.875
1998:
First Quarter......................................... $13.75 $9.00
Second Quarter........................................ 11.50 6.00
Third Quarter......................................... 8.9375 5.00
Fourth Quarter........................................ 8.50 4.375
The closing sale price for the Common Stock on February 29, 2000 was $7.875.
As of February 29, 2000, we had 193 holders of record and approximately
4,500 beneficial holders of our Common Stock and 16,491,011 shares of Common
Stock were outstanding.
The market price of our Common Stock has fluctuated significantly and is
subject to significant fluctuations in the future. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Future
Performance and Risk Factors."
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently expect
that we will retain our future earnings for use in the operation and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $109,030 $105,596 $133,400 $120,608 $139,328
Operating income (loss)................... (9,707) (13,446) 1,736 (17,241) (7,657)
Income (loss) before income taxes......... (9,143) (9,761) 3,831 (8,721) (6,205)
Net income (loss)......................... (16,259) (9,103) 2,681 (5,232) (4,029)
Net income (loss) per share--basic........ (1.00) (0.56) 0.16 (0.32) (0.25)
Net income (loss) per share--diluted...... (1.00) (0.56) 0.15 (0.32) (0.25)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 8,339 $ 21,359 $ 31,480 $ 35,671 $ 36,150
Working capital........................... 31,052 41,097 53,811 60,981 57,470
Total assets.............................. 56,764 75,146 86,514 85,693 97,537
Capital lease obligations, less current
portion................................. -- 69 160 314 991
Total shareholders' equity................ 37,876 52,523 60,519 67,425 68,014
ITEM 7. 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."
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 includes the NCD THINSTAR
line of Windows-based terminals, the NCD EXPLORA network terminals and NCD NC
200 and NCD NC400 network computers. On the software side, our products are the
NCD THINPATH family of client and server software, developed to enhance the
connectivity, management and features of the NCD thin clients as well as PCs in
accessing information and applications on Windows servers. Some of the software
products were part of the NCD THINSTAR software family in 1998; they have been
re-named and were announced in March 1999 as part of the NCD THINPATH software
family. These products are sold through OEMs, system integrators and
distributor/VAR channels worldwide.
RECENT DEVELOPMENTS
On December 31, 1998, we completed the acquisition of Tektronix' Network
Displays business unit for $3.0 million in cash and warrants to purchase one
million shares of our common stock at $8.00 per share. The acquisition was
accounted for as a purchase business combination with a total purchase price of
$5.9 million. The purchase price was allocated to $1.7 million of net assets
acquired, $1.4 million of in-process research and development and $2.8 million
to other intangible assets. In addition to acquiring certain assets,
approximately 83 former Tektronix employees joined us, primarily in sales,
marketing and
14
engineering roles. In conjunction with this acquisition, we undertook various
restructuring activities to eliminate redundancies with the acquired business,
including the reduction in personnel of approximately 13 employees. We recorded
a charge of approximately $1.0 million related to these restructuring
activities. (See Note 5 of the "Notes to Consolidated Financial Statements.")
During March 1999, we announced the THINPATH family of software which adds a
feature-rich set of options to Microsoft Windows NT Server 4.0 Terminal Server
and Windows 2000 Terminal Services without adding an additional protocol layer.
Various features of THINPATH were introduced throughout 1999.
During 2000 we expect to see continued declines in the revenue generated
under the IBM Agreement as that relationship winds down.
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 will be accounted for using
the purchase method. The purchase price was approximately $2.2 million plus a
stream of future payments based on revenue for the four year period following
the acquisition. We expect to record a charge for purchased in-process research
and development in the first quarter of 2000. Multiplicity LLC provides
strategic performance analysis and capacity planning solutions for networked
Windows NT and Windows 2000 servers. These solutions give customers
sophisticated 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 (WBT).
In March 2000 we announced that revenues to date for the quarter ending
March 31, 2000 had been lower than we expected and that operating expenses had
increased due to the acquisition of Multiplicity and substantial marketing
expenses in connection with the launch of Microsoft's Windows 2000. As a result,
we expect revenues for the quarter ending March 31, 2000 will be lower than
revenues for the final quarter of last year, and we expect to record a net loss
in excess of the loss for the prior quarter.
In the same announcement, we disclosed that we had become more actively
engaged in exploring strategic alternatives intended to enhance shareholder
value, but said we had not entered into any agreement or commitment with respect
to any such strategic transaction, and no assurance can be given that any
transaction will result from these activities.
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. 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 accounts receivable.
15
RESULTS OF OPERATIONS
The following table sets forth certain items in our consolidated statements
of operations as a percentage of net revenues for the periods indicated. Figures
are rounded to the nearest whole percentage, and line items presenting subtotal
and total percentages may therefore differ, due to rounding, from the sum of the
percentages for each line item.
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net revenues:
Hardware products and services............................ 90% 77% 75%
Software licenses and services............................ 10% 23% 25%
---- ---- ----
Total net revenues...................................... 100% 100% 100%
Cost of revenues:
Hardware products and services............................ 58% 56% 53%
Software licenses and services............................ 3% 7% 7%
---- ---- ----
Total cost of revenues.................................. 61% 63% 61%
---- ---- ----
Gross profit................................................ 39% 37% 39%
Operating expenses:
Research and development.................................. 12% 13% 11%
Marketing and selling..................................... 30% 29% 23%
General and administrative................................ 6% 5% 5%
Business restructuring.................................... -- 1% --
Acquired in-process research and development.............. -- 1% --
Litigation settlement..................................... -- -- (0)%
---- ---- ----
Total operating expenses................................ 48% 49% 38%
---- ---- ----
Operating income (loss)..................................... (9)% (13)% 1%
Non-operating income and gains, net......................... 1% 3% 2%
---- ---- ----
Income (loss) before income taxes........................... (8)% (9)% 3%
Provision for income taxes (income tax benefit)............. 7% (1)% 1%
---- ---- ----
Net income (loss)........................................... (15)% (9)% 2%
==== ==== ====
TOTAL NET REVENUES
Total net revenues for 1999 were $109.0 million, an increase of 3% from 1998
net revenues of $105.6 million. Net revenues for 1998 decreased by 21% compared
to 1997 net revenues of $133.4 million. International revenues were 40% of total
net revenues for 1999, representing an increase from 35% and 34% in 1998 and
1997, respectively. Sales to Adtcom and Tech Data accounted for 18% and 15%,
respectively of 1999 revenue. Sales to IBM accounted for 29% and 26% of revenues
in 1998 and 1997, respectively.
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 service
activities. Hardware revenues were $98.5 million for 1999, an increase of 21%
compared to revenues of $81.2 million in 1998. Hardware revenues for 1998
16
decreased 19% compared to revenues of $100.6 million in 1997. The increase in
revenues in 1999 reflects increased shipments of Windows-based terminals and
NC's partially offset by a decrease in shipments under the IBM Agreement. The
increase in shipments of NC's is a result of the acquisition of product lines
acquired from Tektronix. The decrease in revenues in 1998 reflects decreased
shipments of UNIX-based products as we began to transition to the sale of lower
priced Windows-based terminals and decreased shipments under the IBM Agreement.
We expect shipments under the IBM Agreement to continue to decline in 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. Revenues from software and related services were
$10.5 million for 1999, a decrease of 57% compared to revenues of $24.4 million
in 1998. Revenues in 1998 decreased by 26% compared to revenues of
$32.8 million in 1997. The most significant decrease in 1999 was in the NCD
WINCENTER product line. In addition to the decreased product sales, revenues for
1997 included revenues from AT&T of $1.2 million related to an agreement with
AT&T that terminated in September 1997. Our OEM relationship with Citrix ended
on September 30, 1998. This has and will continue to result in significantly
reduced sales of WINCENTER products, and, potentially, a decrease in total
software revenues in future periods if our newly announced software products do
not achieve sufficient marketplace acceptance.
GROSS MARGIN ON HARDWARE REVENUES
Our gross margin percentages on hardware revenues were 36%, 27% and 29% for
the years ended December 31, 1999, 1998 and 1997, respectively. The increase in
margin in 1999 primarily reflects the decrease in sales of products to IBM on an
OEM basis, and an increase in sales of higher margin NCD branded products. The
decrease in margin for 1998 relates to a higher mix of lower margin product sold
to IBM.
We continue to increase the mix of revenues generated through indirect
channels. This should continue to put downward pressure on gross margin
percentages on hardware revenues in future periods. The transition from network
computers to windows based terminals will also cause margins to decline, though
the expected decrease in shipments under the IBM Agreement could partially
offset these expected declines.
GROSS MARGIN ON SOFTWARE REVENUES
Our gross margin percentages on software revenues were 75%, 68% and 70% for
the years ended December 31, 1999, 1998 and 1997, respectively. The increase in
1999 when compared to 1998 is the result of a move to our branded products that
do not rely on licensed technology and therefore have lower costs. The decline
in 1998 when compared to 1997 was due primarily to a higher mix of WINCENTER
revenues in 1998, which carry a lower margin because of higher third-party
royalty costs, and reduced revenues of other software products, including
revenues associated with the AT&T agreement and PC-XWARE. Certain technology
used in our products is licensed from third parties on a royalty-bearing basis.
Accordingly, royalties are a significant component of total software cost of
sales through 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $12.9 million, $13.2 million
and $14.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. R&D expenses as a percentage of
17
revenues were 12%, 13% and 11% for 1999, 1998 and 1997, respectively. We plan to
maintain our investment in research and development in the area of thin client
computing products through 2000.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $33.0 million, $31.1 million and
$30.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase of $1.9 million in 1999 compared to 1998 was the
result of increased employee based expenses that resulted from the Tektronix
acquisition. The slight increase in 1998 compared to 1997 related to our
continued investment in the marketing and selling of our products during a
transition year of lower revenues. As a percentage of net revenues, marketing
and selling expenses were 30%, 29% and 23% for 1999, 1998 and 1997,
respectively. The higher percentage in 1998 is the result of slightly increased
spending and lower net revenues in 1998 and lower spending in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $6.9 million, $5.2 million
and $6.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively. As a percentage of net revenues, G&A expenses were 6% for 1999 and
5% for both 1998 and 1997. Amortization of goodwill related to the acquisition
of the Network Displays division of Tektronix, Inc. was $0.4 million in 1999.
BUSINESS RESTRUCTURING
On December 31, 1998, we acquired the Network Displays business unit of
Tektronix Inc ("NWD"). As a result of the acquisition, we reduced its workforce
and discontinued certain activities that were overlapping with the acquired
business. Accordingly, during the fourth quarter of 1998, we recorded a charge
of $1.0 million for costs of employee severance benefits and to discontinue
overlapping activities. See Note 5 of the "Notes to Consolidated Financial
Statements" contained herein.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with our acquisition of NWD on December 31, 1998,
approximately $1.4 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
costs 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 projects acquired in the acquisition
of NWD consisted of development of a Windows-based terminal and related
software, browser terminal software and token ring support for the NC line of
network computers. Further development on the Windows-based terminal was
discontinued during 1999 since the project overlapped with existing products.
There was no significant impact on operating results as a result of this action.
The Windows-based terminal software was integrated into our existing line of
THINPATH software and is currently being shipped. A new version of browser
terminal software was released and is being shipped as part of the NCBRIDGE
software product family. Token ring support was added to our NC line of network
computers and began shipping in 1999.
INTEREST INCOME, NET
Interest income, net of interest expense, was $0.6 million, $1.6 million and
$1.9 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The continuing decrease in interest income relates primarily to decreased
average balances in interest-earning accounts.
18
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income for 1998 reflects the sale of our interest in Precept
Software, Inc. after Precept was acquired by Cisco Systems in March 1998,
resulting in a net gain of approximately $2.1 million. Other income in 1997
reflects the receipt of insurance proceeds for certain legal expenses incurred
in association with the securities litigation costs.
INCOME TAXES AND INCOME TAX BENEFIT
We recognized an income tax provision of $7.1 million and $1.2 million in
1999 and 1997, respectively, compared to an income tax benefit of $0.7 million
in 1998. During 1999, we increased the valuation allowance to provide a full
reserve against all of our gross deferred tax assets because operating losses
created uncertainty about our ability to generate sufficient taxable income to
utilize our deferred tax assets. This charge, which was recorded in the third
quarter, and foreign income taxes comprise the 1999 tax provision. See Note 7 of
the "Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
Total assets of $56.8 million at December 31, 1999 decreased $18.3 million
from $75.1 million at December 31, 1998. The change in total assets reflects
decreases in cash and equivalents, short-term investments, property and
equipment, and deferred income taxes of $5.3 million, $7.8 million,
$0.2 million and $6.6 million, respectively, partially offset by increases in
accounts receivable, inventory and prepaid assets of $0.4 million, $0.7 million
and $1.3 million respectively. Total liabilities as of December 31, 1999
decreased by $3.7 million to $18.9 million from $22.6 million at December 31,
1998.
CAPITAL REQUIREMENTS
Capital spending requirements for 2000 are estimated at approximately
$2.6 million, and at December 31, 1999, we had commitments for capital
expenditures of approximately $30,000.
LIQUIDITY
As of December 31, 1999, we had combined cash and equivalents and short-term
investments totaling $8.3 million, with no significant debt. Cash used in
operations was $10.9 million and $5.8 million in 1999 and 1998, respectively
compared to cash provided by operations of $6.4 million in 1997. Cash used in
operations in 1999 primarily reflects our net loss of $16.3 million and
decreases in accrued expenses and deferred revenue of $2.1 million and
$1.8 million, respectively, partially offset by deferred income taxes of
$6.6 million and depreciation and amortization of $3.6 million. Cash used in
operations in 1998 primarily reflects our net loss of $9.1 million and decreases
in accrued expenses and deferred revenues of $3.2 million and $2.2 million,
respectively, partially offset by decreases in inventories and accounts
receivable of $5.8 million and $3.6 million, respectively. Cash provided by
operations in 1997 primarily reflects our net income of $2.7 million,
depreciation and amortization of $3.3 million and increases in accounts payable
of $6.8 million, partially offset by increases in inventories and accounts
receivable of $5.6 million and $3.6 million, respectively. Cash flows provided
by investing activities in 1999 of $4.1 million came from the sales of
short-term investments offset by purchases of property and equipment. Cash flows
used in investing activities in 1998 of $3.6 million primarily reflects the cash
portion of the acquisition of NWD of $3.0 million. Cash flows provided by
investing activities in 1997 of $1.3 million came from the sales of short-term
investments and decreases in other assets offset by purchases of property and
equipment. Cash flows provided by financing activities of $1.5 million in 1999
are provided mainly from the proceeds from the issuance of common stock. Cash
flows used in financing activities in 1998 reflects repurchases of
$10.7 million of our common stock, partially offset by Intel's investment in our
common stock. Cash flows used in financing activities in 1997 reflect
repurchases of $12.2 million of our common stock.
19
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. 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 accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth.
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 continue to grow software revenue. In addition
to the financing we received approval for in March 2000, we may be required to
seek additional financing before we achieve positive cash flow or in order to
comply with covenants under the line of credit. In that event, 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. If adequate
funds are not available to satisfy our short-term or long-term capital
requirements we may be required to limit our operations significantly.
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," established
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 are
in the process of determining the impact that adoption will have on our
consolidated financial statements.
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 a majority of our revenues from the sale of thin client network
computing products and related software. Until several years ago, our thin
client product offerings primarily focused on the UNIX marketplace using our X
protocol. Our introduction of WINCENTER multi-user Windows NT application server
software and new, lower-priced thin client network computing devices allowed us
to offer thin client network computing systems that provide users with access to
Windows applications. Our expansion of our thin client computing model into the
Windows-based environment was limited because of our inability to offer an
endorsed Microsoft solution within the Windows market prior to the introduction
of the Windows-based terminal in June 1998 and intense competition from
alternative desktop systems, particularly personal computers, whose selling
prices are at historic lows for relatively high performance configurations. 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. 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.
RELIANCE ON OEM RELATIONSHIPS
We have committed significant resources, including research and development,
manufacturing and sales and marketing resources, to the execution of our OEM
Agreements. The production cycle of related product requires us to rely on OEM
customers to provide accurate product requirement forecasts, which are subject
to change by OEM customers which have changed their forecasts from time to time
in the past. Should we commence production of related product based on provided
forecasts that are subsequently reduced, we bear the risk of increased levels of
unsold inventories. Should the expected business volumes associated with these
OEM agreements not occur, or occur in volumes below management's expectations,
there would be a material, adverse effect on our operating results.
20
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.
Our software products also face substantial competition from software
vendors that offer similar products. We are trying to penetrate a software
market currently dominated by Microsoft, Citrix and others. There is no
assurance that we will be able to succeed. Failure to gain market share could
have an adverse effect on our operating results.
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, 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 last month of our fiscal quarters. This trend
increases the risk of material quarter-to-quarter fluctuations in our revenues
and operating results.
Failure to penetrate software markets currently dominated by others could
lead to lower than expected margins and result in an adverse effect on our
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
21
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 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.
RELIANCE ON INDEPENDENT CONTRACTORS
We rely on independent contractors for virtually all of the manufacture of
our thin client computing products. 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 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 us to seek alternate sources of supply, could also
lead to supply constraints or delays in delivery of our products and adversely
affect our operating results. The operations of certain of our foreign suppliers
were briefly disrupted during 1992 due to political instability in Thailand.
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
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
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
22
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
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.
LIQUIDITY
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. 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 accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth. In addition to the financing we received in March 2000,
we may be required to seek additional financing before we can achieve positive
cash flow or in order to comply with covenants under the line of credit. In that
event, 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. If adequate funds are not available to satisfy our short-term or
long-term capital requirements, we may be required to limit our operations
significantly.
ITEM 7A. MARKET RISK SENSITIVE INSTRUMENTS
Our market risk sensitive instruments as of December 31, 1999 are primarily
exposed to interest rate risks. Because of the short-term maturities of these
instruments, a 100 basis point change in related interest rates would not have a
material effect on their fair value.
Effective January 2000 a majority of our international sales will be
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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ 25
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 26
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... 27
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... 29
Notes to Consolidated Financial Statements.................. 30
Supplementary Data: Quarterly Financial Data (Unaudited).... 41
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Network Computing Devices, Inc.
We have audited the accompanying consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Network Computing Devices, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Mountain View, California
February 10, except as to Note 11,
which is as of March 30, 2000
25
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents............................... $ 4,781 $10,045
Short-term investments.................................. 3,558 11,314
Accounts receivable, net of allowances of $5,301 and
$3,550 as of December 31, 1999 and 1998,
respectively.......................................... 21,987 21,590
Inventories............................................. 15,082 14,362
Deferred income taxes................................... -- 3,126
Prepaid assets.......................................... 4,532 3,214
------- -------
Total current assets...................................... 49,940 63,651
Property and equipment, net............................... 3,651 3,850
Deferred income taxes..................................... -- 3,496
Other assets.............................................. 3,173 4,149
------- -------
Total assets................................................ $56,764 $75,146
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................ $10,419 $10,438
Accrued expenses........................................ 4,739 5,647
Deferred revenue........................................ 3,384 6,105
Income taxes payable.................................... 277 274
Current portion of capital lease obligations............ 69 90
------- -------
Total current liabilities................................. 18,888 22,554
Long-term portion of capital lease obligations............ 69
Commitments
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 16,432,921 and 16,049,130 shares issued
and outstanding as of December 31, 1999 and 1998,
respectively.......................................... 16 16
Capital in excess of par value.......................... 61,333 59,721
Accumulated deficit..................................... (23,473) (7,214)
------- -------
Total shareholders' equity................................ 37,876 52,523
------- -------
Total liabilities and shareholders' equity.................. $56,764 $75,146
======= =======
See accompanying notes.
26
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net revenues:
Hardware products and services............................ $ 98,500 $ 81,194 $100,555
Software licenses and services............................ 10,530 24,402 32,845
-------- -------- --------
Total net revenues.......................................... 109,030 105,596 133,400
Cost of revenues:
Hardware products and services............................ 63,402 59,337 71,118
Software licenses and services............................ 2,626 7,693 9,957
-------- -------- --------
Total cost of revenues...................................... 66,028 67,030 81,075
-------- -------- --------
Gross profit................................................ 43,002 38,566 52,325
Operating expenses:
Research and development.................................. 12,935 13,213 14,179
Marketing and selling..................................... 33,027 31,124 30,455
General and administrative................................ 6,885 5,231 6,102
Business restructuring.................................... (138) 996 --
Acquired in-process research and development.............. -- 1,448 --
Litigation settlement (credit)............................ -- -- (147)
-------- -------- --------
Total operating expenses.................................... 52,709 52,012 50,589
-------- -------- --------
Operating income (loss)..................................... (9,707) (13,446) 1,736
Interest income............................................. 564 1,609 1,946
Interest expense............................................ -- (14) (51)
Other income, net........................................... -- 2,090 200
-------- -------- --------
Income (loss) before income taxes........................... (9,143) (9,761) 3,831
Provision for income taxes (income tax benefit)............. 7,116 (658) 1,150
-------- -------- --------
Net income (loss)........................................... $(16,259) $ (9,103) $ 2,681
======== ======== ========
Basic earnings per share:
Net income (loss) per share............................... $ (1.00) $ (0.56) $ 0.16
======== ======== ========
Shares used in per share computations..................... 16,192 16,393 16,725
======== ======== ========
Diluted earnings per share:
Net income (loss) per share............................... $ (1.00) $ (0.56) $ 0.15
======== ======== ========
Shares used in per share computations..................... 16,192 16,393 18,313
======== ======== ========
See accompanying notes.
27
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
------------------- IN EXCESS (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT OF PAR DEFICIT) EQUITY
-------- -------- --------- ------------ -------------
Balances as of December 31, 1996................ 17,037 $17 $ 68,200 $ (792) $ 67,425
Issuance of common stock under Stock Option Plan
and Employee Stock Purchase Plan, including
related tax benefit........................... 438 -- 2,634 -- 2,634
Repurchase and retirement of common stock....... (1,191) (1) (12,220) -- (12,221)
Net loss........................................ -- -- 2,681 2,681
------ --- -------- -------- --------
Balances as of December 31, 1997................ 16,284 16 58,614 1,889 60,519
Issuance of common stock under Stock Option Plan
and Employee Stock Purchase Plan, including
related tax benefit........................... 384 2,150 -- 2,150
Sale of common stock............................ 750 1 6,937 -- 6,938
Fair value of warrants issued for business
acquisition................................... -- 2,690 -- 2,690
Repurchase and retirement of common stock....... (1,369) (1) (10,670) -- (10,671)
Net loss........................................ -- -- (9,103) (9,103)
------ --- -------- -------- --------
Balances as of December 31, 1998................ 16,049 16 59,721 (7,214) 52,523
Issuance of common stock under Stock Option Plan
and Employee Stock Purchase Plan.............. 519 -- 2,316 -- 2,316
Repurchase and retirement of common stock....... (135) -- (704) -- (704)
Net loss........................................ -- -- (16,259) (16,259)
------ --- -------- -------- --------
Balances as of December 31, 1999................ 16,433 $16 $ 61,333 $(23,473) $ 37,876
====== === ======== ======== ========
See accompanying notes.
28
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating actitivites:
Net income (loss)......................................... $(16,259) $ (9,103) $ 2,681
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities:
Non-cash restructuring charges (credit)................. (138) 96 --
Depreciation and amortization........................... 3,618 3,022 3,287
Deferred income taxes................................... 6,622 (820) 404
Gain on sale of investment.............................. -- (2,090) --
Acquired in-process research and development............ -- 1,448 --
Changes in:
Accounts receivable, net.............................. (397) 3,558 (3,599)
Inventories........................................... (720) 5,782 (5,636)
Prepaid expenses...................................... 229 (278) 809
Accounts payable...................................... (19) (1,729) 6,828
Income taxes payable.................................. 3 (323) 237
Accrued expenses...................................... (2,081) (3,195) (22)
Deferred revenue...................................... (1,765) (2,182) 1,432
-------- -------- --------
Net cash provided by (used in) operating activites...... (10,907) (5,814) 6,421
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments................... (26,010) (16,229) (12,649)
Sales and maturities of short-term investments........ 33,766 15,155 14,248
Changes in other assets............................... (974) (230) 2,539
Net proceeds from sale of investment.................. -- 2,402 --
Acquisition of business............................... -- (3,037) --
Property and equipment purchases...................... (2,661) (1,704) (2,816)
-------- -------- --------
Net cash provided by (used in) investing activities..... 4,121 (3,643) 1,322
-------- -------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations....... (90) (155) (748)
Repurchases of common stock........................... (704) (10,671) (12,221)
Proceeds from issuance of stock, net.................. 2,316 9,088 2,634
-------- -------- --------
Net cash provided by (used in) financing activities..... 1,522 (1,738) (10,335)
-------- -------- --------
Change in cash and cash equivalents..................... (5,264) (11,195) (2,592)
Cash and cash equivalents:
Beginning of year..................................... 10,045 21,240 23,832
-------- -------- --------
End of year........................................... $ 4,781 $ 10,045 $ 21,240
======== ======== ========
Noncash investing and financing activities:
Fair value of warrants issued for acquisition of
business............................................ $ -- $ 2,690 $ --
======== ======== ========
Income tax benefit from employee stock transactions... $ -- $ 263 $ 660
======== ======== ========
See accompanying notes.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. was incorporated on
February 17, 1988. We provide thin client hardware and software that delivers
simultaneous, high-performance, easy-to-manage and cost effective access to any
application from thin client, UNIX and PC desktops. Our product lines include
the NCD THINSTAR Windows-based terminals and NCD EXPLORA network terminals, and
NC200 AND NC400 network computers, NCD THINPATH software to extend the
functionality reach of NCD THINSTAR Windows-based terminals, NCD THINPATH
software for implementing thin client computing to a variety of enterprise
desktops, NCD WINCENTER multi-user Windows NT server software, and NCD PC-XWARE
software that delivers PC access to UNIX and multi-user Windows NT PCs.
LIQUIDITY The accompanying financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the years ended December 31, 1999 and 1998, we
incurred losses of $16,259,000 and $9,103,000, respectively and we have an
accumulated deficit of $23,473,000 at December 31, 1999. These factors, among
others, may indicate that we will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or the amounts or classification of
liabilities that might be necessary should we be unable 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.
As previously disclosed, we are actively engaged in exploring several
strategic alternatives to enhance shareholder value. We are also in discussions
with third parties concerning additional investment in the Company. No
assurances can be given that we will be successful in these initiatives or that
we will achieve profitability or positive cash flow. If we are unable to
conclude any of these initiatives and bring the Company to profitability or
positive cash flow, there can be no assurances we can continue as a going
concern.
CONSOLIDATION The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. The functional
currency for the Company and its subsidiaries is the U.S. dollar. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS We consider all highly liquid investments purchased with a
maturity date of three months or less to be cash equivalents. Cash equivalents
at December 31, 1999 and 1998 consist of bank deposits, commercial paper and
corporate debt securities.
SHORT-TERM INVESTMENTS We have classified all of our short-term investments
as "available-for-sale" securities. The carrying value of such securities is
adjusted to fair market value, with unrealized gains and losses, net of deferred
taxes, being excluded from earnings and reported as a component of other
comprehensive income. Cost is determined by specific identification for purposes
of computing realized gains or losses.
INVENTORIES Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis, or market (net
realizable value).
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Equipment
under capital leases is stated at the lower of fair value or the present value
of the minimum lease payments at the inception of
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the lease. Depreciation is computed using the straight-line method. Useful lives
of two to five years are used for equipment and furniture; demonstration
equipment is depreciated over an 18-month period. Leasehold improvements and
equipment under capital leases are amortized over the shorter of the lease term
or the useful lives of the respective assets.
INTANGIBLE ASSETS Intangible assets are included in other assets and are
amortized over the economic life of the asset, which is assumed to be a seven
year period, on a straight-line basis. Intangible assets include customer lists,
workforce in place, non-compete agreements and goodwill associated with
acquisitions accounted for under the purchase method.
REVENUE RECOGNITION Revenues on the sale of hardware products and from the
licensing of software products are generally recognized upon shipment, provided
that no significant obligations remain and collection of the resulting
receivable is deemed probable. Product warranty costs and an allowance for sales
returns are accrued at the time the related revenues are recognized. Service
contract revenues are recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged
to expense when incurred. Costs incurred in the development of new software
products and enhancements to existing software products are also expensed as
incurred until the technological feasibility of the product has been
established. After technological feasibility has been established, any
additional costs are capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," and included in other
assets. Capitalized software is amortized to operations over eighteen months to
three years, based on the expected life of the product. Capitalization ceases
when the product is available for release to customers. We had unamortized
software licenses of $126,000, $78,000, and $293,000 at December 31, 1999, 1998
and 1997, respectively. Amortization expense of capitalized software licenses
was $150,000, $215,000, and $603,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
INCOME TAXES Under the asset and liability method of SFAS No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES Our management has made a number of estimates and
assumptions relating to the valuation and reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of our cash and
cash equivalents, short-term investments, accounts receivable, and accounts
payable approximate their respective fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF We
evaluate our long-lived assets and certain identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Recoverability of intangible assets is measured by a comparison of the carrying
amount to the assets' fair value calculated using discounted future cash flows
with a discount rate commensurate with the risks involved with the cash flow
stream.
NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed
using the weighted-average number of common shares outstanding during the
period. Diluted net income (loss) per share is computed using the
weighted-average number of common shares and potential common shares from stock
options and warrants outstanding (1,588,000 shares in 1997), when dilutive,
using the treasury stock method. At December 31, 1999 and 1998 there were
4,676,490 and 4,757,098 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 years.
STOCK-BASED COMPENSATION We account for our stock-based compensation plans
using the intrinsic value method. As such, compensation expense is recorded on
the date of grant if the current market price of the underlying stock exceeded
the exercise price.
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," 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 quarters of all
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.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to
conform with current year presentation.
NOTE 2. ACQUISITION
On December 31, 1998, we acquired Tektronix' Network Displays Business unit
("NWD") for $3.0 million in cash and warrants to purchase one million shares of
our common stock over a term of five years at an exercise price of $8.00 per
share. The fair value of the warrants issued in the acquisition was calculated
using the Black-Scholes pricing model with the following assumptions:
contractual life of 5 years, dividend yield of 0%, risk free interest rate of
4.85% and expected volatility of 61.5%. Direct costs of the acquisition totaled
approximately $200,000. The acquisition was accounted for as a purchase business
combination with a total purchase price of $5.9 million. The purchase price was
allocated to $1.7 million of net assets acquired (primarily inventory),
$1.4 million to in-process research and development and $2.8 million to other
intangible assets which are being amortized over a 7 year useful life using the
straight-line method. In addition to acquiring certain assets of NWD,
approximately 83 former NWD employees, primarily in sales, marketing and
engineering roles, joined NCD. In conjunction with this acquisition, we
undertook various restructuring activities to eliminate redundancies with the
acquired business. We recorded a charge of approximately $1.0 million related to
these restructuring activities. NWD's results of operations have been included
in the accompanying financial statements from December 31, 1998. See Note 5
contained herein.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SHORT-TERM INVESTMENTS
The fair value of short-term investments consisted of the following as of
December 31 (in thousands):
1999 1998
-------- --------
Corporate debt securities.................................. $3,558 $ 9,799
Commercial paper........................................... -- 1,515
------ -------
$3,558 $11,314
====== =======
There were no material unrealized gains or losses at December 31, 1999 and
1998.
The maturities of available-for-sale securities as of December 31, 1999 were
as follows (in thousands):
WITHIN
ONE YEAR
--------
Corporate debt securities................................... $3,558
======
NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
1999 1998
-------- --------
Inventories as of December 31 consisted of (in thousands):
Purchased components and sub-assemblies................... $ 9,825 $10,733
Work in process........................................... 826 1,285
Finished goods............................................ 4,431 2,344
------- -------
$15,082 $14,362
======= =======
1999 1998
-------- --------
Property and equipment as of December 31 consisted of (in
thousands):
Office equipment.......................................... $10,039 $14,369
Machinery and equipment................................... 5,718 6,599
Demonstration equipment................................... 3,008 3,847
Furniture and fixtures.................................... 1,757 2,117
Leasehold improvements.................................... 1,552 2,143
------- -------
22,074 29,075
Less accumulated depreciation and amortization.............. 18,423 25,225
------- -------
$ 3,651 $ 3,850
======= =======
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
(CONTINUED)
Included in property and equipment is approximately $447,000 of equipment
under capital leases as of December 31, 1999 and 1998. Accumulated amortization
related to this equipment is approximately $447,000 and $363,000 as of
December 31, 1999 and 1998, respectively.
1999 1998
-------- --------
Accrued expenses as of December 31 consisted of (in
thousands):
Payroll-related costs..................................... $ 2,465 $ 2,904
Royalties................................................. 215 285
Warranty.................................................. 760 906
Other accrued expenses.................................... 1,299 1,552
------- -------
$ 4,739 $ 5,647
======= =======
Income taxes paid were $496,000, $283,000 and $262,000 for 1999, 1998 and
1997, respectively. Interest paid was $13,000, $14,400 and $51,000 for 1999,
1998 and 1997, respectively.
NOTE 5. BUSINESS RESTRUCTURING
On December 31, 1998, we acquired certain assets of Tektronix, Inc.'s NWD
division. As a result of this acquisition, we reduced our workforce and
discontinued certain activities that were redundant with the acquired business.
As a result of the restructuring action, a charge to operations of $1.0 million
was recorded for 1998. The charge, comprising employee severance benefits
($546,000), facility exit costs ($153,000), the write-off of prepaid royalties
($96,000) and the termination of a sales consulting agreement ($201,000), has
been reported as an operating expense for 1998. The restructuring plan included
the termination of approximately 13 employees, primarily in sales and
engineering roles, and the closure of four of our offices in the United States.
Total cash charges amounted to $900,000, none of which had been paid as of
December 31, 1998 and are included in accrued expenses. By the end of 1999 it
was determined that the plan was substantially complete, and an operating credit
of $138,000 was recorded. A total of 13 employees were terminated under the plan
at a total cost of $532,000.
NOTE 6. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM In April 1997, our Board of Directors adopted a
program to repurchase up to 1,000,000 shares of our common stock during the
12-month period ended April 30, 1998. Repurchases were made under the program
using our cash resources. Shares repurchased are available for issuance under
our stock plans and for other corporate purposes. In September 1997, the
repurchase program was completed with an aggregate of 1,000,000 shares
repurchased at prices ranging from $8.38 to $12.00 per share for a total
purchase price of $10.7 million. In November 1997, our Board of Directors
adopted an additional program to repurchase up to 1,000,000 shares of our common
stock during the 12-month period ended October 31, 1998. In July 1998, the
second repurchase program was completed with an aggregate of 1,000,000 shares
repurchased at prices ranging from $6.50 to $9.63 at a total aggregate price of
$8.5 million. In June 1998, we announced an additional program to repurchase up
to 750,000 shares of our common stock. Repurchases of 694,800 shares have been
made as of December 31, 1999 under the third program at prices ranging from
$4.94 to $8.25 at a total aggregate price of $4.4 million. Total repurchases of
2,694,800 shares were made under all three programs at prices ranging from $4.94
to $12.00 per share for a total purchase price of $23.6 million.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN In 1992, we established the 1992 Employee Stock
Purchase Plan and have reserved 1,650,000 shares of common stock for issuance
thereunder. The plan permits eligible employees to purchase common stock through
payroll deductions of up to 10 percent of their base earnings. The plan has an
annual offering period that is divided into two purchase periods of six months
each. The purchase price of the stock is equal to the lesser of 85% of the fair
market value of such shares at the beginning of each annual offering period (or
the commencement of the employee's participation, if later) or the end of the
current six month purchase period. As of December 31, 1999, 1,468,501 shares
have been issued under this plan, of which 184,194 were issued in 1999.
STOCK OPTION PLANS As of December 31, 1999, we had reserved 548,000 shares,
500,000 shares and 300,000 shares of common stock for issuance under our 1999
Stock Option Plan, the 1999 Non Qualified Stock Option Plan and the 1994 Outside
Directors' Stock Option Plan, respectively ("collectively the Plans"). During
1999 our 1989 Stock Option Plan expired and was replaced by the 1999 Stock
Option Plan. A total of 548,000 shares that were still available for grant at
the time the 1989 Stock Option Plan expired were allocated to the 1999 Stock
Option Plan. Under the 1999 Stock Option Plan, options are granted to employees,
officers, directors and consultants to purchase shares of our common stock at
not less than the fair market value of common stock at the grant date (for
incentive stock options) or 85% of the fair market value of such common stock
(for nonstatutory stock options). Options generally vest and become exercisable
to the extent of 25% one year from grant date with the remainder vesting ratably
over the 36-month period thereafter. Prior to August 1994, the options generally
expired five years from grant date. Since August 1994, the options expire ten
years from grant date. Under the 1994 Outside Directors' Stock Option Plan,
options are granted to outside directors to purchase shares of our common stock
at not less than the fair market value of common stock at the grant date.
Options vest and become exercisable to the extent of 25% on the first
anniversary of the grant date with the remainder vesting 25% on each of the
following three anniversary dates. As of December 31, 1999, 2,452,598 options
were exercisable under the Plans.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $3.98, $5.49, and $6.37, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999--dividend yield of 0%, expected volatility of
83%, risk-free interest rate of between 4.68% and 6.41%, and an expected life of
5 years; 1998--dividend yield of 0%, expected volatility of 84%, risk-free
interest rate of between 4.68% and 4.71%, and an expected life of 5 years;
1997--dividend yield of 0%, expected volatility of 84%, risk-free interest rate
of between 5.71% and 6.75%, and an expected life of between 3 and 5 years.
We apply Accounting Principles Board ("APB") Opinion No. 25 in accounting
for our stock options issued to employees and, accordingly, no compensation cost
has been recognized for our stock plans in the accompanying consolidated
financial statements. Had we determined compensation cost based on the fair
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
value at the grant dates for the Plans under SFAS No. 123, our net income (loss)
and income (loss) per share would have been changed to the pro forma amounts
indicated below:
1999 1998 1997
-------- -------- --------
Net income (loss) (in thousands):
As reported............................................... $(16,259) $(9,103) $2,681
Pro forma................................................. (19,056) (12,396) (554)
Basic income (loss) per share:
As reported............................................... $ (1.00) $ (0.56) $ 0.16
Pro forma................................................. (1.18) (0.76) (0.03)
Diluted income (loss) per share:
As reported............................................... $ (1.00) $ (0.56) $ 0.15
Pro forma................................................. (1.18) (0.76) (0.03)
The effects of applying SFAS No. 123 in this pro forma disclosure is not
indicative of the effects on reported results for future years. SFAS No. 123
does not apply to awards prior to 1995, and additional awards in future years
are anticipated.
In November 1997, upon approval by the Board of Directors, we repriced
316,120 options originally issued at prices ranging from $11.13 to $14.75. The
options were repriced at $8.50, the then current market value of our stock. The
1997 cancellations and grants in the summary below and pro forma amounts above
include the 316,120 options.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of option transactions under the Plans follows:
WEIGHTED-
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ---------
Balances as of December 31, 1996............................ 572,382 3,236,208 $4.23
Options authorized........................................ 250,000 -- --
Options granted........................................... (1,207,175) 1,207,175 9.85
Options cancelled......................................... 619,574 (619,574) 9.67
Options exercised......................................... -- (226,523) 4.18
---------- --------- -----
Balances as of December 31, 1997............................ 234,781 3,597,286 $5.18
Options authorized........................................ 500,000 -- --
Options granted........................................... (594,100) 594,100 7.96
Options cancelled......................................... 217,899 (217,899) 8.29
Options exercised......................................... -- (216,389) 3.98
---------- --------- -----
Balances as of December 31, 1998............................ 358,580 3,757,098 $5.50
Options authorized........................................ 1,098,000 -- --
Options granted........................................... (1,029,400) 1,029,400 5.91
Options expired........................................... (841,979) -- --
Options cancelled......................................... 765,259 (765,259) 7.30
Options exercised......................................... -- (344,749) 4.17
---------- --------- -----
Balances as of December 31, 1999............................ 350,460 3,676,490 $5.37
========== ========= =====
The following table summarizes information about options outstanding as of
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- ----------------------------
WEIGHED-
AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCUSE PRICE
- ---------------------------- --------- ---------------- ---------------- --------- ----------------
$ 3.50...................... 1,385,563 6.44 $ 3.50 1,328,637 $ 3.50
3.56 to 5.38.............. 928,895 7.71 4.69 413,407 4.03
5.46 to 7.88.............. 737,821 7.76 6.97 344,226 7.04
7.98 to 10.44............. 594,211 7.99 8.47 351,328 8.56
12.62 to 12.63............. 30,000 7.41 12.63 15,000 12.63
--------- ---- ------ --------- ------
$ 3.50 to 12.63............. 3,676,490 7.28 $ 5.37 2,452,598 $ 4.87
========= =========
We have warrants outstanding to purchase up to 1,000,000 shares of our
common stock at an exercize price of $8.00. The warrants are exercizable until
they expire on December 31, 2003
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The components of our provision for income taxes (income tax benefit) for
the years ended December 31 are as follows (in thousands):
1999 1998 1997
-------- -------- --------
Current
Federal................................................... $ -- $(202) $ (226)
State and other........................................... 494 101 312
------ ----- ------
Total current............................................... 494 (101) 86
------ ----- ------
Deferred
Federal................................................... 5,433 (710) 355
State and other........................................... 1,189 (110) 49
------ ----- ------
Total deferred.............................................. 6,622 (820) 404
------ ----- ------
Charge in lieu of income taxes associated with the exercise
of stock options.......................................... -- 263 660
------ ----- ------
$7,116 $(658) $1,150
====== ===== ======
Total income tax expense (benefit) differs from the expected tax expense
(benefit) (computed by applying the U.S. federal income tax rate of 34% to loss
before income taxes) as follows (in thousands):
Tax expense (benefit) at federal statutory rate............. $(3,109) $(3,319) $1,303
State income taxes, net of federal benefit.................. 805 67 30
Tax exempt investment income................................ -- -- (53)
Research and experimental credit............................ (342) (438) (63)
Not operating losses and temporary differences for which no
tax benefit is recognized................................. 9,799 2,995 --
Other....................................................... (37) 37 (67)
------- ------- ------
$ 7,116 $ (658) $1,150
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31 are as follows
(in thousands):
1999 1998
-------- --------
Deferred tax assets:
Accruals, allowances and reserves......................... $5,534 $6,152
Net operating loss and tax credit carryforwards........... 12,453 5,566
Property and equipment, principally due to differences in
depreciation and capitalized leases..................... 196 626
Intangible assets......................................... 627 579
------ ------
Total gross deferred tax assets............................. 18,810 12,923
Less valuation allowance.................................... 18,810 6,305
------ ------
Deferred tax asset.......................................... -- 6,618
------ ------
Deferred tax liabilities.................................... -- --
------ ------
Net deferred tax assets..................................... $ -- $6,618
====== ======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
In light of our recent history of operating losses, we have provided a
valuation allowance for all of our deferred tax assets as we are presently
unable to conclude that it is more likely than not that the deferred tax assets
will be realized. As a result, the deferred tax valuation allowance increased by
$12.5 million from 1998. As of December 31, 1999, we have a net operating loss
carryover for federal and California income tax purposes of approximately
$23.2 million and $6.9 million, respectively. In addition, we have federal and
California research and development credit carryforwards of $1.7 million and
$1.4 million, respectively. Our federal net operating loss and research and
development credit carryforwards will expire in the years 2010 through 2019 if
not utilized. Our California net operating loss carryforwards will expire in the
years 2000 through 2004. The California research and development credit can be
carried forward indefinitely.
NOTE 8. CREDIT CONCENTRATIONS
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. We place our cash equivalents and short-term investments with
high-credit qualified financial institutions and, by policy, limits the amount
of credit exposure to any one financial institution. Concentrations of credit
risk with respect to trade receivables have increased as we have moved to a two
tier distribution model. Four customers, Adtcom, Tech Data, Ingram Micro and
UCSI Distribution comprise more than 50% of our gross trade receivables.
NOTE 9. COMMITMENTS AND CONTINGENCIES
We lease our principal facilities under noncancellable operating lease
agreements that expire through 2003. We also lease office facilities in several
locations in the United States, and in locations in Australia, Canada, France,
Germany, Japan, Sweden and the United Kingdom, which are used as sales offices.
Rent expense was approximately $2,440,000, $2,377,000 and $2,552,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, net of sublease
income of $710,000, $750,000, and $700,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
We also lease certain equipment under capital leases. As of December 31,
1999, minimum lease payments under all noncancellable lease agreements were as
follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
-------- ---------
Year Ending December 31,
2000...................................................... $69 $2,551
2001...................................................... -- 1,267
2002...................................................... -- 822
2003...................................................... -- 279
Thereafter................................................ -- 141
--- ------
Total minimum lease payments................................ 69 $5,060
======
Less amounts representing interes........................... --
---
Present value of minimum lease payments..................... 69
Less current portion........................................ 69
---
Long-term capital lease obligations......................... $--
===
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The above future operating lease payments are anticipated to be offset by
the following sublease contract income:
2000........................................................ 746
2001........................................................ 307
------
Total sublease income....................................... $1,053
======
NOTE 10. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
We have adopted the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers. The
method for determining what information to report is based on the way management
organizes data for making operating decisions and assessing financial
performance. Our chief operating decision maker is considered to be its
executive staff, consisting of the Chief Executive Officer and the Chief
Financial Officer. Primarily because we operate in one industry, thin client
computing, including related hardware and software, the executive staff reviews
financial information presented on a basis consistent with that presented in the
Consolidated Statements of Operations.
Sales to Adtcom and Tech Data represented 18% and 15%, respectively, of net
revenue for the year ended December 31, 1999. Sales to IBM accounted for 29% and
26% of net revenues for the years ended December 31, 1998 and 1997,
respectively.
Export sales to our international customers outside North America, primarily
Europe, comprised approximately 40%, 35% and 34% of net revenues for the years
ended December 31, 1999, 1998 and 1997, respectively.
International revenues by country are as follows as a percentage of total
international revenues:
1999 1998 1997
-------- -------- --------
Germany.................................................... 51% 23% 19%
France..................................................... 16% 15% 23%
United Kingdom............................................. 12% 40% 39%
Other...................................................... 21% 22% 19%
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
Net fixed assets by region are as follows:
1999 1998
-------- --------
United States............................................... $2,841 $3,239
Europe...................................................... 754 572
Other....................................................... 56 39
------ ------
Total....................................................... $3,651 $3,850
====== ======
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUBSEQUENT EVENTS
In January 2000, we acquired the business of Multiplicity LLC, a privately
held developer of advanced server management software for Microsoft's Windows NT
and Windows 2000 operating systems. The acquisition will be accounted for using
the purchase method. The purchase price was approximately $2.2 million plus a
stream of future payments based on revenue for the four year period following
the acquisition. We acquired assets and technology for cash. We expect to record
a charge for purchased in-process research and development in the first quarter
of 2000. Multiplicity LLC provides strategic performance analysis and capacity
planning solutions for networked Windows NT and Windows 2000 servers.
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. 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 accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth.
41
QUARTERLY FINANCIAL DATA
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1999
Hardware products and services..................... 22,785 25,341 26,859 23,515
Software licenses and services..................... 3,639 2,533 2,433 1,925
------ ------ ------ ------
Total net revenues................................. 26,424 27,874 29,292 25,440
Gross profit....................................... 11,250 11,513 11,545 8,694
Operating income (loss)............................ (2,232) (1,879) (588) (5,008)
Income before income taxes......................... (1,988) (1,783) (463) (4,909)
Net income......................................... (1,988) (1,783) (7,414) (5,074)
Net income per share:
Basic............................................ (0.12) (0.11) (0.46) (0.31)
Diluted.......................................... (0.12) (0.11) (0.46) (0.31)
Shares used in per share computations:
Basic............................................ 16,054 16,135 16,219 16,356
Diluted.......................................... 16,054 16,135 16,219 16,356
1998
Hardware products and services..................... 22,573 14,677 20,877 23,067
Software licenses and services..................... 8,091 7,988 5,238 3,085
------ ------ ------ ------
Total net revenues................................. 30,664 22,665 26,115 26,152
Gross profit....................................... 10,854 9,324 9,191 9,197
Operating income (loss)............................ (1,163) (3,456) (2,877) (5,950)
Income before income taxes......................... (752) (1,128) (2,236) (5,645)
Net income......................................... (489) (733) (2,236) (5,645)
Net income per share:
Basic............................................ (0.03) (0.04) (0.14) (0.35)
Diluted.......................................... (0.03) (0.04) (0.14) (0.35)
Shares used in per share computations:
Basic............................................ 16,612 16,731 16,228 16,008
Diluted.......................................... 16,612 16,731 16,228 16,008
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In August 1999 Mr. Gilbertson became Chairman of the Board of Directors.
Prior to that Mr. Gilbertson had served as President and Chief Executive Officer
since joining us in May 1996. Prior to joining us, Mr. Gilbertson served as
Chairman of Avidia Systems, Inc., a manufacturer of ATM switching systems, and
also as President and Chief Executive Officer of CMX Systems, Inc., a
manufacturer of precision measurement and positioning products from 1993 to
1996. Prior thereto, he served as President and Chief Executive Officer of Data
Switch Corporation. Mr. Gilbertson holds an MBA fron the University of Chicago,
served as Chairman of the Board of the American Electronics Association, and was
a member of the faculty of Harvard Business School for five years.
In August 1999 Mr. Morin was promoted to President and Chief Executive
Officer. Prior to that Mr. Morin had served as Executive Vice President,
Operations & Finance and Chief Financial Officer since joining us in May 1996.
Prior to joining us, Mr. Morin served as Senior Vice President, Finance and
Administration for Memorex Telex Corporation from 1993 to 1996. Prior thereto,
he worked at Data Switch, where he was Executive Vice President. Mr. Morin's
background also includes more than ten years with Thyssen Bornemisza Inc. as
head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Wood joined us in August 1999 after two years as CFO at Sutmyn Storage
Corp. a Santa Clara, CA data storage company. Mr. Wood had joined Sutmyn
following seven years at Memorex Telex, most recently as senior vice president
of finance. His prior experience includes serving as a principal in the San
Francisco office of Ernst & Young. A 1980 graduate of the University of San
Diego, Mr. Wood is a CPA and also holds a J.D. degree from the University of San
Francisco School of Law.
In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President International
Operations since joining us in July 1997. Mr. DeSantis came to us from
Cincinnati Bell where he held positions as Vice President of European Operations
and International Sales. Mr. DeSantis holds a degree in Philosophy and
Mathematics from Fairfield University, and has completed post graduate work at
Stanford University.
Mr. Greer has served on our Board of Directors since November 1992.
Mr. Greer has been a senior managing director of Weiss, Peck & Greer, L.L.C., an
investment management company, or its predecessor, since 1970. Mr. Greer is also
a director of Federal Express Corporation and Robert Mondavi Corp., a winemaker.
Mr. Klein has served on our Board of Directors since March 1998. Since
January 1998 Mr. Klein has served as President and Chief Operating Officer of
NuvoMedia, Inc., a designer and developer of electronic books. From
February 1988 to December 1997, Mr. Klein served Network Computing Devices, Inc.
in various capacities, most recently as our Chief Technical Officer from
June 1996 to December 1997.
Dr. Low has served on our Board of Directors since December 1995. Dr. Low
has been President and Chief Executive Officer of PRL Associates, a technology
consulting firm, since 1992. Prior to forming PRL Associates, from 1957 to 1992,
Dr. Low served in various capacities at International Business Machines
Corporation ("IBM"), most recently as President of the General Products Division
from 1987 to 1990 and as General Manager, Technology and Products and a member
of IBM's Corporate Management Board from 1990 to 1992. Dr. Low held the title of
Vice President at IBM from 1984 to 1992. Dr. Low is also a director of Applied
Materials Corporation, a semiconductor equipment manufacturer, Solectron
Corporation and Veeco Instruments, as well as several privately-held
corporations.
43
Mr. MacDonald has served on our Board of Directors since May 1995. From
October 1997 to April 1998, Mr. MacDonald served as a consultant for Active
Software, Inc., a software company. Mr. MacDonald also served as President and
Chief Executive Officer of Active Software from April 1996 to September 1997.
Mr. MacDonald was employed by Adobe Systems Incorporated, a software company,
from 1983 to March 1996, where he served as Vice President, Sales and Marketing
from 1983 to 1989 and as Senior Vice President and General Manager from 1989 to
1996. Mr. MacDonald is also a director of Verity, Inc., a software company as
well as an independent consultant for various companies in the software
industry.
Mr. Preuss has served on our Board of Directors since April 1995 and as
Chairman of the Board from January 1996 to August 1999. Mr. Preuss has served as
President of The Preuss Foundation, Inc., a non-profit corporation that sponsors
cancer research and related seminars and conferences, since it was founded in
1985. From 1970 to 1986, Mr. Preuss was President and Chairman of the Board of
Integrated Software Systems Corporation, which he founded. Mr. Preuss currently
serves as a director of Overland Data, a manufacturer of high-performance tape
solutions for back-up, interchange and archival storage. Mr. Preuss is also a
Regent of the University of California.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities. Officers, directors and greater than 10% beneficial owners
are required by SEC regulation to furnish us with copies of all reports they
file under Section 16(a). To our knowledge, based solely on our review of the
copies of such reports furnished to us and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to our
officers, directors and greater than 10% beneficial owners were complied with
during the year ended December 31, 1999, except for one late Form 5 filed by
Philip Greer reporting options granted to him in May 1999 pursuant to our
Outside Directors Stock Option Plan.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued to or on behalf of our Chief Executive Officer and
each of our four other most highly compensated executive officers (determined as
of December 31, 1999) (collectively, the "Named Officers") for the fiscal years
ended December 31, 1997, 1998 and 1999:
44
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
----------------------- STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION(2)
- --------------------------- -------- --------- -------- ------------- ---------------
Rudolph G. Morin(3).................... 1999 $298,333 $50,000 85,000 $ 7,200(4)
President and Chief Executive 1998 276,667 -- -- 14,267(4)
Officer 1997 257,500 31,250 -- 14,172(4)
Robert G. Gilbertson(5)................ 1999 $270,833 $ -- -- $ --
Former President and Chief 1998 314,583 9,591 -- 5,213
Executive Officer 1997 300,000 37,500 -- 4,950
John DeSantis(6)....................... 1999 $267,117(8) $35,682 85,000 $64,628(7)
Former Senior Vice President -- 1998 205,114(8) 74,094(8) -- --
Sales and Marketing 1997 102,206(8) 43,649(8) -- --
- ------------------------
(1) Includes amounts (if any) deferred under the 401(k) Plan and commissions
earned in 1999.
(2) Except as otherwise noted, consists of the dollar value of premiums paid on
life insurance for the benefit of the Named Officer.
(3) Mr. Morin joined us in May 1996 and was promoted to President and Chief
Executive Officer in August 1999.
(4) Includes $7,200, $7,200 and $7,800 paid for automobile allowance in 1999,
1998 and 1997, respectively.
(5) Mr. Gilbertson joined us as President and Chief Executive Officer in
May 1996. In August 1999 he resigned as President and Chief Executive
Officer and was simultaneously appointed Chairman of the Board of Directors.
(6) Mr. DeSantis joined us in July 1997 and was promoted to Senior Vice
President, Sales and Marketing in April 1999. Mr. DeSantis' employment
terminated on April 3, 2000.
(7) Consists of $64,628 for relocation expenses.
(8) In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President
International Operations from July 1997 through March 1999. Of the $267,117
salary earned by Mr. DeSantis during 1999, $51,367 was earned during the
period January through March 1999 while serving in the capacity of Vice
President International Operations.
STOCK OPTION GRANTS
The following table contains information concerning grants of stock options
under our 1999 Stock Option Plan (the "1999 Option Plan") to the Named Officers
during the year ended December 31, 1999:
45
OPTION GRANTS IN 1999
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OPTION TERM(1)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (SHARES)(2) FISCAL YEAR(3) ($/SHARE) DATE 5%($) 10%($)
- ---- ----------- --------------- --------- ---------- ---------- ----------
Rudolph G. Morin............. 85,000 10.34% $5.375 5/4/09 $287,326 $728,141
Robert G. Gilbertson......... -- -- -- -- -- --
John DeSantis................ 85,000 10.34% $5.375 5/4/09 $287,326 $728,141
- ------------------------
(1) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of our Common Stock, as well as the
optionee's continued employment through the vesting period.
(2) Each option vests and becomes exercisable to the extent of 25% of the
underlying shares one year following the date of grant, with the remainder
vesting on a monthly basis ratably over the 36-month period thereafter.
(3) Options to purchase an aggregate of 821,900 shares of Common Stock were
granted to employees during the year.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information with respect to the Named Officers
concerning the exercise of options during 1999 and unexercised options held as
of December 31, 1999:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Rudolph G. Morin......... -- -- 350,000 85,000 $1,531,250 $212,500
Robert G. Gilbertson..... -- -- 700,000 -- $3,062,500 --
John DeSantis............ -- -- 59,895 100,105 -- $212,500
- ------------------------
(1) Based on the closing price of $7.875, as reported on The Nasdaq National
Market on December 31, 1999 (the last trading day prior to the fiscal
year-end).
(2) Sale price at time of exercise less exercise price.
COMPENSATION OF DIRECTORS
Non-employee directors are paid an annual retainer of $15,000 per calendar
year, payable semiannually, plus a fee of $1,500 for each meeting of the Board
of Directors they attend and $500 for each meeting of a committee they attend,
plus reimbursement for transportation and other expenses incurred in attending
such meetings. In addition to the foregoing compensation, Directors Preuss and
Low also receive a fee of $1,500 for each meeting of the Executive Committee
they attend. Under the 1994 Outside Directors' Stock Option Plan (the
"Directors' Plan"), each non-employee director is granted an initial option for
30,000 shares of Common Stock, followed by annual grants of options for 7,500
shares each,
46
subject to the director's continuous service on the Board of Directors. In 1999,
no other compensation was paid to a director serving in such capacity.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
We entered into an employment agreement with Rudolph G. Morin effective
May 28, 1996. The original term of the agreement was two years and is subject to
automatic annual renewal for successive one-year terms unless either party
provides notice of termination at least 60 days prior to the end of each term.
The agreement fixes Mr. Morin's base salary, subject to increases, if any. On
August 25, 1999, the Compensation Committee approved an increase in Mr. Morin's
annual salary from $285,000 to $325,000, effective August 27, 1999. The
agreement provides for an incentive bonus award based on the achievement of
certain financial objectives, up to a maximum amount equal to 300% of base
salary. The agreement also provides for reimbursement of reasonable
out-of-pocket and ordinary expenses for commuting or relocating to the Mountain
View area and necessary business expenses incurred in performing services as
President and Chief Executive Officer and in his former role as Executive Vice
President, Operations & Finance and Chief Financial Officer. In May 1999, the
Compensation Committee approved a grant of 85,000 options to Mr. Morin under the
1999 Stock Option Plan. In 1996 pursuant to his agreement, Mr. Morin received
350,000 options to purchase shares of common stock under the 1989 Option Plan.
The agreement provides that these options will vest in full and become fully
exercisable in the event of any change in control. In the event Mr. Morin is
terminated other than for cause, or if he voluntarily terminates his employment
because of a material change in his job duties or title or specified acts of
misconduct by us, he is entitled under the agreement to receive a severance
payment equal to his then-current base salary for a period equal to the term of
employment remaining under the agreement (but not less than 12 months) and to
receive up to $40,000 in outplacement assistance.
We entered into an employment agreement with Robert G. Gilbertson effective
May 20, 1996. The agreement originally fixed Mr. Gilbertson's annual salary at
$300,000. On May 28, 1998, the Compensation Committee approved an increase in
Mr. Gilbertson's salary from $300,000 to $325,000, which was subsequently
reduced to $162,500 when Mr. Gilbertson assumed a role as half-time employee.
Mr. Gilbertson's agreement remains subject to further annual increases, if any,
and provides for an incentive bonus award based on the achievement of certain
financial objectives, up to a maximum amount equal to 300% of base salary. The
agreement also provides for reimbursement of reasonable out-of-pocket and
ordinary expenses for commuting or relocating to the Mountain View area and
necessary business expenses incurred in performing services as Chairman of the
Board. As part of his agreement, Mr. Gilbertson has been granted options to
purchase 700,000 shares of Common Stock. The agreement provides that these
options will become fully exercisable in the event of a change of control. The
agreement provides that all stock options currently held by Mr. Gilbertson under
the 1989 Option Plan and other outside plans will vest in full and become fully
exercisable in the event of any change in control after six months from
employment date. In the event Mr. Gilbertson is terminated other than for cause,
or if he voluntarily terminates his employment because of a material change in
his job duties or title or specified acts of misconduct by us, he is entitled
under the agreement to receive a severance payment equal to his then-current
base salary for a period equal to the term of employment remaining under the
agreement (but not less than 12 months) and to receive up to $40,000 in
outplacement assistance.
In April 2000, we entered into a Confidential Separation Agreement with John
DeSantis pursuant to which Mr. DeSantis resigned as Senior Vice President, Sales
and Marketing effective April 3, 2000. The agreement provides that, for a period
of six (6) months after April 3, 2000, Mr. DeSantis will receive severance
payments of $21,667 per month. Under the agreement, Mr. DeSantis has agreed to
provide consulting services through October 3, 2000 to facilitate the transfer
of responsibilities as Senior Vice President, Sales and Marketing and to hold
himself available to provide additional part-time consulting services as needed,
on a schedule consistent with such duties as Mr. DeSantis may have as a
full-time
47
employee elsewhere. The agreement also provides that the stock options granted
to Mr. DeSantis will continue to vest through October 3, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to us relating to
the beneficial ownership of our Common Stock by (i) each person who is known by
us to be the beneficial owner of more than 5% of the outstanding shares of our
Common Stock, (ii) each executive officer named in the tables under "Executive
Compensation," (iii) each director, and (iv) all executive officers and
directors as a group, as of February 29, 2000:
NUMBER OF
SHARES
NAME AND ADDRESS OWNED(1) PERCENT
- ---------------- --------- --------
Dimensional Fund Advisors Inc.(2)......................... 943,200 5.81%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Kiskiminetas Springs School(3)............................ 1,036,800 6.40%
1888 Brett Lane
Saltsburg, PA 15681
Alan Andreini(4).......................................... 1,171,600 7.20%
395 Hudson Street
New York, NY 10014
Robert G. Gilbertson(5)................................... 712,849 4.32%
Rudolph G. Morin(6)....................................... 361,282 2.20%
Gregory S. Wood........................................... 1,233 *
Peter Preuss(7)........................................... 111,250 *
Douglas H. Klein(8)....................................... 164,884 1.00%
Paul Low(9)............................................... 111,250 *
John DeSantis(10)......................................... 74,171 *
Philip Greer(11).......................................... 55,950 *
Stephen A. MacDonald(12).................................. 41,250 *
All executive officers and directors as a group (9
persons)(13)............................................ 1,634,119 9.91%
- ------------------------
* Less than 1%
(1) Except as indicated and pursuant to applicable community property laws, we
believe that all persons named in the table have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them.
(2) Pursuant to Schedule 13G filed by Dimensional Fund Advisors Inc.
("Dimensional") on February 11, 2000, Dimensional is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940 which
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "Funds"). In its role as
investment advisor or manager, Dimensional possesses voting and investment
power over the securities described in this table and owned by the Funds.
All securities reported in this table are owned by the Funds, and
Dimensional disclaims beneficial ownership of such securities.
(3) Based on a Schedule 13G filed by Kiskiminetas Springs School
("Kiskiminetas") on February 10, 2000, Kiskiminetas is a non-profit
educational institution that has an endowment composed of Network Computing
Devices, Inc. common stock and certain other securities. The voting power
and the investment power of Kiskiminetas over the shares of common stock
vested in the Finance
48
Committee of the Board of Trustees of Kiskiminetas (the "Finance
Committee"), which is exercised by the approval of the majority of the
members thereof. The Finance Committee is composed of seven members. The
Members of the Finance Committee are Alan J. Andreini, Michael Yukevich,
Jr., John A. Pidgeon, Allen R. Glick, Carl L. Kalnow, James P. Moore, Jr.,
Maynard H. Murch, IV, and Janice Fuellhart. Since the decision-making power
is vested in the Finance Committee, we need not be concerned with which
individuals are responsible for administering which brokerage account.
(4) On February 14, 2000, Alan Andreini filed a Schedule 13G Amendment
reflecting ownership of securities listed in this table for his own account
and by persons for whom he exercises trading authority. As of December 31,
1999, Mr. Andreini's accounts held 934,500 shares of common stock. As of
December 31, 1999, Mr. Andreini was authorized to exercise trading authority
over: (i) an account of Kiskiminetas at PaineWebber, which held 170,000
shares of common stock; (ii) the account of The Andreini Foundation (the
"Foundation") which held 23,500 shares of common stock; (iii) the account of
John D. Andreini (who is deceased) and Blanche M. Andreini (the "Parents")
at Cheevers Hand & Angeline, Inc., which held 41,700 shares of common stock;
and (iv) an account at Piper Jaffray, Inc. for the benefit of his son, Alan
J. Andreini, Jr., under Illinois Uniform Transfers to Minors Act, which held
2,000 shares of common stock. Pursuant to the rules promulgated under the
federal securities laws, Mr. Andreini may be deemed to be the beneficial
owner of the common stock owned by each such person because he has shared
investment and voting power in respect of the account of Kiskiminetas and
the account of the Parents, and has sole investment and voting power in
respect of the Foundation and of the account of his son. Mr. Andreini
disclaims beneficial ownership of the common stock held by Kiskiminetas, the
Parents and the Foundation.
(5) Includes 700,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(6) Includes 350,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(7) Includes 50,000 vested shares underlying options held by Stephen A. Hurwitz
as Trustee for Mr. Preuss' son, with respect to which Mr. Preuss disclaims
beneficial ownership. Also includes 61,250 shares of Common Stock that may
be acquired upon exercise of stock options that are currently exercisable or
will become exercisable within 60 days of February 29, 2000.
(8) Includes 157,666 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(9) Includes 111,250 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(10) Includes 61,979 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(11) Includes 7,200 shares held by Norman Gold as Trustee for Mr. Greer's
daughters, with respect to which Mr. Greer disclaims beneficial ownership.
Also includes 48,750 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable or will become
exercisable within 60 days of February 29, 2000.
(12) Includes 41,250 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(13) Includes 1,582,145 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable or will become
exercisable within 60 days of February 29, 2000.
49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Bylaws provide that we shall indemnify our directors and officers to the
full extent permitted by Delaware law. We have entered into indemnification
agreements with our officers and directors containing provisions that may
require us, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
officers and directors (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms. We maintain
insurance policies covering officers and directors under which the insurer has
agreed to pay the amount of any claim made against our officers or directors for
wrongful acts that such officers or directors may otherwise be required to pay
or for which we are required to indemnify such officers and directors, subject
to certain exclusions.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements:
See Index to Consolidated Financial Statements at page 24 of this
Report.
(2) Financial Statement Schedule:
PAGE SCHEDULE TITLE
---- -------- -----
S-1 II Valuation and Qualifying Accounts and Reserves
S-2 Independent Auditors' Report on Schedule
All other financial statement schedules are omitted because they are
not applicable or not required, or because the required information
is included in the Consolidated Financial Statements and Notes
thereto which are included herein.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or are incorporated by reference into, this Report.
(b) Reports on Form 8-K during the quarter ended December 31, 1999:
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ RUDOLPH G. MORIN
-----------------------------------------
Rudolph G. Morin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RUDOLPH G. MORIN President, Chief Executive Officer
--------------------------------- and Director (Principal Executive April 14, 2000
Rudolph G. Morin Officer)
/s/ GREGORY S. WOOD Vice President, Chief Financial
--------------------------------- Officer and Secretary (Principal April 14, 2000
Gregory S. Wood Financial and Accounting Officer)
/s/ ROBERT G. GILBERTSON
--------------------------------- Chairman of the Board of Directors April 14, 2000
Robert G. Gilbertson
/s/ PETER PREUSS
--------------------------------- Director April 14, 2000
Peter Preuss
/s/ PHILIP GREER
--------------------------------- Director April 14, 2000
Philip Greer
/s/ DOUGLAS KLEIN
--------------------------------- Director April 14, 2000
Douglas Klein
/s/ PAUL R. LOW
--------------------------------- Director April 14, 2000
Paul R. Low
/s/ STEPHEN A. MACDONALD
--------------------------------- Director April 14, 2000
Stephen A. MacDonald
52
SCHEDULE II
NETWORK COMPUTING ACCOUNTS AND RESERVES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
-------------------------
CHARGED TO CHARGED TO
BALANCE AT GROSS OTHER BALANCE
BEGINNING REVENUES AND ACCOUNTS-- DEDUCTIONS-- AT END
OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
---------- ------------ ---------- ------------ ---------
1999
Allowance for doubtful accounts....... $ 487 $ -- $ -- $ 2(1) $ 485
Sales returns and allowances.......... 3,063 8,871 -- 7,118(2) 4,816
Warranty reserve...................... 906 1,009 -- 1,155(3) 760
1998
Allowance for doubtful accounts....... $ 646 $ 203 $ -- $ 362(4) $ 487
Sales returns and allowances.......... 3,638 3,196 -- 3,771(5) 3,063
Warranty reserve...................... 631 389 -- 114(3) 906
1997
Allowance for doubtful accounts....... $1,111 $ 210 -- $ 675(6) $ 646
Sales returns and allowances.......... 3,486 1,372 -- 1,220(7) 3,638
Warranty reserve...................... 495 615 -- 479(3) 631
- ------------------------
(1) Includes accounts written off of $2
(2) Includes amounts credited to income of $3,062 and accounts written off of
$4,056
(3) Warranty costs incurred
(4) Includes amounts credited to income of $210 and accounts written off of $152
(5) Includes amounts credited to income of $2,396 and accounts written off of
$1,375
(6) Includes amounts credited to income of $150 and accounts written off of $525
(7) Includes amounts credited to income of $907 and accounts written off of $313
S-1
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
10.8(2) Lease Agreement dated August 18, 1988, as amended, between
Registrant and Mountain View Industrial Associates for
premises at 350-360 North Bernardo Avenue, Mountain View,
California.
10.9(2) Lease Agreement dated September 21, 1989, as amended,
between Registrant and Mountain View Industrial Associates
for premises at 380 North Bernardo Avenue, Mountain View,
California.
10.11(4)* 1989 Stock Option Plan, as amended.
10.12(2)* Form of Stock Option Agreements for use with the 1989 Stock
Option Plan.
10.13(2)* Employee Stock Purchase Plan (revised).
10.14(2)* Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.15(2)* Registrant's 401(k) Retirement Plan.
10.20(2) Lease Agreement dated April 29, 1985, as amended, between
Graphic Software Systems, Inc. and Beaverton-Redmond Tech
Properties, a Joint Venture.
10.22(2) Distributorship and OEM Agreement and related Trademark
License Agreement, each dated July 23, 1990, between
Registrant and Nihon NCD K.K.
10.23(2) Form of Registrant's standard purchase order.
10.24(6)* Registrant's Incentive Bonus Plan.
10.29(3) Full Service Lease dated October 20, 1993 between Z-Code and
Novato Gateway Associates for premises at 101 Rowland Way,
Suite 300, Novato, California.
10.31(4)* 1994 Outside Directors Stock Option Plan.
10.32(4)* Form of Nonstatutory Stock Option Agreement for Outside
Directors.
10.34(5) Lease agreement by and between Registrant and Ravendale
Investments dated September 20, 1995.
10.36(5)+ Client/Server Software License Agreement dated March 29,
1996 between Registrant and Citrix Systems, Inc.
10.37(5)+ Software Licensing Agreement dated as of June 30, 1995
between Registrant and Evans & Sutherland Computer
Corporation.
10.38(5)+ License and Development Agreement dated December 18, 1995
between Registrant and Software.com, Inc.
10.39(5)+ Cooperative Hardware Marketing Agreement dated November 29,
1995 between Registrant and International Business
Machines Corporation ("IBM"), as amended December 20,
1995.
10.40(5)+ X-Station Terminal Transition Agreement dated November 29,
1995 between Registrant and IBM, as amended December 13,
1995.
10.42(6)+ Alliance Agreement dated June 27, 1996 by and between the
Registrant and IBM.
10.44(7) IBM Letter of Intent and Funding Agreement.
10.45(7)+ Attachment 2 to Article 1--Development of the Alliance
Agreement dated November 4, 1997 between Registrant and
IBM.
10.46(7) Attachment 3 to Article 2--Manufacturing of the Alliance
Agreement dated November 4, 1997 between Registrant and
IBM.
10.47(8)+ Development and License Agreement dated March 6, 1998
between Registrant and Intel Corporation.
10.48(9) Asset Purchase Agreement dated December 31, 1998 between
Registrant and Tektronix, Inc.
10.49 Asset Purchase Agreement dated January 7, 2000 by and
between the Registrant and Multiplicity LLC
10.50 Global Procurement Agreement dated January 30, 2000 by and
between Registrant and Hitachi
10.51* Incentive Stock Option Agreement.
10.52* 1999 Stock Option Plan.
21.1 List of subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
27.1 Financial Data Schedule.
- ------------------------
* Constitutes a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
+ Confidential treatment has been granted as to a portion of this exhibit.
(1) Incorporated by reference to identically numbered exhibit to Registrant's
Form 8-A Registration Statement filed on January 14, 1999.
(2) Incorporated by reference to identically numbered exhibit to Registrant's
Form S-1 Registration Statement (No. 33-47246) which became effective on
June 4, 1992 (the "1992 Registration Statement").
(3) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1993.
(4) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1994.
(5) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1995.
(6) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1996.
(7) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1997.
(8) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Report for the quarter ended March 31, 1998.
(9) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1998.