UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2000
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ______to ______
Commission file number: 0-20124
NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Ravendale Avenue, Mountain View, California 94043
(Address of principal executive offices and zip code)
Registrant's telephone number: (650) 694-0650
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock was 16,579,171
at March 31, 2000
NETWORK COMPUTING DEVICES, INC.
INDEX
DESCRIPTION PAGE NUMBER
- ------------------------------------------------------------------------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three-Month Periods Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Three-Month Periods Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3: Quantitative and Qualitative Disclosure about Market Risk 15
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 16
Signature 17
2
NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
March 31, December 31,
2000 1999
-------------- --------------
Current assets:
Cash and cash equivalents $ 3,416 $ 4,781
Short-term investments 300 3,558
Accounts receivable, net 17,027 21,987
Inventories 13,918 15,082
Other current assets 4,494 4,532
-------------- --------------
Total current assets 39,155 49,940
Property and equipment, net 3,382 3,651
Other assets 3,039 3,173
-------------- --------------
Total assets $ 45,576 $ 56,764
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,043 $ 10,419
Accrued expenses 6,840 4,739
Deferred revenue 3,309 3,384
Short-term debt 2,616 -
Other current liabilities 468 346
-------------- --------------
Total current liabilities 24,276 18,888
Shareholders' equity:
Common stock 17 16
Capital in excess of par 61,950 61,333
Accumulated deficit (40,667) (23,473)
-------------- --------------
Total shareholders' equity 21,300 37,876
-------------- --------------
Total liabilities and shareholders' equity $ 45,576 $ 56,764
============== ==============
See accompanying notes.
3
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
------------------------------------
2000 1999
---------------- ----------------
Net revenues:
Hardware products and services $ 12,820 $ 22,785
Software licenses and services 927 3,639
---------------- ----------------
Total net revenues 13,747 26,424
Cost of revenues:
Hardware products and services 12,489 14,064
Software licenses and services 90 1,110
---------------- ----------------
Total cost of revenues 12,579 15,174
---------------- ----------------
Gross margin 1,168 11,250
Operating expenses:
Research and development 3,249 3,439
Marketing and selling 7,977 8,358
General and administrative 2,541 1,685
Business restructuring 2,561 -
Acquired in-process research and development 1,800 -
---------------- ----------------
Total operating expenses 18,128 13,482
---------------- ----------------
Operating loss (16,960) (2,232)
Interest income, net 9 244
---------------- ----------------
Loss before income taxes (16,951) (1,988)
Provision for income taxes 243 -
---------------- ----------------
Net loss $ (17,194) $ (1,988)
================ ================
Net loss per share
Basic $ (1.00) $ (0.12)
================ ================
Diluted $ (1.00) $ (0.12)
================ ================
Shares used in per share computations
Basic 17,233 16,054
================ ================
Diluted 17,233 16,054
================ ================
See accompanying notes.
4
NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
--------------------------------------
2000 1999
--------------- ---------------
Cash flows from operations:
Net loss $ (17,194) $ (1,988)
Reconciliation of net loss to cash used in operations:
In process research and development charge 1,800 -
Depreciation 656 831
Amortization of goodwill 134 101
Changes in:
Accounts receivable, net 4,960 2,668
Inventories 1,164 457
Other current assets 38 40
Accounts payable 624 (3,164)
Accrued expenses 2,101 (290)
Deferred revenue (75) (772)
Other current liabilities 145 (117)
--------------- ---------------
Cash used in operations (5,647) (2,234)
Cash flows from investing activities:
Acquisition of business (2,201) -
Purchases of short-term investments - (5,432)
Sales and maturities of short-term investments 3,258 9,748
Changes in other assets 401 (399)
Property and equipment purchases (387) (753)
--------------- ---------------
Cash provided by investing activities 1,071 3,164
Cash flows from financing activities:
Principal payments on capital lease obligations (23) (22)
Proceeds from short-term debt 2,616 -
Repurchases of common stock - (555)
Proceeds from issuance of stock, net 618 290
--------------- ---------------
Cash provided by (used in) financing activities 3,211 (287)
--------------- ---------------
Increase (decrease) in cash and equivalents (1,365) 643
Cash and equivalents:
Beginning of period 4,781 8,553
--------------- ---------------
End of period $ 3,416 $ 9,196
=============== ===============
See accompanying notes.
5
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network Computing
Devices, Inc. (the "Company") furnished herein reflects all adjustments,
consisting only of normal recurring entries, which in the opinion of management
are necessary to fairly state our consolidated financial position, results of
operations and cash flows for the periods presented. This Quarterly Report on
Form 10-Q should be read in conjunction with the consolidated financial
statements and notes thereto included in our 1999 Annual Report on Form 10-K.
The consolidated results of operations for the three-month period ended March
31, 2000 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2000.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted net loss per share is computed
using the weighted-average number of common shares and potential common shares
from stock options and warrants outstanding, when dilutive, using the treasury
stock method. At March 31, 2000 and 1999 there were 4,552,983 and 4,863,787
options and warrants outstanding, respectively, that could potentially dilute
earnings per share ("EPS") in the future that were not included in the
computation of diluted EPS because to do so would have been antidilutive for
those periods.
INVENTORIES
Inventories, stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market, consisted of (in thousands):
March 31, December 31,
2000 1999
---- ----
Purchased components and sub-assemblies $8,456 $9,825
Work in process 573 826
Finished goods 4,889 4,431
------- -------
$13,918 $15,082
------- -------
INTEREST AND TAX PAYMENTS
Interest payments, primarily interest on capital lease liabilities, were $8,050
and $4,300 for the three months ended March 31, 2000 and 1999, respectively.
Income tax payments, primarily foreign, were $67,600 and $45,200 for the three
months ended March 31, 2000 and 1999, respectively.
MAJOR CUSTOMERS AND OPERATING SEGMENTS
The Company has one operating segment, sales of thin client hardware and
software.
The percentages of total net revenues represented by sales to major customers
are as follows:
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
Adtcom 15% 14%
Tech Data 20% 18%
6
NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS ACQUISITION
On January 7, 2000 we acquired the net assets of Multiplicity LLC in a purchase
business combination with a total purchase price of $2.2 million. The purchase
price was allocated as follows:
In-process research and development $1,800
Other intangible assets 200
Goodwill 161
Tangible assets 40
The allocation of the purchase price was based on an independent appraisal
performed on the acquired net assets.
The goodwill and other intangible assets are being amortized over an
estimated useful life of three years.
SHORT TERM DEBT
Short term debt consists of borrowings under our $15.0 million working
capital line of credit with Foothill Capital Corporation. 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 as well as our compliance with specified financial
covenants.
RESTRUCTURING CHARGE
On March 31, 2000 we announced a restructuring plan involving a general
reduction in workforce affecting all classes of employees and exiting certain
leased facilities. In connection with the plan, we recorded a restructuring
charge of $2.6 million consisting of $2.4 million for employee separation
costs and $0.2 million for facility exit costs. Of the total restructuring
charge, $2.5 million represented cash charges of which $1.8 million was
unpaid and included in accrued liabilities at March 31, 2000. The
restructuring plan is expected to be completed within six months.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED
TO STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE, OPERATING
RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE
DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK FACTORS."
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1999, CONTAINED IN OUR 1999 ANNUAL REPORT ON FORM 10-K.
OVERVIEW
Network Computing Devices, Inc. (the "Company") provides thin client hardware
and software that deliver simultaneous, high-performance, easy-to-manage and
cost effective access to all of the information on enterprise intranets and the
Internet from thin client, UNIX and PC desktops. Our product lines include the
NCD THINSTAR line of Windows-based terminals, and NCD EXPLORA network terminals,
and NCD NC200 and NC400 network computers. On the software side, our products
include the NCD THINPATH family of client and server software, developed to
enhance the connectivity, management and features of the NCD thin clients as
well as PCs in accessing information and applications on Windows Servers. We
also market PCXware, NCDware, NC software, and Citrix based Wincenter. Our
products are sold through distributor/VAR channels, and system integrators
worldwide.
In January 2000, we acquired the assets of Multiplicity LLC, a privately held
developer of advanced server management software for Microsoft's Windows NT and
Windows 2000 operating systems. The acquisition has been accounted for using the
purchase method. The purchase price was $2.2 million plus a stream of future
payments based on revenue for the four year period following the acquisition.
The purchase price was allocated as follows, $1.8 million to purchased
in-process research and development and $0.4 million to other intangible assets.
In addition to acquiring certain assets, approximately six former Multiplicity
LLC employees joined us, in the areas of engineering, sales and administration.
Multiplicity LLC provides strategic performance analysis and capacity planning
solutions for networked Windows NT and Windows 2000 servers. These solutions
give customers system measurement and management that enable troubleshooting,
analysis, administration and planning to help IT organizations improve end-user
service levels.
In February 2000, we entered into an OEM agreement with Hitachi Ltd. of Japan to
develop and manufacture customized NCD thin client terminals under the Hitachi
name. Hitachi's OEM thin client brand will be called FLORANET 130 and is based
on our THINSTAR 400 Windows-based terminal.
In April 2000 we finalized an alliance agreement with Hewlett-Packard Company
whereby HP will sell our products through its indirect sales channel and direct
sales force worldwide. HP will market our NC200 and NC400 network computers, our
THINSTAR line of Windows-based terminals and our THINPATH software.
At March 31, 2000 we had cash and short-term investments of approximately $3.7
million. During the years ended December 31, 1998 and 1999 and the quarter ended
March 31, 2000, we incurred losses of approximately $9.1 million, $16.3 million,
and $17.2 million, respectively, and during those periods our cash and
equivalents decreased by approximately $11.2 million, $5.3 million and $1.4
million, respectively. Based on these factors, among others, our independent
auditors have expressed substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent on our
ability to raise additional capital or obtain continued financing and ultimately
to achieve profitability and positive cash flow.
To reduce our operating expenses, we have implemented a 20% across-the-board
reduction in our workforce, additionally on March 30, 2000 we secured a $15.0
million working capital line of credit with Wells Fargo Bank's Foothill Capital
8
subsidiary. Our line of credit is secured by substantially all of our assets.
Under the terms of the agreement borrowings bear interest at a rate of prime
plus 0.75%. The amount that can be borrowed at any given time is determined by
the balance of our accounts receivable as well as our compliance with specified
financial covenants. Accordingly, this line of credit may not be sufficient to
enable us to continue as a going concern.
We have recently become more actively involved in exploring several strategic
alternatives intended to enhance shareholder value. We have not entered into any
agreement or commitment with respect to any such strategic transaction, and no
assurance can be given that any such transaction will result from these
activities.
On December 31, 1998 we completed the acquisition of Tektronix' Network Displays
business unit ("NWD") for $3.0 million in cash and warrants to purchase one
million shares of our company stock at $8.00 per share. The acquisition was
accounted for as a purchase business combination with a total purchase price of
$5.9 million. The purchase price was allocated as follows; $1.7 million to net
assets acquired, $1.4 million to in-process research and development and $2.8
million to other intangible assets. In addition to acquiring certain assets of
NWD, approximately 83 former NWD employees joined us. 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
in the fourth quarter of 1998 related to these restructuring activities. By the
end of 1999 it was determined that the program was substantially complete, and
an operating profit of $138,000 was recorded. A total of 13 employees were
terminated under the plan at a total cost of $532,000.
We sell hardware product to IBM pursuant to the joint development agreement
dated June 27, 1996 (the "IBM Agreement") of network application terminal for
resale by IBM. The IBM Agreement provides for IBM to purchase a substantial
portion of its requirements for such products from us through December 31, 2000.
RESULTS OF OPERATIONS
TOTAL NET REVENUES
Total net revenues for the first quarters of 2000 and 1999 were $ 13.7
million and $26.4 million, respectively, representing a decrease of 48%. We
experienced a 60% decline in our international revenues compared to a 40%
decline in revenue generated in North America. Revenue generated under the
IBM Agreement continued to decline accounting for approximately 7% and 9% of
revenue, respectively. Other major customers of ours in the first quarter of
2000 included Tech Data and Adtcom who accounted for 20% and 15% of our
revenues, respectively. In the first quarter of 1999 Tech Data and Adtcom
accounted for 18% and 14% of our revenues, respectively.
HARDWARE REVENUES
Hardware revenues are primarily from the sale of thin client products, and to
a lesser extent, related service activities. Revenues were $12.8 million and
$22.8 million for the first quarters of 2000 and 1999, respectively. Hardware
revenues declined 44% and declined across all product lines. This revenue
decline is due in part to a continued drop in demand for our EXPLORA and
NC200 and NC400 network computers and lower sales of Windows-based terminals
to our distributors.
SOFTWARE REVENUES
Software revenues are primarily from the sale and licensing of THINPATH and
other software products and related support services. Revenues from software and
related services were $0.9 million and $3.6 million for the first three months
of 2000 and 1999, respectively. This decrease primarily reflects the transition
from the sale of the Citrix-based Wincenter software to the sale of software
developed-in-house. Our OEM relationship with Citrix for Citrix' WinFrame
product ended on September 30, 1998. This has resulted in significantly reduced
sales of Citrix based products.
GROSS MARGIN ON HARDWARE REVENUES
Gross margin on hardware revenues were $0.3 million and $8.7 million for the
first three months of 2000 and 1999, respectively. Most of the decline in
margin was due to the lower revenues for the quarter, although pricing
pressures on our Windows-based terminals, inventory writedowns related to
discontinued products and lower overhead
9
absorption due to the lower volumes this quarter also contributed. Our gross
margin percentages on hardware revenues were 3% and 38% for the first three
months of 2000 and 1999, respectively.
GROSS MARGIN ON SOFTWARE REVENUES
Gross margin on software revenues were $0.8 million and $2.5 million for the
first three months of 2000 and 1999, respectively. This decline was across
all product lines. Our gross margin percentages on software revenues were 90%
and 69% for the first three months of 2000 and 1999, respectively. The
improvement in gross margin percentage reflects the move from the sale of
licensed software to the sale of our branded software which sell at higher
margins than the Citrix-based products that we were selling.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $3.2 million and $3.4 million
for the first three months of 2000 and 1999, respectively. The decrease was
the result of reduced headcount.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $8.0 million and $8.4 million for the
first three months of 2000 and 1999, respectively. The decrease in marketing
and selling expenses relates to decreasing headcount and lower revenue.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $2.5 million and $1.7
million for the first three months 2000 and 1999, respectively. An increase
in the allowance for bad debts of $0.5 million contributed to the increase.
Goodwill amortization expense, related to the acquisition of the Tektronix
Inc.'s Network Displays business in December 1999 and Multiplicity LLC in
January 2000, was $0.1 million for the first three months of 2000 and 1999
respectively.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with our acquisition of Multiplicity LLC on January 7, 2000,
approximately $1.8 million of the total purchase consideration was allocated to
the value of in-process research and development. The amounts allocated were
determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition because technological feasibility
had not been established and no alternative uses exist. Research and development
cost to bring the products to technological feasibility are not expected to have
a material impact on our future operating results.
The in-process research and development project acquired in the acquisition of
Multiplicity LLC consisted of development of a line of advanced server
management software for Microsoft's Windows NT and Windows 2000 operating
systems. These new products are expected to be released in the second quarter of
2000. The aggregate expected costs to complete the in-process projects is
approximately $0.7 million.
The fair value of the in-process technology was based on projected cash flows
which were discounted based on the risks associated with achieving such
projected cash flows upon successful completion of the acquired projects.
Associated risks include the inherent difficulties and uncertainties in
completing the project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. In developing cash flow projections, revenues were forecast based
upon relevant factors, including aggregate revenue growth rates for the business
as a whole, characteristics of the potential market for the technology and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were forecast based on the characteristics and cash flow
generating potential of the acquired in-process technology.
The fair value of the in-process research and development was $1.8 million.
Projected annual revenues for the in-process project was assumed to increase
from product release through 2003.
10
Gross profit was assumed to be 75%. The projected gross profit percent was based
on an estimated cost of revenue which included duplication, manuals, packaging
materials and third party order fulfillment costs. Gross profit projections were
based on our experience with other similar products.
Estimated operating expenses, income taxes and capital charges to provide a
return on other acquired assets were deducted from gross profit to arrive at net
operating income for the in-process development projects. Operating expenses
were estimated as a percentage of revenue and included sales and marketing
expenses and development costs to maintain the technology once it has achieved
technological feasibility.
We discounted the net cash flows of the in-process research and development
projects to their present values using a discount rate of 35%. This discount
rate approximates the overall rate of return for the acquisition as a whole and
reflects the inherent uncertainties surrounding the successful development of
the in-process research and development projects.
INTEREST INCOME, NET
Interest income, net of interest expense, was $9,000 and $ 244,000 for the first
three months of 2000 and 1999, respectively. The decrease was primarily due to
lower average balances in interest bearing accounts.
INCOME TAXES AND INCOME TAX BENEFIT
The provision for income taxes of $243,000 in the first three months of 2000
is for foreign income taxes. We recognized no income tax benefit for the
first three months of 2000 and 1999, respectively, because continued
operating losses have created uncertainty about our ability to generate
sufficient taxable income to utilize the tax benefit operating losses
provide. At March 31, 2000 we had operating loss carryforwards for federal
and state income tax purposes of approximately $13.0 million and $1.6 million
respectively. These carryforwards are available to offset future taxable
income, if any, thru 2020 and 2005 respectively.
FINANCIAL CONDITION
Total assets of $45.6 million at March 31, 2000 decreased from $56.8 million
at December 31, 1999. The change in total assets primarily reflects decreases
in cash and short-term investments of $4.6 million, accounts receivable of
$5.0 million, and inventory of $1.2 million. Total current liabilities as of
March 31, 2000 increased by $5.4 million, or 29%, from $18.9 million at
December 31, 1999. The change was primarily related to increases in accounts
payable of $0.6 million, accrued expenses of $2.1 million related to the
unpaid portion of the restructuring charge, and short-term debt of $2.6
million.
CAPITAL REQUIREMENTS
Capital spending requirements for the remainder of 2000 are estimated at
approximately $1.0 million.
LIQUIDITY
As of March 31, 2000, we had combined cash, cash equivalents and short-term
investments totaling $3.7 million, with debt of $2.6 under our line of credit
with Foothill Capital. Cash used in operations was $ 5.6 million in the first
three months of 2000 compared to $2.2 million in the first three months of 1999.
In the first three months of 2000, a net loss of $17.2 million was only
partially offset by a decrease in accounts receivable and inventory of $5.0
million and $1.2 million, respectively, and increases in accounts payable and
accrued expenses of $0.6 million and $2.1 million, respectively. In the first
three months of 1999, a decrease in accounts payable of $3.2 million and the net
loss of $2.0 million were only partially offset by a decrease in accounts
receivable of $2.7 million. Cash flows provided from investing activities in the
first three months of 2000 of $1.1 million is the result of sales and maturities
of short-term investments of $3.3 million offset by the cash used to acquire
Multiplicity LLC of $2.2 million. Cash flows provided by financing activities of
$3.2 million in the first three months of 2000 primarily reflects the proceeds
from the line of credit and the issuance of stock of $2.6 million and $0.6
million, respectively.
Based on the factors discussed above, among others, our independent auditors
have expressed substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern is dependent on our ability
to raise additional capital or obtain continued financing and ultimately to
achieve profitability and positive cash flow.
11
On March 30, 2000, we finalized a working capital line of credit with Foothill
Capital, which provides us with up to $15.0 million of available credit subject
to the conditions described below. Our line of credit is secured by
substantially all of our assets. Under the terms of the agreement borrowings
bear interest at a rate of prime plus 0.75%. The amount that can be borrowed at
any given time is determined by the balance of our 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 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 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," establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. The
statement is effective for fiscal years beginning after June 15, 2000. We
will adopt the standard no later than the first quarter of fiscal year 2001
and are in the process of determining the impact that adoption will have on
our consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation (FIN 44)." The provisions of FIN 44
are effective July 1, 2000. We do not expect the adoption of this standard to
impact the accounting for any stock-based awards granted to date.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
LIQUIDITY
At March 31, 2000 we have cash and equivalents and short-term investments of
approximately $3.7 million. During the years ended December 31, 1998 and 1999
and the quarter ended March 31, 2000, we incurred losses of approximately $9.1
million, $16.3 million and $17.2 million, respectively, and during those periods
our cash and equivalents decreased by approximately $11.2 million, $5.3 million
and $1.4 million, respectively. Based on these factors, among others, our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going concern is
dependent on our ability to raise additional capital or obtain continued
financing and ultimately to achieve profitability and positive cash flow. To
reduce our operating expenses, we have implemented a 20% across-the-board
reduction in our workforce. Additionally, we have obtained a $15.0 million line
of credit with Foothill Capital. However, the continued availability of this
line of credit is subject to conditions that we may not be able to satisfy.
Other sources of financing may not be available in the near future, or may be
available only on terms that are highly dilutive to our stockholders. If we
cannot return to positive cash flow in the near future, we may be required to
raise additional financing upon disadvantageous terms or scale back our
operations significantly.
EVOLVING THIN CLIENT COMPUTING MARKET
We derive substantially all of our revenues from the sale of thin client network
computing products. Our future success will depend substantially upon increased
acceptance of the thin client computing model and the successful marketing of
our thin client computing hardware and software products. There can be no
assurance that our thin client computing products will compete successfully with
alternative desktop solutions or that the thin client computing model will be
widely adopted in the rapidly evolving desktop computer market. To date, the
market for thin client computing products has not lived up to
12
industry expectations, due in part to competition from low-cost PC's. If new
markets fail to develop for our thin client computing products our business
could fail.
OTHER RISK FACTORS
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 who 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 could be a material, adverse effect on our operating results.
The market for thin client products and similar products that facilitate access
to data over networks is highly competitive. We experience significant
competition from other network computer manufacturers, suppliers of personal
computers and workstations and software developers. Competition within the thin
client computing market has intensified over the past several years, resulting
in price reductions and reduced profit margins. We expect this intense
competition to continue, and there can be no assurance that we will be able to
continue to compete successfully against current and future competitors as the
desktop computer market evolves and competition increases. There is the
possibility that competition in the future could come from companies not
currently in the market or with greater resources than our which could adversely
effect 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.
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.
The markets for our products are characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and short
product life cycles. Our future results will depend to a considerable extent on
our ability to continuously develop, introduce and deliver in quantity new
hardware and software products that offer our customers enhanced performance at
competitive prices. The development and introduction of new products is a
complex and uncertain process requiring substantial financial resources and high
levels of innovation, accurate anticipation of technological and market trends
and the successful and timely completion of product development. Once a hardware
product is developed, we must rapidly bring it into volume production, a process
that requires accurate forecasting of customer requirements in order to achieve
acceptable manufacturing costs. The introduction of new or enhanced products
also requires us to manage the transition from older, displaced products in
order to minimize disruption to customer ordering patterns, avoid excessive
13
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. As we are continuously
engaged in this product development and transition process, our operating
results may be subject to considerable fluctuation, particularly when measured
on a quarterly basis. The inability to finance important research and
development projects, delays in the introduction of new and enhanced products,
the failure of such products to gain market acceptance, or problems associated
with new product transitions could adversely affect our operating results.
We rely increasingly on independent distributors and resellers for the
distribution of our products. In early 1996, we experienced significant returns
of our software products from our distributors. Although controls have since
been improved, there can be no assurance that we will not experience some level
of returns in the future. In addition, there can be no assurance that our
distributors and resellers will continue their current relationships with us or
that they will not give higher priority to the sale of other products, which
could include products of our competitors. A reduction in sales effort or
discontinuance of sales of our products by our distributors and resellers could
lead to reduced sales and could adversely affect our operating results. In
addition, there can be no assurance as to the continued viability or the
financial stability of our distributors and resellers, our ability to retain our
existing distributors and resellers or our ability to add distributors and
resellers in the future.
We rely on contract manufacturers for virtually all of the manufacture of our
thin client computing products. Our reliance on these contract manufacturers
limits our control over delivery schedules, quality assurance and product costs.
In addition, a number of our suppliers are located abroad. Our reliance on these
foreign suppliers subjects us to risks such as the imposition of unfavorable
governmental controls or other trade restrictions, changes in tariffs and
political instability. We currently obtain all of the sub-assemblies used for
our thin client computing products from a single supplier located in Thailand.
Any significant interruption in the supply of products from this contractor
would have a material, adverse effect on our business and operating results.
Disruptions in the provision of components by our other suppliers, or other
events that would require that we seek alternate sources of supply, could also
lead to supply constraints or delays in delivery of our products and adversely
affect its operating results.
A number of components and parts used in our products, including certain
semiconductor components, also are currently available from single or limited
sources of supply. We have no long-term purchase agreements or other guaranteed
supply arrangements with suppliers of these single or limited source components.
We have generally been able to obtain adequate supplies of parts and components
in a timely manner from existing sources under purchase orders and we endeavor
to maintain inventory levels adequate to guard against interruptions in
supplies. However, our inability to obtain sufficient supplies of these parts
and components from existing suppliers or to develop alternate supply sources
would adversely affect our operating results.
A majority of our international sales are denominated in Euros. These sales are
subject to exchange rate fluctuations which could affect our operating results
negatively or positively, depending on the value of the U.S. dollar against the
Euro. International sales and operations may also be subject to risks such as
the imposition of governmental controls, export license requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the laws
of certain countries do not protect our products and intellectual property
rights to the same extent as the laws of the United States. There can be no
assurance that these factors will not have an adverse effect on our future
international sales and, consequently, on our operating results.
Our success depends to a significant degree upon the continuing contributions of
our senior management and other key employees. We believe that our future
success will depend in large part on our ability to attract and retain
highly-skilled engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be successful in attracting, integrating and retaining such personnel. We
believe that concerns about our current financial strength could deter potential
hires from seeking employment with us. Failure to attract and retain key
personnel could have a material, adverse effect on our business, operating
results or financial condition.
The market price of our common stock has fluctuated significantly over the past
several years and is subject to material fluctuations in the future in response
to announcements concerning us or our competitors or customers, quarterly
variations in operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by us or our
competitors, general conditions in the computer industry, developments in the
financial markets
14
and other factors. In particular, shortfalls in our quarterly operating results
from historical levels or from levels forecast by securities analysts could have
an adverse effect on the trading price of the common stock. We may not be able
to quantify such a quarterly shortfall until the end of the quarter, which could
result in an immediate and adverse effect on the common stock price. In
addition, the stock market has, from time to time, experienced extreme price and
volume fluctuations that have particularly affected the market prices for
technology companies and which have been unrelated to the operating performance
of the affected companies. Broad market fluctuations of this type may adversely
affect the future market price of our common stock.
We have announced that we have become more actively engaged in exploring several
strategic alternatives intended to enhance shareholder value. We have not
entered into any agreement or commitment with respect to any such strategic
alternatives and may be unsuccessful in our efforts to do so.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our market risk sensitive instruments as of March 31, 2000 are primarily
exposed to interest rate risks. Because of the short-term maturity of these
instruments, a 100 basis point change in related interest rates would not
have a material effect on their fair value.
Effective January 2000 a majority of our international sales are denominated in
Euros. These sales are subject to exchange rate fluctuations which could affect
our operating results negatively or positively, depending on the value of the
U.S. dollar against the Euro.
15
NETWORK COMPUTING DEVICES, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit 10.53 Loan and Security Agreement by and between Network
Computing Devices, Inc. and Foothill Capital
Corporation dated as of March 31, 2000, Copyright
Security Agreement, General Continuing Guarantee,
Guarantor Security Agreement, Intercompany
Subordination Agreement, Patent Security Agreement,
Stock Pledge Agreement and Trademark Security
Agreement.
Exhibit 27 Financial Data Schedule.
(b) The Company filed the following reports on Form 8-K for the three-month
period ended March 31, 2000:
None
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NETWORK COMPUTING DEVICES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Network Computing Devices, Inc.
(Registrant)
Date: May 15, 2000
By: /s/ Gregory S. Wood
-------------------------------------------
Gregory S. Wood
Vice President, Chief Financial Officer and Secretary
(Duly Authorized and Principal Financial and
Accounting Officer)
17