10-Q 1 a2030495z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______to ______ Commission file number: 0-20124 NETWORK COMPUTING DEVICES, INC. (Exact name of registrant as specified in its charter) Delaware 77-0177255 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 Ravendale Avenue, Mountain View, California 94043 (Address of principal executive offices and zip code) Registrant's telephone number: (650) 694-0650 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- The number of shares outstanding of the Registrant's Common Stock was 16,710,509 at September 30, 2000 NETWORK COMPUTING DEVICES, INC. INDEX
DESCRIPTION PAGE NUMBER _______________________________________________________________________________ ___________ Cover Page 1 Index 2 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations for the Three-and Nine-Month Periods Ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3: Quantitative and Qualitative Disclosure about Market Risk 15 Part II: Other Information Item 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 September 30, December 31, 2000 1999 -------------- ------------- Current assets: Cash and cash equivalents $ 704 $ 4,781 Short-term investments 333 3,558 Accounts receivable, net 10,947 21,987 Inventories 9,343 15,082 Other current assets 3,886 4,532 -------------- ------------- Total current assets 25,213 49,940 Property and equipment, net 2,350 3,651 Other assets 2,654 3,173 -------------- ------------- Total assets $ 30,217 $ 56,764 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,463 $ 10,419 Accrued expenses 5,477 4,739 Deferred revenue 2,684 3,384 Notes payable 7,165 - Other current liabilities 439 346 -------------- ------------- Total current liabilities 22,228 18,888 Shareholders' equity: Common stock 17 16 Capital in excess of par 62,130 61,333 Accumulated deficit (54,158) (23,473) -------------- -------------- Total shareholders' equity 7,989 37,876 -------------- -------------- Total liabilities and shareholders' equity $ 30,217 $ 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 September 30, Nine Months Ended September 30, ----------------------------------- ----------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Net revenues: Hardware products and services $ 9,611 $ 26,859 $ 34,467 $ 74,985 Software licenses and services 1,467 2,433 3,511 8,605 --------------- --------------- --------------- --------------- Total net revenues 11,078 29,292 37,978 83,590 Cost of revenues: Hardware products and services 7,856 17,103 30,041 46,892 Software licenses and services 54 644 309 2,390 --------------- --------------- --------------- --------------- Total cost of revenues 7,910 17,747 30,350 49,282 --------------- --------------- --------------- --------------- Gross margin 3,168 11,545 7,628 34,308 Operating expenses: Research and development 1,399 3,097 7,514 9,808 Marketing and selling 3,831 7,451 17,700 24,431 General and administrative 1,877 1,585 6,331 4,768 Business restructuring 1,645 - 4,206 - Acquired in-process research and development - - 1,800 - --------------- --------------- --------------- --------------- Total operating expenses 8,752 12,133 37,551 39,007 --------------- --------------- --------------- --------------- Operating loss (5,584) (588) (29,923) (4,699) Interest income (expense), net (191) 125 (314) 465 --------------- --------------- --------------- --------------- Loss before income taxes (5,775) (463) (30,237) (4,234) Provision for income taxes 97 6,951 448 6,951 --------------- --------------- --------------- --------------- Net loss $ (5,872) $ (7,414) $ (30,685) $ (11,185) =============== =============== =============== =============== Net loss per share Basic and diluted $ (0.35) $ (0.46) $ (1.85) $ (0.69) =============== =============== =============== =============== Shares used in per share computations Basic and diluted 16,710 16,219 16,628 16,136 =============== =============== =============== ===============
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, ------------------------------- 2000 1999 ----------- ---------- Cash flows from operations: Net loss $ (30,685) $ (11,185) Reconciliation of net loss to cash used in operations: In process research and development charge 1,800 - Depreciation and amortization 2,160 2,655 Non cash restructuring charge 336 - Increase in valuation allowance on deferred tax assets - 6,951 Charges in: Accounts receivable, net 11,040 (259) Inventories 5,739 (1,590) Refundable and deferred income tax assets - (329) Other current assets 446 (486) Accounts payable (656) 3,491 Accrued expenses 738 (1,434) Deferred revenue (700) (892) Other current liabilities 162 36 ----------- ---------- Cash used in operations (9,620) (3,042) Cash flows from investing activities: Acquisition of business (2,224) - Purchases of short-term investments (998) (10,463) Sales and maturities of short-term investments 4,223 19,744 Changes in other assets 417 (869) Property and equipment purchases (469) (2,173) ----------- ---------- Cash provided by investing activities 949 6,239 Cash flows from financing activities: Principal payments on capital lease obligations (69) (67) Proceeds from short-term debt 25,248 - Principal payments on short-term debt (21,383) - Repurchases of common stock - (704) Proceeds from issuance of stock, net 798 1,327 ----------- ---------- Cash provided by financing activities 4,594 556 ----------- ---------- Increase (decrease) in cash and equivalents (4,077) 3,753 Cash and equivalents: Beginning of period 4,781 8,553 ----------- ---------- End of period $ 704 $ 12,306 =========== ==========
See accompanying notes. 5 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The unaudited condensed consolidated financial information of Network Computing Devices, Inc. (the "Company") furnished herein reflects all adjustments, consisting only of normal recurring entries, which in the opinion of management are necessary to fairly state our consolidated financial position, results of operations and cash flows for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our 1999 Annual Report on Form 10-K. The consolidated results of operations for the three- and nine-month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2000. NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and potential common shares from stock options and warrants outstanding, when dilutive, using the treasury stock method. At September 30, 2000 and 1999 there were 4,538,936 and 4,909,562 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):
September 30, December 31, 2000 1999 ------------- ------------ Purchased components and sub-assemblies $6,271 $9,825 Work in process 657 826 Finished goods 2,415 4,431 ----- ----- $9,343 $15,082 ----- ------
MAJOR CUSTOMERS AND OPERATING SEGMENTS The Company has one operating segment, thin clients. The percentages of total net revenues represented by sales to major customers are as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 -------- ----------- -------- -------- Adtcom 25% 19% 22% 16% Tech Data 1% 16% 14% 15% UCSI Distribution 6% 3% 11% 3% Ingram Micro 17% 10% 7% 8% IBM 1% 13% 4% 12%
6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Gross accounts receivable as a percentage of total gross accounts receivable for major customers are as follows:
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Adtcom 32% 31% Tech Data 16% 17% UCSI Distribution 15% 7% Ingram Micro 12% 14%
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. During the three months ended September 30, 2000, we paid $0.5 million of the accrued restructuring liability leaving unpaid cash charges of $0.7 million and unpaid noncash charges of $0.1 million included in accrued liabilities as of September 30, 2000. The restructuring plan is expected to be completed by the end of the fourth quarter of 2000. During the third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded restructuring charges of $1.6 million consisting of cash charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non cash charges of $0.4 million related to the discontinued product lines, including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity LLC. During the three months ended September 30, 2000 we paid $0.4 million of the accrued restructuring liability leaving unpaid cash charges of $0.8 million included in accrued liabilities as of September 30, 2000. The restructuring plan is expected to be completed by mid 2001. CONVERSION OF ACCOUNTS PAYABLE In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK FACTORS." THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, CONTAINED IN OUR 1999 ANNUAL REPORT ON FORM 10-K. OVERVIEW Network Computing Devices, Inc. (the "Company") provides thin client hardware and software that deliver simultaneous, high-performance, easy-to-manage and cost effective access to all of the information on enterprise intranets and the Internet from thin client, UNIX and PC desktops. Our product lines include the NCD THINSTAR line of Windows-based terminals, NCD EXPLORA network terminals, and NCD NC200, NC400 AND NC900 network computers. On the software side, our products include the NCD THINPATH family of client and server software, developed to enhance the connectivity, management and features of the NCD thin clients as well as PCs in accessing information and applications on Windows Servers. We also market PCXware, NCDware, and NC software. Our products are sold through distributor/VAR channels, and system integrators worldwide. In January 2000, we acquired the assets of Multiplicity LLC, a privately held developer of advanced server management software for Microsoft's Windows NT and Windows 2000 operating systems. The acquisition has been accounted for using the purchase method. The purchase price was $2.2 million plus a stream of future payments based on revenue for the four year period following the acquisition. $1.8 million of the purchase price was allocated to purchased in-process research and development and $0.4 million was allocated to other intangible assets. Multiplicity LLC provided strategic performance analysis and capacity planning solutions for networked Windows NT and Windows 2000 servers. These solutions gave customers system measurement and management that enabled troubleshooting, analysis, administration and planning to help IT organizations improve end-user service levels. During the third quarter of 2000, due to a change in strategic direction and cash constraints, we discontinued development efforts on the Multiplicity product line and recorded a related restructuring charge for the impairment of the purchased intangibles. 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 network computers, our line of Windows-based terminals and related software. We continue to sell network application terminals to IBM for resale pursuant to a joint development agreement dated June 27, 1996 (the "IBM Agreement"). The IBM agreement provides for IBM to purchase a substantial portion of its requirements for such products from us through December 31, 2000. At September 30, 2000 we had cash and short-term investments of $1.0 million. During the years ended December 31, 1998 and 1999 and the nine months ended September 30, 2000, we incurred losses of $9.1 million, $16.3 million, and $30.7 million, respectively, and during those periods our cash and cash equivalents decreased by $11.2 million, $5.3 million and $4.1 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we announced a 20% across-the-board reduction in our workforce and recorded a restructuring charge. In the third quarter we recorded a further restructuring charge of $1.6 million. This charge included 8 severance related to further headcount reductions, facility closure costs, and non cash charges related to discontinued product lines, including an impairment loss on the intangibles attributable to our purchase of Multiplicity LLC. On March 30, 2000 we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary. Our line of credit is secured by substantially all of our assets. Under the terms of the agreement borrowings bear interest at a rate of 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. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to seek new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenue represents sales to customers of hardware and software product and the related service and support. Total net revenues for the third quarters of 2000 and 1999 were $11.1 million and $29.3 million, respectively, representing a decrease of 62%, and $38.0 million and $83.6 million for the first nine months of 2000 and 1999, respectively, representing a decrease of 55%. Our principal customers in the third quarter of 2000 included Adtcom and Ingram Micro, who accounted for 25% and 17% of our revenues, respectively. In the third quarter of 1999 Adtcom, Tech Data, IBM and Ingram Micro, accounted for 19%, 16%, 13% and 10% of our revenues, respectively. For the first nine months of 2000 Adtcom, Tech Data and UCSI Distribution accounted for 22%, 14%, and 11% of our revenues respectively, while in the first nine months of 1999 Adtcom, Tech Data and IBM accounted for 16%, 15% and 12% of our revenue, respectively. HARDWARE REVENUES Hardware revenues are primarily from the sale of thin client products, and to a lesser extent, related service activities. Revenues were $9.6 million and $26.9 million for the third quarters of 2000 and 1999, respectively, and $34.5 million and $75.0 million for the first nine months of 2000 and 1999, respectively. Hardware revenues declined across all product lines. This revenue decline is due in part to a drop in demand for our network computers, lower sales of windows-based terminals to distributors, and continued declines in sales to IBM. SOFTWARE REVENUES Software revenues are primarily from the sale and licensing of THINPATH and other software products and related support services. Revenues from software and related services were $1.5 million and $2.4 million for the third quarters of 2000 and 1999, respectively, and $3.5 million and $8.6 million for the first nine 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. The third quarter of 2000 included $0.6 million of net revenue related to a single sale of a license to certain of our software. GROSS MARGIN ON HARDWARE REVENUES Gross margin on hardware revenues represents net revenues less cost of revenues related to hardware products and services. Gross margin on hardware revenues was $1.8 million and $9.8 million for the third quarters of 2000 and 1999, respectively, and $4.4 million and $28.1 million for the first nine months of 2000 and 1999, respectively. Our gross margin percentages on 9 hardware revenues were 18% and 36% for the third quarters of 2000 and 1999, respectively, and 13% and 37% for the first nine months of 2000 and 1999, respectively. Most of the decline in margin was due to the lower revenues for the quarter. Continued pricing pressures on our Windows-based terminals and lower overhead absorption due to the lower volumes this quarter also contributed to the decline. GROSS MARGIN ON SOFTWARE REVENUES Gross margin on software revenues represents net revenues less cost of revenues related to software license and services. Gross margin on software revenues was $1.4 million and $1.8 million for the third quarters of 2000 and 1999, respectively, and $3.2 million and $6.2 million for the first nine months of 2000 and 1999, respectively. This decline was across all product lines. Our gross margin percentages on software revenues were 96% and 74% for the third quarters of 2000 and 1999, respectively, and 91% and 72% for the first nine months of 2000 and 1999, respectively. The improvement in gross margin percentage reflects the move from the sale of licensed software product to the sale of our branded software, which sell at higher margins than our licensed software product, and the single sale of a license to certain of our software. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses consist primarily of software and hardware development costs. R&D expenses were $1.4 million and $3.1 million for the third quarters of 2000 and 1999, respectively, and $7.5 million and $9.8 million for the first nine months of 2000 and 1999, respectively. The decrease in spending for R&D was the result of decreased headcount. MARKETING AND SELLING EXPENSES Marketing and selling expenses represent the expenses incurred to promote and sell our product. Marketing and selling expenses were $3.8 million and $7.5 million for the third quarters of 2000 and 1999, respectively, and $17.7 million and $24.4 million for the first nine months of 2000 and 1999, respectively. The decrease in marketing and selling expenses relates to decreasing headcount, lower revenue, and lower spending on advertising, public relations and other marketing costs. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses consist of expenses not directly related to the development, manufacture or sale of our product. G&A expenses were $1.9 million and $1.6 million for the third quarters of 2000 and 1999, respectively, and $6.3 million and $4.8 million for the first nine months of 2000 and 1999, respectively. The increase in the third quarter of 2000 is significantly the result of foreign currency losses of $0.4 million. Bad debt expense of $0.6 million and foreign currency losses of $0.7 million, offset by a reduction in employee based expenses of $0.5 million contributed to the increase in expenses during the first nine months of 2000, when compared to the first nine months of 1999. Intangibles amortization expense, related to the acquisition of Tektronix Inc.'s Network Displays business in December 1998 and Multiplicity LLC in January 2000, was $0.1 million for the third quarters of 2000 and 1999, respectively, and $0.4 million and $0.3 million for the first nine 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. 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. During the third quarter of 2000, due to a change in strategic direction and cash constraints, we discontinued the Multiplicity product line and all research and development on these products ceased. 10 INTEREST INCOME (EXPENSE), NET Interest income (expense), net was ($191,000) and $125,000 for the third quarters of 2000 and 1999, respectively, and ($314,000) and $465,000 for the first nine months of 2000 and 1999, respectively. The changes were due to lower average balances in interest-bearing accounts and interest expense on the line of credit with Foothill Capital and note payable to SCI Technology, Inc. INCOME TAXES AND INCOME TAX BENEFIT The provision for income taxes in the third quarter of 2000 is for foreign income taxes. We continue to generate tax net operating loss carryforwards for the United States federal and state jurisdictions. However, no assets have been recognized in respect of these carryforwards because continued losses create uncertainty about our ability to generate sufficient taxable income to realize the related benefits. FINANCIAL CONDITION Total assets of $30.2 million at September 30, 2000 decreased from $56.8 million at December 31, 1999. The change in total assets primarily reflects decreases in cash and short-term investments of $7.3 million, accounts receivable of $11.0 million, and inventories of $5.7 million. Total current liabilities of $22.2 million as of September 30, 2000 increased by $3.3 million, or 18%, from $18.9 million at December 31, 1999. The change was primarily related to increases in accrued expenses of $0.7 million related to the unpaid portion of the restructuring charge and notes payable of $3.9 million related to the line of credit with Foothill Capital and the note payable to SCI Technology, Inc., offset by a decrease in accounts payable and deferred revenue of $0.7 million and $0.7 million, respectively. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 2000 are estimated at approximately $0.1 million. LIQUIDITY As of September 30, 2000, we had combined cash, cash equivalents and short-term investments totaling $1.0 million, with $3.9 million drawn under our line of credit with Foothill Capital. Cash used in operations was $9.6 million in the first nine months of 2000 compared to $3.0 million in the first nine months of 1999. In the first nine months of 2000, a decrease in accounts payable of $0.7 million and a net loss of $30.7 million were only partially offset by a decrease in accounts receivable and inventories of $11.0 million and $5.7 million, respectively, and an increase in accrued expenses of $0.7 million. In the first nine months of 1999, an increase in inventories of $1.6 million, a decrease in accrued expenses of $1.4 million, and a net loss of $11.2 million were only partially offset by an increase in accounts payable of $3.5 million. Cash flows provided from investing activities in the first nine months of 2000 of $0.9 million are principally the result of sales and maturities of short-term investments of $4.2 million offset by the $2.2 million of cash used to acquire Multiplicity LLC and purchases of short-term investments of $1.0 million. Cash provided by investing activities for the first nine months of 1999 of $6.2 million is primarily the result of sales and maturities of short-term investments of $19.7 million offset by purchases of capital equipment of $2.2 million, and purchases of short-term investments of $10.5 million. Cash flows provided by financing activities of $4.6 million in the first nine months of 2000 primarily reflects $3.9 million in proceeds from the line of credit, net of repayments, and $0.8 million from sales of stock under our employee stock option and stock purchase plans. Based on the factors discussed above, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. On March 30, 2000, we obtained a working capital line of credit from Foothill Capital, which provides us with up to $15.0 million of available credit subject to the conditions described below. Our line of credit is secured by substantially all of our 11 assets. Under the terms of the agreement borrowings bear interest at a rate of prime plus 0.75%. The amount that can be borrowed at any given time is determined by the balance of our qualifying accounts receivable. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. 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. These factors, in turn, may be adversely affected by doubts about our ability to continue as a going concern. We will be required to seek additional financing before we achieve positive cash flow or in order to comply with covenants under the line of credit. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. No assurance can be given that additional financing will be available, or that if available, it will be available on terms acceptable to our shareholders or us. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133," establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. We will adopt the standard no later than the first quarter of fiscal year 2001 and we are in the process of determining the impact that adoption will have on our consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (FIN 44)." The provisions of FIN 44 are effective July 1, 2000. The adoption of this standard did not impact the accounting for any stock-based awards granted to date. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In June 2000, the SEC issued SAB 101B that delayed the implementation date of SAB 101. We must adopt SAB 101 no later than in the fourth quarter of 2000. We have not determined the impact that SAB 101 will have on our financial statements. FUTURE PERFORMANCE AND RISK FACTORS Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below. LIQUIDITY 12 At September 30, 2000 we had cash and cash equivalents and short-term investments of approximately $1.0 million. During the years ended December 31, 1998 and 1999 and the nine months ended September 30, 2000, we incurred losses of approximately $9.1 million, $16.3 million and $30.7 million, respectively, and during those periods our cash and cash equivalents decreased by approximately $11.2 million, $5.3 million and $4.1 million, respectively, while our short-term debt increased by -0-, -0-, and $7.2 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue, as a going concern is dependent on our ability to raise additional capital or obtain continued financing in the near term and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we implemented a 20% across-the-board reduction in our workforce. Subsequently we reduced our headcount further. Additionally, we obtained a line of credit with Foothill Capital. However, the continued availability of this line of credit is subject to conditions that we may not be able to satisfy. Other sources of financing may not be available in the near future, or may be available only on terms that are highly dilutive to our stockholders. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. EVOLVING THIN CLIENT COMPUTING MARKET We derive substantially all of our revenues from the sale of thin client network computing products. Our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of our thin client computing hardware and software products. There can be no assurance that our thin client computing products will compete successfully with alternative desktop solutions or that the thin client computing model will be widely adopted in the rapidly evolving desktop computer market. To date, the market for thin client computing products has not lived up to industry expectations, due in part to competition from low-cost PC's. If new markets fail to develop for our thin client computing products our business could fail. OTHER RISK FACTORS The market for thin client products and similar products that facilitate access to data over networks is highly competitive. We experience significant competition from other network computer manufacturers, suppliers of personal computers and workstations and software developers. Competition within the thin client computing market has intensified over the past several years, resulting in price reductions and reduced profit margins. We expect this intense competition to continue, and there can be no assurance that we will be able to continue to compete successfully against current and future competitors as the desktop computer market evolves and competition increases. There is the possibility that competition in the future could come from companies not currently in the market or with greater resources than ours which could adversely effect our operating results. Concern over our long-term viability could affect potential customers' willingness to purchase products from us, which could adversely effect 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 13 our current financial strength could deter potential hires from seeking employment with us, and has resulted in the loss of a number of management and other employees over the past several months. Failure to attract and retain key personnel could have a material, adverse effect on our business, operating results or financial condition. The market price of our common stock has fluctuated significantly over the past several years and is subject to material fluctuations in the future in response to announcements concerning us or our competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by us or our competitors, general conditions in the computer industry, developments in the financial markets and other factors. In particular, shortfalls in our quarterly operating results from historical levels or from levels forecast by securities analysts could have an adverse effect on the trading price of the common stock. We may not be able to quantify such a quarterly shortfall until the end of the quarter, which could result in an immediate and adverse effect on the common stock price. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices for technology companies and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of our common stock. Our common stock is currently trading below $1.00 on the NASDAQ National Market (the "NNM"). Should the trading price continue to remain under $1.00, The NASDAQ Stock Market may take action to terminate the listing of our stock on the NNM. Such delisting would adversely affect the liquidity of our common stock in the public markets and could substantially increase the volatility of the trading price. 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. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future results will depend to a considerable extent on our ability to continuously develop, introduce and deliver in quantity new hardware and software products that offer our customers enhanced performance at competitive prices. The development and introduction of new products is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and timely completion of product development. Once a hardware product is developed, we must rapidly bring it into volume production, a process that requires accurate forecasting of customer requirements in order to achieve acceptable manufacturing costs. The introduction of new or enhanced products also requires us to manage the transition from older, displaced products in order to minimize disruption to customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. As we are continuously engaged in this product development and transition process, our operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The inability to finance important research and development projects, delays in the introduction of new and enhanced products, the failure of such products to gain market acceptance, or problems associated with new product transitions could adversely affect our operating results. We rely increasingly on independent distributors and resellers for the distribution of our products. In early 1996, we experienced significant returns of our software products from our distributors. Although controls have since been improved, 14 there can be no assurance that we will not experience some level of returns in the future. In addition, there can be no assurance that our distributors and resellers will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of our competitors. A reduction in sales effort or discontinuance of sales of our products by our distributors and resellers could lead to reduced sales and could adversely affect our operating results. In addition, there can be no assurance as to the continued viability or the financial stability of our distributors and resellers, our ability to retain our existing distributors and resellers or our ability to add distributors and resellers in the future. An increasing percentage of our revenue and accounts receivable are concentrated in a relatively small number of these distributors. We rely on contract manufacturers for virtually all of the manufacture of our thin client computing products. Our reliance on these contract manufacturers limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our suppliers are located abroad. Our reliance on these foreign suppliers subjects us to risks such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. We currently obtain all of the sub-assemblies used for our thin client computing products from a single supplier located in Thailand. Any significant interruption in the supply of products from this contractor would have a material, adverse effect on our business and operating results. Disruptions in the provision of components by our other suppliers, or other events that would require that we seek alternate sources of supply, could also lead to supply constraints or delays in delivery of our products and adversely affect its operating results. A number of components and parts used in our products, including certain semiconductor components, also are currently available from single or limited sources of supply. We have no long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components. We have generally been able to obtain adequate supplies of parts and components in a timely manner from existing sources under purchase orders and we endeavor to maintain inventory levels adequate to guard against interruptions in supplies. However, our inability to obtain sufficient supplies of these parts and components from existing suppliers or to develop alternate supply sources would adversely affect our operating results. Most 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. 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. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our market risk sensitive instruments as of September 30, 2000 are primarily exposed to interest rate risks. Because of the short-term maturity of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value. Effective January 2000, a majority of our international sales are denominated in Euros. These sales are subject to exchange rate fluctuations which could affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. The declining value of the euro against the dollar has had a significant impact on our results during 2000. 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 4.1 Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. Exhibit 4.2 Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. Exhibit 10.54 Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.1.) Exhibit 10.55 Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.2) Exhibit 27 Financial Data Schedule (b) The Company filed the following reports on Form 8-K during the three-month period ended September 30, 2000: None 16 NETWORK COMPUTING DEVICES, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Network Computing Devices, Inc. (Registrant) Date: November 14, 2000 By: /s/ Gregory S. Wood --------------------------- Gregory S. Wood Vice President, Chief Financial Officer and Secretary (Duly Authorized and Principal Financial and Accounting Officer) 17