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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
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NETWORK COMPUTING DEVICES, INC.
INDEX
<TABLE>
<CAPTION>
DESCRIPTION PAGE NUMBER
_______________________________________________________________________________ ___________
<S> <C>
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
</TABLE>
2
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NETWORK COMPUTING DEVICES, INC.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
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
============== ==============
</TABLE>
See accompanying notes.
3
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
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
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
4
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NETWORK COMPUTING DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
See accompanying notes.
5
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NETWORK COMPUTING DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial information of Network Computing
Devices, Inc. (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):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Purchased components and sub-assemblies $6,271 $9,825
Work in process 657 826
Finished goods 2,415 4,431
----- -----
$9,343 $15,082
----- ------
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
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%
</TABLE>
6
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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:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Adtcom 32% 31%
Tech Data 16% 17%
UCSI Distribution 15% 7%
Ingram Micro 12% 14%
</TABLE>
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
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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
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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
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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
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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
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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
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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
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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,
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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.
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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
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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: 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)
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