Exhibit 99.1
Report of Independent Certified Public Accountants
Board of Directors
Network Computing Devices, Inc.
Mountain View, California
We have audited the accompanying statement of revenues and expenses of the
ThinSTAR product line (the "Carved out Financial Statements") of Network
Computing Devices, Inc. ("Company"), for each of the years ended December 31,
2001 and 2000. The statement is the responsibility of the Company's management.
The Carved out Financial Statements do not represent a complete set of financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America; rather, they are intended to conform with
certain rules and regulations of the Securities and Exchange Commission. Our
responsibility is to express an opinion on this statement based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the schedule of
gross sales is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the schedule of
gross sales. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
schedule presentation. We believe that our audits provide a reasonable basis for
our opinion.
The operations covered by the statement of revenues and expenses referred to
above have no separate legal status or existence. The accompanying statement was
prepared as described in Note 1 to present the revenues and expenses, including
certain allocated expenses, directly associated with the ThinSTAR product line
and are not intended to be a complete presentation of ThinSTAR product line
results. Furthermore, the amounts in the accompanying statement are not
necessarily indicative of the costs and expenses that would have resulted if the
ThinSTAR product line had been operated as a separate entity.
In our opinion, the statement referred to above presents fairly, in all material
respects, the revenues and expenses of Network Computing Devices, Inc., for each
of the years ended December 31, 2001 and 2000, as carved out between the
ThinSTAR product line and the Company's remaining business.
San Francisco, California
April 30, 2002
Network Computing Devices, Inc.
Statement of Revenues and Expenses of the ThinSTAR Product Line
Years ended December 31, (thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------
Net revenues - Hardware products $16,486 $ 17,814
- -----------------------------------------------------------------------------------------------------------
Cost of revenues 14,869 18,968
- -----------------------------------------------------------------------------------------------------------
Gross profit (loss) 1,617 (1,154)
- -----------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 788 1,259
Marketing and selling 5,075 7,739
General and administrative 2,225 2,603
Business restructuring - 1,330
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 8,088 12,931
- -----------------------------------------------------------------------------------------------------------
Operating loss (6,471) (14,085)
Interest income 15 36
Interest expense (535) (216)
Other income, net - 296
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes (6,991) (13,969)
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes 10 99
- -----------------------------------------------------------------------------------------------------------
Net loss $(7,001) $(14,068)
- -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Statement of Revenues and Expenses
Network Computing Devices, Inc.
Notes to Statement of Revenues and Expenses
1. Basis of Presentation On March 26, 2002, Network Computing Devices,
Inc. ("Company") sold its Windows-Based Terminal
product line ("ThinSTAR") to Neoware Systems,
Inc. The assets sold, which had no carrying
value on the books as of December 31, 2001 and
2000, consisted principally of customer records,
the ThinSTAR trademark and other intellectual
property and contract rights used in the
business of designing, developing and
distributing the ThinSTAR product line.
In accordance with paragraph 8.2 of the Asset
Purchase Agreement, the Company has prepared
financial statements to meet certain
requirements of Rule 3.05 of Regulation S-X. The
required financial statements include a
statement of revenues and expenses which include
carved out revenues and expenses of the ThinSTAR
product line.
Historically, financial statements were not
prepared for ThinSTAR, as the Company did not
maintain ThinSTAR as a separate business unit.
Accordingly, it is impracticable to provide full
audited statements for ThinSTAR, including
balance sheets and statements of cash flows, or
other information regarding operating, investing
and financing cash flows. This statement has
been developed from the historical accounting
records of the Company and represents the
revenues of ThinSTAR and expenses, including
certain allocated expenses, directly associated
with producing those revenues. The statement
does not purport to represent all the costs,
expenses and results associated with a stand
alone, separate entity.
All of the estimates in the statement, as
described in Note 3, are based on assumptions
that Company management believes are reasonable.
However, these estimates are not necessarily
indicative of the net revenues and costs that
would have resulted if ThinSTAR had been
operated as a separate entity.
2. Revenue Recognition Hardware revenues consist primarily of revenues
from the sale of thin client terminals and
related hardware. Hardware revenues are
recognized when the products are shipped
following receipt of a valid purchase order.
With respect to sales through certain
international distributors, revenue is
recognized when the shipment is made available
at a third party logistics center and the buyer
is notified of the availability. The Company
warrants its hardware products for defects in
materials for a period of three years. During
this warranty period, the customer may return
defective product to the Company for repair or
replacement, at the Company's option. In the
event the Company is unable to repair or replace
the defective product, it may refund the
customer the corresponding purchase price. The
Company reduces revenues and cost of sales by an
amount representing returns estimated by the
Company based upon historical experience
factors. Warranty costs are accrued based upon
actual units sold and historical failure rates.
Estimated reductions to revenue for sales and
marketing programs including special price
quotes, price protection, promotions and
marketing development activities and other
volume related incentives are recorded
throughout the period and fluctuate based on
market conditions. If market conditions decline,
then the Company may increase these incentives,
which would result in additional declines in
revenue. The adjustments are charged to income
in the period in which the information that gave
rise to the adjustment becomes known. An
allowance for doubtful accounts is maintained
for estimated losses that would result from the
customers' inability to make payments. Should
the financial condition of the Company's
customers deteriorate, additions to the
allowance account may be required, which would
also result in additional decreases in revenue.
3
3. Assumptions Used In preparation of the Statement of Revenues and
Expenses, the Company made a number of
assumptions and estimates to allocate certain
indirect costs to arrive at the carved out
portion. Below is a summary of significant
assumptions and estimates used by management.
Cost of Goods Sold: The Company uses a standard
costing system to manage inventory and cost
flow. Variances from actual costs, inventory
shrinkage, freight and similar items are
allocated to ThinSTAR products based on relative
revenues or specific identification to product
line.
Research and Development: Research and
development costs are charged to expense when
incurred. Costs are generally comprised of
personnel costs. These costs are allocated based
on department head count.
Marketing and Selling: Costs are principally
allocated based on revenue for each of the
domestic and international categories. Certain
costs for technical support or similar matters
is based on rework or repair history.
General and Administrative, Business
Restructuring, and Interest: Costs are allocated
based on revenues.
Interest Expense: Costs are allocated based on
revenues.
4
Unaudited Statement of Revenues and Expenses
For the Three Months Ended March 31, 2002 and 2001
Network Computing Devices, Inc.
Unaudited Statement of Revenues and Expenses of the ThinSTAR Product Line
Three months ended March 31, (thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net revenues - Hardware products $ 2,754 $3,821
- -----------------------------------------------------------------------------------------------------------
Cost of revenues 2,710 2,740
- -----------------------------------------------------------------------------------------------------------
Gross profit 44 1,081
- -----------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 200 183
Marketing and selling 1,145 1,316
General and administrative 653 444
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 1,998 1,943
- -----------------------------------------------------------------------------------------------------------
Operating loss (1,954) (862)
Interest expense, net (95) (63)
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes (2,049) (925)
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes 1 3
- -----------------------------------------------------------------------------------------------------------
Net loss $(2,050) $ (928)
- -----------------------------------------------------------------------------------------------------------
See accompanying Notes to Unaudited Statement of Revenues and Expenses
2
Network Computing Devices, Inc.
Notes to Unaudited Statement of Revenues and Expenses
1. Basis of Presentation On March 26, 2002, Network Computing Devices,
Inc. ("Company") sold its Windows-Based Terminal
product line ("ThinSTAR") to Neoware Systems,
Inc. The assets sold, which had no carrying
value on the books as of December 31, 2001 and
2000, consisted principally of customer records,
the ThinSTAR trademark and other intellectual
property and contract rights used in the
business of designing, developing and
distributing the ThinSTAR product line.
In accordance with paragraph 8.2 of the Asset
Purchase Agreement, the Company has prepared
financial statements to meet certain
requirements of Rule 3.05 of Regulation S-X. The
required financial statements include a
statement of revenues and expenses which include
carved out revenues and expenses of the ThinSTAR
product line.
Historically, financial statements were not
prepared for ThinSTAR, as the Company did not
maintain ThinSTAR as a separate business unit.
Accordingly, it is impracticable to provide full
audited statements for ThinSTAR, including
balance sheets and statements of cash flows, or
other information regarding operating, investing
and financing cash flows. This statement has
been developed from the historical accounting
records of the Company and represents the
revenues of ThinSTAR and expenses, including
certain allocated expenses, directly associated
with producing those revenues. The statement
does not purport to represent all the costs,
expenses and results associated with a stand
alone, separate entity.
All of the estimates in the statement, as
described in Note 3, are based on assumptions
that Company management believes are reasonable.
However, these estimates are not necessarily
indicative of the net revenues and costs that
would have resulted if ThinSTAR had been
operated as a separate entity.
2. Revenue Recognition Hardware revenues consist primarily of revenues
from the sale of thin client terminals and
related hardware. Hardware revenues are
recognized when the products are shipped
following receipt of a valid purchase order.
With respect to sales through certain
international distributors, revenue is
recognized when the shipment is made available
at a third party logistics center and the buyer
is notified of the availability. The Company
warrants its hardware products for defects in
materials for a period of three years. During
this warranty period, the customer may return
defective product to the Company for repair or
replacement, at the Company's option. In the
event the Company is unable to repair or replace
the defective product, it may refund the
customer the corresponding purchase price. The
Company reduces revenues and cost of sales by an
amount representing returns estimated by the
Company based upon historical experience
factors. Warranty costs are accrued based upon
actual units sold and historical failure rates.
3
Estimated reductions to revenue for sales and
marketing programs including special price
quotes, price protection, promotions and
marketing development activities and other
volume related incentives are recorded
throughout the period and fluctuate based on
market conditions. If market conditions decline,
then the Company may increase these incentives,
which would result in additional declines in
revenue. The adjustments are charged to income
in the period in which the information that gave
rise to the adjustment becomes known. An
allowance for doubtful accounts is maintained
for estimated losses that would result from the
customers' inability to make payments. Should
the financial condition of the Company's
customers deteriorate, additions to the
allowance account may be required, which would
also result in additional decreases in revenue.
3. Assumptions Used In preparation of the Statement of Revenues and
Expenses, the Company made a number of
assumptions and estimates to allocate certain
indirect costs to arrive at the carved out
portion. Below is a summary of significant
assumptions and estimates used by management.
Cost of Goods Sold: The Company uses a standard
costing system to manage inventory and cost
flow. Variances from actual costs, inventory
shrinkage, freight and similar items are
allocated to ThinSTAR products based on relative
revenues or specific identification to product
line.
Research and Development: Research and
development costs are charged to expense when
incurred. Costs are generally comprised of
personnel costs. These costs are allocated based
on department head count.
Marketing and Selling: Costs are principally
allocated based on revenue for each of the
domestic and international categories. Certain
costs for technical support or similar matters
is based on rework or repair history.
General and Administrative, Business
Restructuring, and Interest: Costs are allocated
based on revenues.
Interest Expense: Costs are allocated based on
revenues.
4