** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-Q**

|       |   |                                                                                                                                                                                                                                                                                                  |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý** |   | **Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                                  |
|       |   | **for the quarterly period ended  March 31, 2002**                                                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                  |
| **o**      |   | **Transition Report Pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                  |
|       |   | **for the transition  period from                       to                      .** |
|       |   |                                                                                                                                                                                                                                                                                                  |

 

**CommissionFile Number 0-20124**

 

**NETWORK COMPUTING DEVICES, INC.**

(Exact name of registrant as specified in its charter)

 

 
| **Delaware**                                                    |   | **77-0177255**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |                                 |
| **301  Ravendale Drive, Mountain View, California**             |   | **94043**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |

 

**(650) 694-0650**(Registrant’stelephone number, including area code)

 

**Common Stock, $0.001 par value**(Title of class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes ý       No o

 

As of April 30, 2002, 17,613,237 shares of the registrant’s CommonStock were outstanding.

 

** **

**NETWORK COMPUTING DEVICES, INC.**

 

**INDEX**

 
| *Description*                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |
| Cover  Page                                                                                                             |
|                                                                                                                    |
| Index                                                                                                                   |
|                                                                                                                    |
| Part I: Financial  Information                                                                                          |
|                                                                                                                    |
| Item 1: Financial  Statements                                                                                           |
|                                                                                                                    |
| Condensed  Consolidated Balance Sheets as of   March 31, 2002 (unaudited) and   December 31, 2001             |
|                                                                                                                    |
| Condensed  Consolidated Statements of Operations for the Three-Month Periods Ended March  31, 2002 and 2001 (unaudited) |
|                                                                                                                    |
| Condensed  Consolidated Statements of Cash Flows for the Three-Month Periods Ended March  31, 2002 and 2001 (unaudited) |
|                                                                                                                    |
| Notes  to Condensed Consolidated Financial Statements                                                                   |
|                                                                                                                    |
| Item  2: Management’s Discussion and Analysis of Financial Condition And Results of  Operations                    |
|                                                                                                                    |
| Item  3: Quantitative and Qualitative Disclosure About Market Risk                                                      |
|                                                                                                                    |
| Part II: Other Information                                                                                              |
|                                                                                                                    |
| Item 6: Exhibits  and Reports on Form 8-K                                                                               |
|                                                                                                                    |
| Signature                                                                                                               |

 

**NETWORK COMPUTING DEVICES, INC.**

**PartI:  Financial Information**

**Item1.  Financial Statements**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

*(in thousands)*

        
| **ASSETS**                                                                                                            |   |                             |   |                   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|------------------------|--------|
|                                                                                                                  |   | **(unaudited)  March 31,  2002** |   | **December 31,  2001** |   |
| Current assets:                                                                                                       |   |                             |   |                   |   |
| Cash                                                                                                                  |   | $                                | 615    |                   | $      | 484 |   |
| Accounts  receivable, net of allowances of $1,400 and $1,681as of March 31, 2002 and  December 31, 2001, respectively |   | 5,363                            |   | 7,298                  |   |
| Inventories                                                                                                           |   | 3,242                            |   | 4,930                  |   |
| Prepaid expenses  and other current assets                                                                            |   | 1,219                            |   | 928                    |   |
| Total current assets                                                                                                  |   | 10,439                           |   | 13,640                 |   |
|                                                                                                                  |   |                             |   |                   |   |
| Property and  equipment, net                                                                                          |   | 544                              |   | 649                    |   |
| Intangible  assets                                                                                                    |   | 1,512                            |   | 1,613                  |   |
| Other assets                                                                                                          |   | 150                              |   | 165                    |   |
| Total assets                                                                                                          |   | $                                | 12,645 |                   | $      | 16,067 |   |

 
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |   |    |       |    |       |
|--------------------------------------------------|--------|---------|------------|---------|------------|
|                                             |   |    | ** ** |    | ** ** |
| Current  liabilities:                            |   |    | ** ** |    | ** ** |
| Accounts payable                                 |   | $       | 4,957      |    | $          | 6,840 |   |
| Accrued expenses                                 |   | 2,741   |       | 2,378   |       |
| Deferred revenue                                 |   | 442     |       | 194     |       |
| Notes payable                                    |   | 4,390   |       | 6,506   |       |
| Accrued income  taxes                            |   | 76      |       | 72      |       |
| Total current  liabilities                       |   | 12,606  |       | 15,990  |       |
|                                             |   |    |       |    |       |
| Shareholders’  equity:                      |   |    |       |    |       |
| Preferred stock                                  |   | 3,500   |       | 3,500   |       |
| Common stock                                     |   | 18      |       | 18      |       |
| Capital in  excess of par                        |   | 62,380  |       | 62,380  |       |
| Accumulated  deficit                             |   | (65,859 | )          | (65,821 | )          |
| Total  shareholders’ equity                 |   | 39      |       | 77      |       |
| Total  liabilities and shareholders’ equity |   | $       | 12,645     |    | $          | 16,067 |   |

 

See accompanying notes

 

3

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**NETWORK COMPUTING DEVICES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

 
|                                   |   | **Three Months Ended March 31,** |   |
|----------------------------------------|--------|----------------------------------|--------|
|                                   |   | **2002**                         |   | **2001** |   |
| Net revenues:                          |   |                             |   |   |   |
| Hardware  products                     |   | $                                | 4,036  |   | $ | 8,679 |   |
| Software  products                     |   | 530                              |   | 787 |   |
| Services                               |   | 125                              |   | 1,013 |   |
| Total net revenues                     |   | 4,691                            |   | 10,479 |   |
| Cost of  revenues:                     |   |                             |   |   |   |
| Hardware  products                     |   | 3,762                            |   | 6,420 |   |
| Software  products                     |   | 168                              |   | 273 |   |
| Services                               |   | 53                               |   | 442 |   |
| Total cost of  revenues                |   | 3,983                            |   | 7,135 |   |
| Gross Margin                           |   | 708                              |   | 3,344 |   |
| Operating  expenses:                   |   |                             |   |   |   |
| Research and  development              |   | 636                              |   | 611 |   |
| Marketing and  selling                 |   | 1,951                            |   | 3,297 |   |
| General and  administrative            |   | 1,112                            |   | 1,112 |   |
| Gain on sale of  product line          |   | (3,450                           | )      | — |   |
| Business  restructuring                |   | 278                              |   | — |   |
| Total operating  expenses              |   | 527                              |   | 5,020 |   |
| Operating income  (loss)               |   | 181                              |   | (1,676 | ) |
| Interest  expense, net                 |   | (215                             | )      | (145 | ) |
| Loss before  income taxes              |   | (34                              | )      | 1,821 |   |
| Provision for  income taxes            |   | 4                                |   | 7 |   |
| Net loss                               |   | $                                | (38    | ) | $ | (1,828 | ) |
| Net loss per  share                    |   |                             |   |   |   |
| Basic and  diluted                     |   | $                                | (0.00  | ) | $ | (0.10 | ) |
| Shares used in  per share computations |   |                             |   |   |   |
| Basic and  diluted                     |   | 17,613                           |   | 17,613 |   |

 

See accompanying notes

 

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**NETWORK COMPUTING DEVICES, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

 
|                                                                |   | **Three Months Ended March 31,** |   |
|---------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                |   | **2002**                         |   | **2001** |   |
| Cash flow from  operations:                                         |   |                             |   |   |   |
| Net loss                                                            |   | $                                | (38    | ) | $ | (1,828 | ) |
| Reconciliation  of net loss to cash used in operations:             |   |                             |   |   |   |
| Depreciation                                                        |   | 127                              |   | 337 |   |
| Amortization of  intangible assets                                  |   | 101                              |   | 101 |   |
| Gain on sale of  product line                                       |   | (3,450                           | )      | — |   |
| Provision for  doubtful accounts, sales returns and allowances, net |   | 281                              |   | 728 |   |
| Changes in:                                                         |   |                             |   |   |   |
| Accounts  receivable, net                                           |   | 1,654                            |   | (839 | ) |
| Inventories                                                         |   | 1,688                            |   | 1,287 |   |
| Prepaid expenses                                                    |   | (291                             | )      | 1,094 |   |
| Accounts payable                                                    |   | (1,883                           | )      | (1,044 | ) |
| Accrued expenses                                                    |   | 363                              |   | (600 | ) |
| Deferred revenue                                                    |   | (52                              | )      | (711 | ) |
| Deferred gain on  sale of product line                              |   | 300                              |   | — |   |
| Income taxes  payable                                               |   | 4                                |   | (26 | ) |
| Cash provided by  (used in) operations                              |   | (1,196                           | )      | (1,501 | ) |
| Cash flows from  investing activities:                              |   |                             |   |   |   |
| Sales and  maturities of short-term investments                     |   | —                           |   | 339 |   |
| Changes in other  assets                                            |   | 15                               |   | 226 |   |
| Net proceeds  from sale of product line                             |   | 3,450                            |   | — |   |
| Property and  equipment purchases                                   |   | (22                              | )      | (17 | ) |
| Cash provided by  (used in) investing activities                    |   | 3,443                            |   | 548 |   |
| Cash flows from  financing activities:                              |   |                             |   |   |   |
| Proceeds from  line of credit                                       |   | 5,397                            |   | 9,727 |   |
| Principal  payments on line of credit                               |   | (7,513                           | )      | (10,873 | ) |
| Proceeds from  issuance of stock, net                               |   | —                           |   | 1,500 |   |
| Cash provided by  (used in) financing activities                    |   | (2,116                           | )      | 354 |   |
| Increase  (decrease) in cash and equivalents                        |   | 131                              |   | (599 | ) |
| Cash and  equivalents:                                              |   |                             |   |   |   |
| Beginning of  period                                                |   | 484                              |   | 1,419 |   |
| End of period                                                       |   | $                                | 615    |   | $ | 820 |   |

 

See accompanying notes.

 

5

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**NETWORK COMPUTING DEVICES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*Basis of Presentation*

The unaudited condensedconsolidated financial information of Network Computing Devices, Inc. and itswholly-owned subsidiaries (the “Company” or “NCD”) furnished herein reflectsall adjustments, consisting only of normal recurring entries, which in theopinion of management are necessary to fairly state our consolidated financialposition, results of operations and cash flows for the periods presented. Thefunctional currency for the Company is the U.S. dollar.  All significant intercompany balances andtransactions have been eliminated in consolidation. This Quarterly Report onForm 10-Q should be read in conjunction with the consolidated financialstatements and notes thereto included in our 2001 Annual Report on Form10-K.  The consolidated results ofoperations for the three-month period ended March 31, 2002 are not necessarilyindicative of the results to be expected for any subsequent quarter or for theentire year ending December 31, 2002.

*Sale of Windows-based Terminal Product Line*

In March 2002, theCompany sold its ThinSTAR Windows-based terminal product line (“ThinSTARProduct Line”) to Neoware Systems, Inc. (“Neoware”) for cash of up to $4.25million.  The assets sold consisted ofcustomer records, trademark rights and other intellectual property and contractrights used in the business of designing, developing and manufacturing theproducts sold. The Company recorded a net gain on this sale of approximately$3.45 million.  Included in the $4.25million purchase price is $300,000 that is being held in an escrow to satisfyany indemnification claims that may arise and $250,000 that is contingent uponNCD meeting specified sales targets for ThinSTAR products in Europe, the MiddleEast and Africa. In connection with the acquisition, Neoware received an optionto acquire substantially all of NCD’s European operations, which serve thosemarkets. The $300,000 held in escrow has been recorded as deferred revenueuntil such time when all conditions of the escrow agreement are satisfied. Alsorelated to the sale, eleven NCD sales and support personnel subsequently joinedNeoware.

*Going Concern Uncertainty*

The Company has incurredlosses of approximately $9.7 million for the year ended December 31, 2001 and arelatively insignificant loss ($38,000) for the three months ended March 31,2002. At March 31, 2002, the Company had a working capital deficit of $2.2million.   The Company’s ability tocontinue as a going concern is dependent upon its ability to obtain additionalfinancing and ultimately attain profitability.

The Company believes thatit will be required to obtain additional financing during the next three to sixmonths in order to sustain its current operations. The Company is pursuing bothbank financing and potential equity investors. Management believes that theCompany will require additional financing of approximately $1.0 million inorder to fund its operations during the next 12 months.  However, no assurance can be given thatadditional financing will be available, or that if available, will have termsacceptable to the Company or its shareholders. If adequate funds are not available to satisfy its capital requirements,the Company may be required to limit its operations significantly. NCD’sfinancial statements do not include any adjustments relating to therecoverability and classification of reported asset amounts or the amount andclassification of liabilities that might be necessary should NCD be unable tocontinue as a going concern.

*Revenue Recognition*

Hardware revenues consistprimarily of revenues from the sale of thin client terminals and relatedhardware. Hardware revenues are recognized when the products are shippedfollowing receipt of a valid purchase order. With respect to sales throughcertain international distributors, revenue is recognized when the shipment ismade available at a third party logistics center and the buyer is notified ofthe availability. The Company warrants its hardware products for defects inmaterials for a period of three years. During this warranty period, thecustomer may return defective product to the Company for repair or replacement,at the Company’s option.  In the eventthe Company is unable to repair or replace the defective product, it may refundthe customer the corresponding purchase price. The Company reduces revenues andcost of sales by an amount representing returns estimated by the Company basedupon historical experience factors. Warranty costs are accrued based upon actual units sold and historicalfailure rates.

 

6

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Software revenues consist primarily of revenues fromthe sale of (i) *NCD**ThinPATH*, (ii) *NCD**PC-Xware*, the Company’s thinclient software for PCs, and (iv) *NCDware*, the Company’s proprietary operatingsystem software. Software revenues are recognized when the software license issold and the software is delivered. The Company does not offer free softwareupgrades and because it****provides 30-day complimentary telephonesupport for software, there is no undelivered element related to softwaresales.

Service revenues are generated from the sale of hardware servicecontracts. The Company’s *Extended Warranty Program* extends theCompany’s three-year standard warranty, and its *Express Exchange Program*provides for the shipment of a replacement unit within 24 to 48 hours, uponcustomer request.  Service revenues arerecognized ratably over the term of the hardware service contract. TheCompany’s deferred revenue includes all unrecognized service revenue.

Estimated reductions torevenue for sales and marketing programs including special price quotes, priceprotection, promotions and marketing development activities and other volumerelated incentives are recorded throughout the period and fluctuate based on marketconditions.  If market conditionsdecline, then the Company may increase these incentives, which would result inadditional declines in revenue.  Theadjustments are charged to income in the period in which the information thatgave rise to the adjustment becomes known. An allowance for doubtful accounts is maintained for estimated lossesthat would result from the customers’ inability to make payments. Should thefinancial condition of the Company’s customers deteriorate, additions to theallowance account may be required, which would also result in additionaldecreases in revenue.

*Net Loss Per Share*

Basic net loss per shareis computed using the weighted-average number of common shares outstandingduring the period. Diluted net loss per share is computed using theweighted-average number of common shares and potential common shares from stockoptions and warrants outstanding, when dilutive, using the treasury stockmethod. At March 31, 2002 and 2001 there were 5,953,421 and 4,630,381 optionsand warrants outstanding, respectively. There were also 750,000 shares ofconvertible preferred stock (convertible into 7,500,000 shares of common stock)outstanding at March 31, 2002. Such options, warrants and convertible preferredshares could potentially dilute earnings per share (“EPS”) in the future, butthey were not included in the computation of diluted EPS because to do so wouldhave been antidilutive for those periods The Company’s loss per share for thethree months ended March 31, 2002 was less than $0.01.

*Inventories*

Inventories stated at thelower of standard costs, which approximates actual cost on a first-in,first-out basis, or market, consisted of (in thousands):
|                                     |   | **March 31, 2002** |   | **December 31, 2001** |   |
|------------------------------------------|--------|--------------------|--------|-----------------------|--------|
| Purchased  components and sub-assemblies |   | $                  | 5,306  |                  | $      | 5,838 |   |
| Work in process                          |   | 771                |   | 488                   |   |
| Finished goods                           |   | 2,846              |   | 4,360                 |   |
| Reserve for  obsolete inventory          |   | (5,681             | )      | (5,756                | )      |
|                                     |   | $                  | 3,242  |                  | $      | 4,930 |   |

 

 

7

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*Interestand tax payments*

Interest payments, primarilyinterest on notes payable, were approximately $215,000 and $145,000 for thethree months ended March 31, 2002 and 2001, respectively.  Income tax payments, primarily taxes due inforeign jurisdictions, were approximately $0 and $36,000 for the three monthsended March 31, 2002 and 2001, respectively.

*Operating Segments and Major Customers*

The company hasone operating segment, sales of thin client hardware and software.

The percentages oftotal net revenues represented by sales to major customers are as follows:
|                        |   | **Three Months Ended March 31** |   |
|-----------------------------|--------|---------------------------------|--------|
|                        |   | **2002**                        |   | **2001** |   |
| GTS  Gral *                 |   | 15                              | %      | 9 | % |
| Ingram  Micro               |   | 13                              | %      | 2 | % |
| AKS  Information Systems AB |   | 11                              | %      | — |   |
| Alternative  Technology     |   | 10                              | %      | 1 | % |
| Tech  Data                  |   | 4                               | %      | 19 | % |
| Adtcom                      |   | 6                               | %      | 15 | % |

 

----

*      GTS Gral is a European reseller substantially owned by adirector of the Company.  At March 31,2002, the Company had approximately $1.2 million of accounts receivable fromGTS Gral.

 

A substantial portion of the Company’s sales is to customers locatedoutside the United States, primarily in Europe.  International revenues represent 57% and 43% of total revenue ofthe Company for each of the quarters ended March 31, 2002 and 2001.

*RestructuringCharges*

During the first quarter of 2002, the Companyundertook restructuring actions involving a general reduction in workforceaffecting all classes of employees and discontinuing development activitiesrelated to its ThinSTAR Product Line. Approximately 30 employees wereterminated during the quarter. In connection with these actions, the Company recordedrestructuring charges of $0.3 million consisting of expected cash charges foremployee separation costs. Approximately $0.2 million remains unpaid and isincluded in accrued liabilities as of March 31, 2002. In addition, the Companyis currently in the process of consolidating all of its U.S. operations intothe Portland, Oregon facility and is also attempting to identify a subtenantfor its Mountain View facility, which will be substantially vacated in May2002.  The Company will continue to beobligated for the rent payments under the Mountain View lease until such timethat a subtenant is found. Costs associated with this relocation have not beenrecognized as of the quarter ended March 31, 2002.  The total cost committed by the Company through the end of thelease term (February 2003) is approximately $512,000. Management expects therestructuring plan to be completed in the third quarter of 2002.

*NotesPayable*

In October 2001, a line of credit from Silicon ValleyBank (“SVB”) was obtained.  This line ofcredit entitled the Company to borrow amounts up to 60% of domestic accountsreceivable and up to 60% of foreign accounts receivable from which the Companyhad secured credit insurance, in each case subject to certain eligibilityrequirements and compliance with specified financial covenants. The line ofcredit was secured by substantially all of the Company’s assets and boreinterest at the rate of prime plus 2%. In connection with the line of credit,the Company issued warrants to SVB to purchase 650,000 shares of its CommonStock at a price of $.50 per share, expiring on October 29, 2006.

 

8

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The line of credit wasterminated in March 2002, and all amounts outstanding thereunder, totalingapproximately $1.6 million were repaid at the time of the sale of the ThinSTARProduct Line. As of December 31, 2001, the total amount available andoutstanding under the line of credit was $2,116,000.

TheCompany’s line of credit with Foothill Capital was terminated when the line ofcredit was obtained from SVB. As of the date of termination, the total amountoutstanding under the line of credit was approximately $0.8 million andborrowings bore interest at a rate of prime plus 6.75%, including a covenantdefault rate of 4%, for a total of 12.75%.

In August 2000, anagreement was reached with SCI to convert $3.3 million of accounts payable toSCI into a 13-month convertible note (the “Convertible Note”). The ConvertibleNote bore interest at 6.5% per annum and each $1.00 of the outstandingprincipal was convertible into one share of Common Stock at any time during theterm of the Convertible Note at $.75 per shares.  In August 2001, the Convertible Note was extended for an additionalyear (due September 30, 2002)) with an increase in the interest rate to 8% perannum, computed on the unpaid balance beginning October 1, 2001, and theconversion price was reduced to $.62 per share.

In October 2001,the Company concluded an agreement with SCI to convert an additional $1.0 millionof accounts payable to them into a note which matures on September 29, 2002 andbears interest at a rate of 8% per annum. The note is not convertible.

 

9

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**Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

**Overview**

***This discussion includes forward-looking statements,including but not limited to statements with respect to our future financialperformance, operating results, plans and objectives. Actual results may differmaterially from those currently anticipated depending upon a variety offactors, including those described below under the sub-heading, “FuturePerformance and Risk Factors.”***

***The following discussion should be read in conjunction withthe unaudited condensed consolidated interim financial statements and notesthereto included in Part I—Item 1 of this Quarterly Report on Form 10-Q, andthe audited consolidated financial statements and notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended December 31, 2001, contained in our 2001 AnnualReport on Form 10-K.***

Historically, NCD hasprovided thin client hardware and software delivering simultaneous,high-performance, easy-to-manage and cost effective access to all of theinformation on enterprise intranets and the Internet from thin client, UNIX andPC desktops. Our hardware product lines have included the *NCD ThinSTAR* line ofWindows-based terminals (“ThinSTAR Product Line”) and the *NCD NC900* network computers.On the software side we offered the *NCD ThinPATH* family of client and serversoftware, developed to enhance the connectivity, management and features of theNCD thin clients as well as PCs in accessing information and applications onWindows servers. Our thin clients, *NCD ThinPATH* software, and installationand support services have been a combination delivering a fully integrateddesktop solution to companies seeking a low-cost, easy to manage, simple touse, high performance user experience. Since introducing our first product in1989, we have installed over 1,000,000 thin clients worldwide.

In March 2002, we soldour ThinSTAR Product Line to Neoware Systems, Inc. (“Neoware”) for cash of upto $4.25 million.  The assets sold consistedof customer records, trademark rights and other intellectual property andcontract rights used in the business of designing, developing and manufacturingthe products sold. We recorded a net gain on this sale of approximately $3.45million.  Included in the $4.25 millionpurchase price is $300,000 that is being held in an escrow to satisfy anyindemnification claims that may arise and $250,000 that is contingent upon NCDmeeting specified sales targets for ThinSTAR products in Europe, the Middle Eastand Africa. In connection with the acquisition, Neoware received an option toacquire NCD’s European operations which serve those markets. The $300,000 heldin escrow has been recorded as deferred revenue until such time when allconditions of the escrow agreement are satisfied.  Also related to the sale, eleven NCD sales and support personnelsubsequently joined Neoware.

Going forward, we willfocus on our worldwide *NCD ThinPATH* software business whilecontinuing to market our *NCD NC900* Network Computer product lineworldwide.  In addition, the ThinSTARProduct Line will continue to be available from us in Europe the Middle Eastand Africa under an OEM agreement with Neoware.  As a result, our European customer offerings for these marketswill be essentially unchanged.

**Recent Developments**

*Debt Financing Activities*

In October 2001, we obtained a line of credit from Silicon Valley Bank(“SVB”).  This line of credit entitledus to borrow amounts up to 60% of our domestic accounts receivable and up to60% of our foreign accounts receivable from which we had secured creditinsurance, in each case subject to certain eligibility requirements andcompliance with specified financial covenants. The line of credit was securedby substantially all of our assets and bore interest at the rate of prime plus2%. In connection with the line of credit, we issued warrants to SVB topurchase 650,000 shares of our Common Stock at a price of $.50 per share,expiring on October 31, 2006.  In connectionwith the sale of our ThinSTAR Product Line, the line of credit was terminatedin March 2002, and all amounts outstanding thereunder, totaling approximately$1.6 million were repaid. As of December 31, 2001, the total amount availableand outstanding under the line of credit was $2,116,000.

In March 2000 we obtained a line of credit fromFoothill Capital.  This line of creditprovided us with up to $15 million in credit, subject to certain conditionsrelated to our accounts receivable from time to time.  As a result of these conditions, the actual amount that wasavailable under the line of credit ranged from $.20 million to $6.0million.  Borrowings under the line ofcredit were secured by substantially all of our assets and initially boreinterest at a rate of prime plus 0.75%. The line of

10

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credit was amended several times prior to itstermination.  In May 2001, the line ofcredit was amended to establish new financial covenants and eliminate themaximum ratio of borrowings against foreign accounts receivable.  Additionally, in May 2002, the line ofcredit was amended to modify the maturity date of the loan from March 30, 2003to August 15, 2001, raise the interest rate from prime plus 0.75% to prime plus2.75% and waive the early termination fee. As of June 30, 2001, we were in default of the minimum EBITDA (EarningsBefore Income Taxes, Depreciation and Amortization) covenant of $38,000 for thethree-month period ended June 30, 2001. In July 2001, the line of credit was further amended to reduce themaximum amount of the credit line from $15.0 million to $3.5 million.  In August 2001, the maximum credit line wasfurther reduced to $3.25 million and the maturity date was extended toSeptember 15, 2001 to provide additional time for SVB to complete its duediligence work and make a final determination regarding its preliminaryproposal to extend a new revolving credit facility to us.

Ourline of credit with Foothill Capital was terminated when we obtained our lineof credit from SVB. Asof the date of termination, the total amount outstanding under the line ofcredit was approximately $0.8 million. Prior to its termination, our borrowingsduring the third quarter of 2001 bore interest at a rate of prime plus 6.75%,which included a covenant default rate of 4% for a total of 12.75% at September30, 2001.

In August 2000, weconcluded an agreement with SCI to convert $3.3 million of our accounts payableto SCI into a 13-month convertible note (the “Convertible Note”).  The Convertible Note bore interest at 6.5%per annum and each $1.00 of the outstanding principal was convertible into oneshare of our Common Stock at any time during the term of the ConvertibleNote.  In August 2001, the $3.3 millionConvertible Note issued to SCI was extended for an additional year with anincrease in the interest rate to 8% per annum, computed on the unpaid balancebeginning October 1, 2001, and the conversion price was reduced to $.62 pershare.

In October 2001,we concluded an agreement with SCI to convert an additional $1.0 million of ouraccounts payable to them into a note, which matures on September 29, 2002 andbears interest at a rate of 8% per annum. This note is not convertible.

*Equity Financing Activities*

In October 2001,we received $2,000,000 in capital through a private placement of 530,000 sharesof Series C Convertible Preferred Stock (“Series C Preferred”). The Series CPreferred shares were issued on November 13, 2001. The Series C Preferredshares are entitled to dividends of $.23 per annum, when and if declared by theBoard of Directors and accrue semi-annually if not paid. No dividends have beendeclared.  Each share of the Series CPreferred is convertible into ten shares of Common Stock at the election of theholder, subject to the amendment of the Company’s Certificate of Incorporationto increase the number of authorized shares of Common Stock by not less than5,300,000 shares.  In connection withthis private placement, the purchaser also received warrants to purchase1,200,000 shares of Common Stock at $.50 per share.  The warrants expire on August 29, 2006.

*Restructuring Activities*

During the first quarter of 2002, we undertook restructuring actionsinvolving a general reduction in workforce affecting all classes of employeesand discontinuing development activities related to our ThinSTAR ProductLine.  Approximately 30 employees wereterminated during the quarter.  Inconnection with these actions, we recorded restructuring charges of $0.3million for employee separation costs. Approximately $0.2 million remainsunpaid and is included in accrued liabilities as of March 31, 2002. Inaddition, we are currently in the process of consolidating all of our U.S.operations into the Portland, Oregon facility. We are also attempting toidentify a subtenant for our Mountain View facility, which will besubstantially vacated in May 2002.  Wewill continue to be obligated for the rent payments under the Mountain Viewlease until such time that a subtenant is found. Costs associated with thisrelocation have not been recognized as of the quarter ended March 31, 2002. Thetotal cost committed by the Company through the end of the lease term (February2003) is approximately $512,000. Management expects the restructuring plan tobe completed by the third quarter of 2002.

*OtherRecent Developments*

In January 2002, weentered into a Settlement Agreement with Pencom Systems, Inc., a formercustomer who filed a lawsuit against us in March 2001, in the Superior Court ofthe State of California, County of Santa Clara, alleging among other things,that the products we delivered pursuant to our sales contract did not performas required by the contract.  Thecomplaint sought monetary damages in excess of $250,000. Pursuant to thesettlement agreement we agreed to pay Pencom $90,000 in the form of apromissory note payable over 18 months beginning in April 2002.  The note bears no interest. As part of thesettlement, we also agreed to issue the customer 75,000 shares of our CommonStock.

 

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**Resultsof Operations**

***TotalNet Revenues***

Total net revenues forthe first three months of 2002 were $4.7 million, a decrease of 55% from 2001first quarter net revenues of $10.5 million. Sales to GTS Gral, a relatedparty, and Ingram Micro accounted for 15% and 13%, respectively, of netrevenues in the first quarter of 2002. Sales to Tech Data and Adtcom accounted for 19% and 15%, respectively,of net revenues in the first quarter of 2001. The decrease in revenues is explained below.

***HardwareRevenues***

Hardware revenues consist primarily of revenues from the sale of thinclient terminals and related peripheral equipment. Hardware revenues were $4.0million for the first three months of 2002, a decrease of 54% from $8.7 millionfor the first three months of 2001. The decrease in hardware revenues was dueto lower customer demand further aggravated by lower sales to distributors aswe strove to reduce channel inventories of our *NCDThinSTAR* units prior to the sale of that product line to Neoware inMarch 2002.

***SoftwareRevenues***

Software products thatare included in revenue for the periods presented are (i) *NCD**ThinPATH*, (ii) *NCD**PC-Xware*,our thin client software for PCs, and (iii) *NCDware*, our proprietary operating systemsoftware. Revenues from software were $0.5 million for the first three monthsof 2002, a decrease of 38% from $0.8 million for the first three months of2001.  The decrease in software revenuesresulted from the drop in sales of our related hardware products.

***Service Revenues***

Services revenues aregenerated from the sale of hardware service contracts.  Service revenues were $0.1 million for thefirst three months of 2002, a decrease of 90% from $1.0 million for the firstthree months of 2001. Service revenues have declined as a result of the declinein the purchase or renewal of long-term service contracts, as more customersare opting to purchase spare units with their initial orders to serve asreplacements while damaged units are returned to us for repair under warranty.

***GrossMargin on Hardware Revenues***

Gross margin on hardwarerevenues represents revenues less cost of revenues related to hardwareproducts. Our gross margins on hardware revenues were $0.3 million and $2.3million for the first three months of 2002 and 2001, respectively. Our grossmargin percentages on hardware revenues were 7% and 26% for the first threemonths of 2002 and 2001, respectively. The reduction in hardware gross margins was primarily attributable to asignificant increase in costs other than our direct standard productcosts.  Low volume resulted in about$370,000 of unabsorbed production and distribution costs, and increases in ourhardware inventory reserves amounted to $600,000.  Without these two large expenses, our gross margin percentages onhardware revenues would actually have increased over those of the prior year.

***GrossMargin on Software Revenues***

Gross margin on softwarerevenues represents revenues less cost of revenues related to softwareproducts. Our gross margins on software revenues were $0.4 million and $0.5million for the first three months of 2002 and 2001, respectively.  This decrease was across all productlines.  The reduction in gross margindollars on software revenues was due to lower volume as our gross margin percentageson that revenue stream actually increased from 65% for the first three monthsof 2001 to 68% for the first three months of 2002.

***Gross Margin on Service Revenues***

Gross margin on servicerevenues represents revenues less cost of revenues related to services. Ourgross margins on service revenues were $0.1 million and $0.6 million for thefirst three months of 2002 and 2001, respectively.    The reduction in gross margin dollars on service revenues wasdue to lower volume as gross margin percentages on service revenues increasedmodestly from 56% for the first three months of 2001 to 58% for the first threemonths of 2002.

 

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***Research and Development Expenses***

Research and development(“R&D”) expenses consist principally of personnel expenses associated withemployees engaged in hardware and software R&D. R&D expenses were $0.6million for both the first three months of 2002 and 2001.

***Marketingand Selling Expenses***

Marketing and sellingexpenses consist principally of personnel expenses associated with our U.S. andEuropean sales force, as well as a limited amount of marketing and promotionalmaterials. Marketing and selling expenses were $2.0 million and $3.3 millionfor the first three months of 2002 and 2001, respectively representing adecrease of 41%. The decrease in 2002 resulted from the implementation of ourcost reduction plans, including the closure of a number of our U.S. and foreignsales offices and a significant reduction in our marketing programs.

***Generaland Administrative Expenses***

**Generaland administrative expenses (“G&A”) consist of executive, financing, humanresources personnel expenses and expenses associated with outside professionalservices.  G&A expenses were $1.1million for both the first three months of 2002 and 2001. G&A expenses alsoinclude $101,000 in amortization expense for intangible assets for the firstthree months of both 2002 and 2001.**

***InterestExpense, Net***

Interest expense, net,was $215,000 and $145,000 for the first three months of 2002 and 2001,respectively. The change reflects a $70,000 increase in interest expense due toloan fees of $50,000 paid to SVB, the write off of prepaid loan fees ofapproximately $25,000 related to the terminated loan with SVB and the interestcharges on the issuance of a $1.0 million note payable to SCI in September2001.

***Income Taxes***

**The provision for income taxes for the first three monthsof 2002 is for income taxes in foreign jurisdictions.  We continue to generate tax net operating loss carryforwards forthe United States federal and state jurisdictions.  However, no deferred tax assets have been recognized in respectof these carryforwards because continued losses create uncertainty about ourability to generate sufficient taxable income to realize the related benefits.**

**Financial Condition**

At March 31, 2002, we hadtotal assets of $12.6 million, representing a decrease from $16.1 million atDecember 31, 2001. The change in total assets reflects decreases in accountsreceivable of $0.3 million and inventory of $1.7 million. In the first quarterof 2002, accounts payable decreased by $1.9 million as a result of applying aportion of the proceeds from the sale of our ThinSTAR Product Line to reduceour accounts payable.  Reduced accountsreceivable and inventory are a result of our reduced operations.

***CapitalRequirements***

Capital equipmentspending requirements for the remainder of 2002 is estimated at approximately$50,000.

***Liquidity***

As of March 31, 2002, wehad cash totaling $0.6 million and $4.4 million in notes payable, consisting of$4.3 million in notes payable to SCI and $0.1 million in other debt. We alsohave negative working capital of approximately $2.2 million. Cash used inoperations was $0.9 million in the first three months of 2002 compared to cashused in operations of $1.5 million for first three months of 2001.  In the first three months of 2002, the netloss of $38,000 was offset by decreases in accounts receivable of $1.7 million,inventories of $1.7 million, accounts payable of $1.9 million and increases ofprepaid expenses of $0.4 million.  Inthe first three months of 2001, a net loss of $1.8 million was offset by adecrease in inventories of $1.3 million, prepaid expenses of $1.1 million,accounts payable of $1.0 million, accrued expenses of $0.7 million and deferredrevenues of $0.7 million.

 

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Cash provided byinvesting activities of $3.1 million in the first three months of 2002 resultedprincipally from the net proceeds from the sale of the ThinSTAR Product Line of$3.7 million.  Cash provided byinvesting activities of $0.5 million in the first three months of 2001 resultedfrom the maturity of short-term investments of $0.3 million and a reduction inother assets of $0.2 million.

Cash used in financingactivities of $2.1 million in the first three months of 2002 reflects theproceeds of $5.4 million from borrowings under the line of credit and aprincipal reduction on the line of credit of $7.5 million. Cash proceeds fromfinancing activities of $.4 million in the first three months of 2001 resultedfrom the net reduction of the outstanding balance under our line of credit of$1.1 million offset by the receipt of $1.5 million through the sale ofconvertible preferred stock.

On October 29, 2001, wesecured a $5.0 million line of credit with Silicon Valley Bank (“SVB”). InMarch 2002, we paid off this line of credit with proceeds from the sale of ourThinSTAR Product Line.  The line was securedby substantially all of our assets and bore interest at a rate of prime plus2%. Based on terms of the financing agreement and assuming that we were incompliance with specified financial covenants, we could borrow up to 60% of ourdomestic accounts receivable and up to 60% of our foreign accounts receivablein which we had secured credit insurance. As of December 31, 2001, the totalamount available and outstanding to SVB was $2,116,000. In January 2002, weviolated a covenant with SVB, which stopped further advances until a new agreementwas concluded which reduced the maximum amount available to $2.0 million fromthe existing $5.0 million and reduced the advance rate on eligible domestic andforeign accounts receivable to 50% from the original 60%. Also, in connectionwith this line of credit, we issued warrants to SVB to purchase 650,000 sharesof our Common Stock at a price of $.50 per share. The warrants expire onOctober 29, 2006.

Going forward, we believethat we will be required to obtain additional financing during the next threeto six months in order to sustain our current operations. We are diligentlypursuing both bank financing and potential equity investors. Furthermore, webelieve that we will require additional financing of approximately $1.0 millionin order to fund our operations during the next 12 months. However, noassurance can be given that additional financing will be available, or that ifavailable, it will be available on the terms acceptable to our shareholders orus.  If adequate funds are not availableto satisfy our short-term or long-term capital requirements we may be requiredto limit our operations significantly. Our financial statements do not includeany adjustments relating to the recoverability and classification of reportedasset amounts or the amount and classification of liabilities that might benecessary should we be unable to continue as a going concern.

Our Board of Directorshas not declared any dividends on our Series B or Series C PreferredShares.  Accumulated dividends on thoseshares are approximately $163,000 at March 31, 2002.

***RecentAccounting Pronouncements***

In June 2001, theFinancial Accounting Standards Board (“FASB”) finalized Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”),and No. 142, “Goodwill and Other Intangible Assets” (“SFAS 141”). SFAS 141requires the use of the purchase method of accounting and prohibits the use ofthe pooling-of-interests method of accounting for business combinationsinitiated after June 30, 2001. SFAS 141 also requires that we recognizeacquired intangible assets apart from goodwill if the acquired intangibleassets meet certain criteria. SFAS 141 applies to all business combinationsinitiated after June 30, 2001 and for purchase business combinations completedon or after July 1, 2001. It also requires, upon adoption of SFAS 142 that wereclassify the carrying amounts of intangible assets and goodwill based on thecriteria in SFAS 141.

SFAS 142 requires,among other things, that companies no longer amortize goodwill, but insteadtest goodwill for impairment at least annually. In addition, SFAS 142 requiresus to identify reporting units for the purposes of assessing potential futureimpairments of goodwill, reassess the useful lives of other existing recognizedintangible assets, and cease amortization of intangible assets with anindefinite useful life. An intangible asset with an indefinite useful lifeshould be tested for impairment in accordance with the guidance in SFAS 142.SFAS 142 is required to be applied in fiscal years beginning after December 15,2001 to all goodwill and other intangible assets recognized at that date,regardless of when those assets were initially recognized. We are also requiredto reassess the useful lives of other intangible assets within the firstinterim quarter after adoption of SFAS 142. As of March 31, 2002, allintangible assets consist of customer lists, non-compete agreements, workforceand technology and continue to be amortized over 7 years.  We have no recorded goodwill at March 31,2002.  In addition, we were not affectedfinancially from our adoption of SFAS 141 and 142.

In June 2001, FASBissued SFAS No. 143, “Accounting for Asset Retirement Obligations.”  SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.  SFAS No.143 requires that any legal obligation related to the retirement of long-livedassets be quantified and recorded as a liability with the associated assetretirement cost capitalized on the balance sheet in the period it is incurredwhen a reasonable estimate of the fair value of the liability can be made.

 

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In August 2001, FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” (“SFAS 144”).  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 provides a single, comprehensive accounting model for impairment anddisposal of long-lived assets and discontinued operations.

We expect thatSFAS Nos. 143 and 144 will be adopted on their effective dates and that theadoption will not result in any material effects to our financial statements.

**As of March 31, 2002, the net carrying amount ofintangibles remaining after the purchase of the Network Displays Business unitof Tektronix in December 1998 was approximately $1.5 million. We believe thereis no impairment at March 31, 2002 and will continue to monitor the value.**

**Future Performance andRisk Factors**

***Our future business, operating results and financial conditionare subject to various risks and uncertainties, including those describedbelow.***

***Liquidity***

**Asof March 31, 2002, we had cash totaling $0.6 million and $4.4 million in notespayable, consisting of $4.3 million in notes payable to SCI and $0.1 million inother debt.**

**Goingforward, we believe that we will be required to obtain additional financingduring the next three to six months in order to sustain our current operations.We are pursuing both bank financing and potential equity investors.Furthermore, we believe that we will require additional financing ofapproximately $1.0 million in order to fund our operations during the next 12months. However, no assurance can be given that additional financing will beavailable, or that if available, it will be available on the terms acceptableto our shareholders or us.  If adequatefunds are not available to satisfy our short-term or long-term capitalrequirements we may be required to limit our operations significantly. Ourfinancial statements do not include any adjustments relating to therecoverability and classification of reported asset amounts or the amount andclassification of liabilities that might be necessary should we be unable tocontinue as a going concern.**

***Competition***

The market for thinclient products and similar products is characterized by rapidly changingtechnology and by evolving industry standards. We experience significantcompetition from other thin client manufacturers, from suppliers of personalcomputers and workstations and from software developers.

In the ThinSTARWindows-based terminal market, our major competition has come from WyseTechnology, Inc., a larger company with well-established channels, and, morerecently, Compaq Computer Corp.  As afull-fledged PC and server manufacturer, Compaq has been able to “bundle” itsthin clients with other products and services to gain an advantage in certainlarger sales opportunities.  To compete,we have relied heavily on our integrated hardware and software offerings, ournetworking core competency and our recognized product reliability.  We also formed marketing partnerships withother important desktop vendors. As competition in this market has intensified,we have responded by narrowing our focus and selling our Windows-based terminalproduct line to Neoware.

Our *NCD ThinPATH* family ofproducts faces competition primarily from other terminal vendors thatcontinually strive to enhance their network management software offerings.While we believe that our product features give us a competitive advantage, webelieve the gap is narrowing and thus are seeking to add capabilities to ourproducts to maintain our competitive edge.

*NCD PC-Xware* software products face direct competition fromseveral software companies that offer similar products, including HummingbirdCommunications, Ltd., a Canadian company, Visionware, a subsidiary of The SantaCruz Operation, Inc., NetManage, Inc., and Walker, Ritchie, Quinn, aprivately-held company.

*NCD NC900* family of products faces direct competition from PCsthat run a local X server, such as from Hummingbird Communications, Ltd.

 

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In general, competitionin the thin client computing market has intensified over the past few years,resulting in price reductions, reduced profit margins and increased efforts tomaintain market share, which have adversely affected our operating results. Inaddition, intense competition from alternative desktop computing products,particularly PCs, has slowed the growth of the thin client computing market. Weexpect this intense competition to continue. There can be no assurance that wewill be able to continue to compete successfully against current and futurecompetitors as the desktop computer market evolves and competition increases.

***Fluctuationsin Operating Results***

Our operating resultshave varied significantly, particularly on a quarterly basis, as a result of anumber of factors, including general economic conditions affecting industrydemand for computer products, the timing and market acceptance of new productintroductions by us and our competitors, the timing of significant orders fromand shipments to large customers, periodic changes in product pricing anddiscounting due to competitive factors, and the availability and pricing of keycomponents, such as DRAMs, video monitors, integrated circuits and electronicsub-assemblies, some of which require substantial order lead times. Ouroperating results may fluctuate in the future as a result of these and otherfactors, including our success in developing and introducing new products, ourproduct and customer mix, licensing costs, the level of competition which weexperience and our ability to develop and maintain strategic businessalliances.

We operate with arelatively small backlog. Revenues and operating results therefore generallydepend on the volume and timing of orders received, which are difficult toforecast and which may occur disproportionately during any given quarter oryear. Our expense levels are based in part on our forecast of future revenues.If revenues are below expectations, our operating results may be adverselyaffected. We have experienced a disproportionate amount of shipments occurringin the last month of our fiscal quarters. This trend increases the risk ofmaterial quarter-to-quarter fluctuations in our revenues and operating results.

***NewProduct Development and Timely Introduction of New and Enhanced Products***

The markets for ourproducts are characterized by rapidly changing technologies, evolving industrystandards, frequent new product introductions and short product life cycles.Our future results will depend to a considerable extent on our ability tocontinuously develop, introduce and deliver in quantity new hardware andsoftware products that offer our customers enhanced performance at competitiveprices. The development and introduction of new products is a complex anduncertain process requiring substantial financial resources and high levels ofinnovation, accurate anticipation of technological and market trends and thesuccessful and timely completion of product development. Once a hardwareproduct is developed, we must rapidly bring it into volume production, aprocess that requires accurate forecasting of customer requirements in order toachieve acceptable manufacturing costs. The introduction of new or enhancedproducts also requires us to manage the transition from older, displacedproducts in order to minimize disruption to customer ordering patterns, avoidexcessive levels of older product inventories and ensure that adequate suppliesof new products can be delivered to meet customer demand. As we arecontinuously engaged in this product development and transition process, ouroperating results may be subject to considerable fluctuation, particularly whenmeasured on a quarterly basis. The inability to finance important research anddevelopment projects, delays in the introduction of new and enhanced products,the failure of such products to gain market acceptance, or problems associatedwith new product transitions could adversely affect our operating results.

***Relianceon Independent Distributors and Resellers***

We rely significantly onindependent distributors and resellers for the distribution of our products.However, there can be no assurance that our distributors and resellers willcontinue their current relationships with us or that they will not give higherpriority to the sale of other products, which could include products of ourcompetitors. A reduction in sales effort or discontinuance of sales of ourproducts by our distributors and resellers could lead to reduced sales andcould adversely affect our operating results. In addition, there can be noassurance as to the continued viability or the financial stability of ourdistributors and resellers, our ability to retain our existing distributors andresellers or our ability to add distributors and resellers in the future.

***Relianceon Independent Contractors***

We rely on independentcontractors for virtually all of the manufacture of our thin client computingproducts and accessories. Our reliance on these independent contractors limitsour control over delivery schedules, quality assurance and product costs. Inaddition, a number of our independent suppliers are located abroad. Our relianceon these foreign suppliers subjects us to risks such as the imposition ofunfavorable governmental controls or other trade restrictions, changes intariffs and political instability. We currently obtain all of our thin clientcomputing products from a single supplier located in Thailand. Any

 

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significant interruptionin the supply of products from this contractor would have a material, adverseeffect on our business and operating results. Disruptions in the provision ofcomponents by our other suppliers, or other events that would require us toseek alternate sources of supply, could also lead to supply constraints ordelays in delivery of our products and adversely affect our operating results.However, the manufacturing process could be relocated to one of their otherfactories if necessary within a few weeks.

A number of componentsand parts used in our products, including certain semiconductor components,also are currently available from single or limited sources of supply. We haveno long-term purchase agreements or other guaranteed supply arrangements withsuppliers of these single or limited source components. We have generally beenable to obtain adequate supplies of parts and components in a timely mannerfrom existing sources under purchase orders and endeavor to maintain inventorylevels adequate to guard against interruptions in supplies. However, ourinability to obtain sufficient supplies of these parts and components fromexisting suppliers or to develop alternate supply sources would adverselyaffect our operating results.

***International Sales***

**Beginningin 2001, all of our international sales have been denominated in U.S.dollars.  Prior to this date,substantially all of our international sales were denominated in Euros. Thesesales were subject to exchange rate fluctuations, which adversely affected ouroperating results. International sales and operations may also be subject torisks such as the imposition of governmental controls, export licenserequirements, restrictions on the export of technology, political instability,trade restrictions, changes in tariffs and difficulties in staffing andmanaging international operations and managing accounts receivable. Inaddition, the laws of certain countries do not protect our products andintellectual property rights to the same extent as the laws of the UnitedStates. There can be no assurance that these factors will not have an adverseeffect on our future international sales and, consequently, on our operatingresults.**

***Volatilityof Stock Price***

On March 20, 2001, ourCommon Stock was delisted from the Nasdaq National Market due to the failure tomaintain a minimum bid price of $1.00 per share. Our Common Stock is nowtrading on the OTC Bulletin Board, which is considered to be less liquid andmore volatile than the Nasdaq National Market.

The market price of ourcommon stock has fluctuated significantly over the past several years and issubject to material fluctuations in the future in response to announcementsconcerning us or our competitors or customers, quarterly variations inoperating results, announcements of technological innovations, the introductionof new products or changes in product pricing policies by us or ourcompetitors, general conditions in the computer industry, developments in thefinancial markets and other factors. In particular, shortfalls in our quarterlyoperating results from historical levels or from levels forecast by securitiesanalysts 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 thequarter, which could result in an immediate and adverse effect on the commonstock price. In addition, the stock market has, from time to time, experiencedextreme price and volume fluctuations that have particularly affected themarket prices for technology companies and which have been unrelated to theoperating performance of the affected companies. Broad market fluctuations ofthis type may adversely affect the future market price of our common stock.

 

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**Item 3.  Quantitativeand Qualitative Disclosure About Market Risk**

We are exposed tointerest rate risks for our bank and vendor borrowing arrangements. Because ofthe short-term maturities of these instruments, a 100 basis point change inrelated interest rates would not have a material effect on their fair value.

Effective January 2001all of our international sales are denominated in U.S. dollars. We have minimalEuro denominated accounts receivable as of March 31, 2002 which are subject toexchange rate fluctuations when the customer pays in Euros. This will affectour operating results negatively or positively, depending on the value of theU.S. dollar against the Euro.

 

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**NETWORKCOMPUTING DEVICES, INC.**

#### **PART II - OTHER INFORMATION**

**Item 6. Exhibits and Reports on Form 8-K.**

        (a)   The following isa list of exhibits filed as part of this Report on Form 10-Q.  Where indicated by footnote, exhibits thatwere previously filed are incorporated by reference.

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                      | ** ** |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                |   |                                                                                                                                                                 |       |
| 2.1†(1)        |   | Asset  Purchase Agreement, dated March 22, 2002, by and between Network Computing  Devices, Inc. and Neoware Systems, Inc.                                           |       |
|                |   |                                                                                                                                                                 |       |
| 4.3                 |   | Amended  Certificate of Designations, Preferences and rights of the Series B, Series  B1, Series C, Series C1 and Series D Preferred Stock                           |       |
|                |   |                                                                                                                                                                 |       |
| 10.72(1)            |   | Limited  Waiver and Amendment to Loan Documents, dated March 4, 2002, by and between  Network Computing Devices, Inc. and Silicon Valley Bank.                       |       |
|                |   |                                                                                                                                                                 |       |
| 10.731(1)           |   | Asset  Purchase Agreement, dated March 22, 2002, by and between Network Computing  Devices, Inc. and Neoware Systems, Inc.   (Reference is made to Exhibit 2.1) |       |
|                |   |                                                                                                                                                                 |       |
| 10.741(1)           |   | OEM  Supply Agreement, dated March 22, 2002, by and between Network Computing  Devices, Inc. and Neoware Systems, Inc.                                               |       |
|                |   |                                                                                                                                                                 |       |
| 10.75(1)            |   | Non-Competition  and Confidentiality Agreement, dated March 22, 2002, by and between Network  Computing Devices, Inc. and Neoware Systems, Inc.                      |       |

 

_______________

†                                    Confidential treatment has been requestedas to a portion of this exhibit.

(1)                            Incorporated by reference to identicallynumbered exhibit to Registrant’s Form 10-K for the year ended December 31,2001.

 

        (b)   The Companyfiled no reports on Form 8-K during the three-month period ended March 31,2002.

 

 

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**NETWORK COMPUTING DEVICES, INC.**

** **

**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                     |   |   |   |                                           |                                                              |
|--------------------------|--------|--------|--------|------------------------------------------------|-------------------------------------------------------------------|
|                     |   |   |   | Network  Computing Devices, Inc.  (Registrant) |
|                     |   |   |   |
| Date:  May 24, 2002 |   |   |   |                                           |                                                              |
|                     |   |   |   |                                           |                                                              |
|                     |   |   |   | By:                                            |  /s/   Rudolph G. Morin                                 |
|                     |   |   |   |                                           | Rudolph  G. Morin                                                 |
|                     |   |   |   |                                           | Chief  Financial Officer and Secretar*y*                          |
|                     |   |   |   |                                           | (Duly Authorized and Principal Financial and  Accounting Officer) |
|                     |   |   |   |                                           |                                                              |

 

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