-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDp2gZ52XcfY7fTyS11oswYlVOhLhzTuULblcbWXt+wuDg3PZrf1pVnQ8o7+doC1 gyrWO36rWh7vbI7sBnSs0Q== /in/edgar/work/0000912057-00-049599/0000912057-00-049599.txt : 20001115 0000912057-00-049599.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK COMPUTING DEVICES INC CENTRAL INDEX KEY: 0000886138 STANDARD INDUSTRIAL CLASSIFICATION: [3575 ] IRS NUMBER: 770177255 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20124 FILM NUMBER: 764325 BUSINESS ADDRESS: STREET 1: 350 N BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4156940650 MAIL ADDRESS: STREET 1: 350 NORTH BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 a2030495z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______to ______ Commission file number: 0-20124 NETWORK COMPUTING DEVICES, INC. (Exact name of registrant as specified in its charter) Delaware 77-0177255 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 Ravendale Avenue, Mountain View, California 94043 (Address of principal executive offices and zip code) Registrant's telephone number: (650) 694-0650 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- The number of shares outstanding of the Registrant's Common Stock was 16,710,509 at September 30, 2000 NETWORK COMPUTING DEVICES, INC. INDEX
DESCRIPTION PAGE NUMBER _______________________________________________________________________________ ___________ Cover Page 1 Index 2 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations for the Three-and Nine-Month Periods Ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3: Quantitative and Qualitative Disclosure about Market Risk 15 Part II: Other Information Item 6: Exhibits and Reports on Form 8-K 16 Signature 17
2 NETWORK COMPUTING DEVICES, INC. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
ASSETS September 30, December 31, 2000 1999 -------------- ------------- Current assets: Cash and cash equivalents $ 704 $ 4,781 Short-term investments 333 3,558 Accounts receivable, net 10,947 21,987 Inventories 9,343 15,082 Other current assets 3,886 4,532 -------------- ------------- Total current assets 25,213 49,940 Property and equipment, net 2,350 3,651 Other assets 2,654 3,173 -------------- ------------- Total assets $ 30,217 $ 56,764 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,463 $ 10,419 Accrued expenses 5,477 4,739 Deferred revenue 2,684 3,384 Notes payable 7,165 - Other current liabilities 439 346 -------------- ------------- Total current liabilities 22,228 18,888 Shareholders' equity: Common stock 17 16 Capital in excess of par 62,130 61,333 Accumulated deficit (54,158) (23,473) -------------- -------------- Total shareholders' equity 7,989 37,876 -------------- -------------- Total liabilities and shareholders' equity $ 30,217 $ 56,764 ============== ==============
See accompanying notes. 3 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, ----------------------------------- ----------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Net revenues: Hardware products and services $ 9,611 $ 26,859 $ 34,467 $ 74,985 Software licenses and services 1,467 2,433 3,511 8,605 --------------- --------------- --------------- --------------- Total net revenues 11,078 29,292 37,978 83,590 Cost of revenues: Hardware products and services 7,856 17,103 30,041 46,892 Software licenses and services 54 644 309 2,390 --------------- --------------- --------------- --------------- Total cost of revenues 7,910 17,747 30,350 49,282 --------------- --------------- --------------- --------------- Gross margin 3,168 11,545 7,628 34,308 Operating expenses: Research and development 1,399 3,097 7,514 9,808 Marketing and selling 3,831 7,451 17,700 24,431 General and administrative 1,877 1,585 6,331 4,768 Business restructuring 1,645 - 4,206 - Acquired in-process research and development - - 1,800 - --------------- --------------- --------------- --------------- Total operating expenses 8,752 12,133 37,551 39,007 --------------- --------------- --------------- --------------- Operating loss (5,584) (588) (29,923) (4,699) Interest income (expense), net (191) 125 (314) 465 --------------- --------------- --------------- --------------- Loss before income taxes (5,775) (463) (30,237) (4,234) Provision for income taxes 97 6,951 448 6,951 --------------- --------------- --------------- --------------- Net loss $ (5,872) $ (7,414) $ (30,685) $ (11,185) =============== =============== =============== =============== Net loss per share Basic and diluted $ (0.35) $ (0.46) $ (1.85) $ (0.69) =============== =============== =============== =============== Shares used in per share computations Basic and diluted 16,710 16,219 16,628 16,136 =============== =============== =============== ===============
See accompanying notes. 4 NETWORK COMPUTING DEVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, ------------------------------- 2000 1999 ----------- ---------- Cash flows from operations: Net loss $ (30,685) $ (11,185) Reconciliation of net loss to cash used in operations: In process research and development charge 1,800 - Depreciation and amortization 2,160 2,655 Non cash restructuring charge 336 - Increase in valuation allowance on deferred tax assets - 6,951 Charges in: Accounts receivable, net 11,040 (259) Inventories 5,739 (1,590) Refundable and deferred income tax assets - (329) Other current assets 446 (486) Accounts payable (656) 3,491 Accrued expenses 738 (1,434) Deferred revenue (700) (892) Other current liabilities 162 36 ----------- ---------- Cash used in operations (9,620) (3,042) Cash flows from investing activities: Acquisition of business (2,224) - Purchases of short-term investments (998) (10,463) Sales and maturities of short-term investments 4,223 19,744 Changes in other assets 417 (869) Property and equipment purchases (469) (2,173) ----------- ---------- Cash provided by investing activities 949 6,239 Cash flows from financing activities: Principal payments on capital lease obligations (69) (67) Proceeds from short-term debt 25,248 - Principal payments on short-term debt (21,383) - Repurchases of common stock - (704) Proceeds from issuance of stock, net 798 1,327 ----------- ---------- Cash provided by financing activities 4,594 556 ----------- ---------- Increase (decrease) in cash and equivalents (4,077) 3,753 Cash and equivalents: Beginning of period 4,781 8,553 ----------- ---------- End of period $ 704 $ 12,306 =========== ==========
See accompanying notes. 5 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The unaudited condensed consolidated financial information of Network Computing Devices, Inc. (the "Company") furnished herein reflects all adjustments, consisting only of normal recurring entries, which in the opinion of management are necessary to fairly state our consolidated financial position, results of operations and cash flows for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in our 1999 Annual Report on Form 10-K. The consolidated results of operations for the three- and nine-month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2000. NET LOSS PER SHARE Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and potential common shares from stock options and warrants outstanding, when dilutive, using the treasury stock method. At September 30, 2000 and 1999 there were 4,538,936 and 4,909,562 options and warrants outstanding, respectively, that could potentially dilute earnings per share ("EPS") in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for those periods. INVENTORIES Inventories, stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market, consisted of (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Purchased components and sub-assemblies $6,271 $9,825 Work in process 657 826 Finished goods 2,415 4,431 ----- ----- $9,343 $15,082 ----- ------
MAJOR CUSTOMERS AND OPERATING SEGMENTS The Company has one operating segment, thin clients. The percentages of total net revenues represented by sales to major customers are as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 -------- ----------- -------- -------- Adtcom 25% 19% 22% 16% Tech Data 1% 16% 14% 15% UCSI Distribution 6% 3% 11% 3% Ingram Micro 17% 10% 7% 8% IBM 1% 13% 4% 12%
6 NETWORK COMPUTING DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Gross accounts receivable as a percentage of total gross accounts receivable for major customers are as follows:
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Adtcom 32% 31% Tech Data 16% 17% UCSI Distribution 15% 7% Ingram Micro 12% 14%
RESTRUCTURING CHARGE On March 31, 2000 we announced a restructuring plan involving a general reduction in workforce affecting all classes of employees and exiting certain leased facilities. In connection with the plan, we recorded a restructuring charge of $2.6 million consisting of $2.4 million for employee separation costs and $0.2 million for facility exit costs. During the three months ended September 30, 2000, we paid $0.5 million of the accrued restructuring liability leaving unpaid cash charges of $0.7 million and unpaid noncash charges of $0.1 million included in accrued liabilities as of September 30, 2000. The restructuring plan is expected to be completed by the end of the fourth quarter of 2000. During the third quarter of 2000 we undertook additional restructuring actions involving a general reduction in workforce affecting all classes of employees, exiting certain leased facilities and discontinuing development activities related to several product lines. In connection with these actions, we recorded restructuring charges of $1.6 million consisting of cash charges of $1.0 million for employee separation costs and $0.2 million for facility exit costs, and non cash charges of $0.4 million related to the discontinued product lines, including the recognition of an impairment loss of $0.3 million on the intangibles attributable to our purchase of Multiplicity LLC. During the three months ended September 30, 2000 we paid $0.4 million of the accrued restructuring liability leaving unpaid cash charges of $0.8 million included in accrued liabilities as of September 30, 2000. The restructuring plan is expected to be completed by mid 2001. CONVERSION OF ACCOUNTS PAYABLE In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE, OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK FACTORS." THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN PART I -- ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q, AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, CONTAINED IN OUR 1999 ANNUAL REPORT ON FORM 10-K. OVERVIEW Network Computing Devices, Inc. (the "Company") provides thin client hardware and software that deliver simultaneous, high-performance, easy-to-manage and cost effective access to all of the information on enterprise intranets and the Internet from thin client, UNIX and PC desktops. Our product lines include the NCD THINSTAR line of Windows-based terminals, NCD EXPLORA network terminals, and NCD NC200, NC400 AND NC900 network computers. On the software side, our products include the NCD THINPATH family of client and server software, developed to enhance the connectivity, management and features of the NCD thin clients as well as PCs in accessing information and applications on Windows Servers. We also market PCXware, NCDware, and NC software. Our products are sold through distributor/VAR channels, and system integrators worldwide. In January 2000, we acquired the assets of Multiplicity LLC, a privately held developer of advanced server management software for Microsoft's Windows NT and Windows 2000 operating systems. The acquisition has been accounted for using the purchase method. The purchase price was $2.2 million plus a stream of future payments based on revenue for the four year period following the acquisition. $1.8 million of the purchase price was allocated to purchased in-process research and development and $0.4 million was allocated to other intangible assets. Multiplicity LLC provided strategic performance analysis and capacity planning solutions for networked Windows NT and Windows 2000 servers. These solutions gave customers system measurement and management that enabled troubleshooting, analysis, administration and planning to help IT organizations improve end-user service levels. During the third quarter of 2000, due to a change in strategic direction and cash constraints, we discontinued development efforts on the Multiplicity product line and recorded a related restructuring charge for the impairment of the purchased intangibles. In April 2000, we finalized an alliance agreement with Hewlett-Packard Company whereby HP will sell our products through its indirect sales channel and direct sales force worldwide. HP will market our network computers, our line of Windows-based terminals and related software. We continue to sell network application terminals to IBM for resale pursuant to a joint development agreement dated June 27, 1996 (the "IBM Agreement"). The IBM agreement provides for IBM to purchase a substantial portion of its requirements for such products from us through December 31, 2000. At September 30, 2000 we had cash and short-term investments of $1.0 million. During the years ended December 31, 1998 and 1999 and the nine months ended September 30, 2000, we incurred losses of $9.1 million, $16.3 million, and $30.7 million, respectively, and during those periods our cash and cash equivalents decreased by $11.2 million, $5.3 million and $4.1 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we announced a 20% across-the-board reduction in our workforce and recorded a restructuring charge. In the third quarter we recorded a further restructuring charge of $1.6 million. This charge included 8 severance related to further headcount reductions, facility closure costs, and non cash charges related to discontinued product lines, including an impairment loss on the intangibles attributable to our purchase of Multiplicity LLC. On March 30, 2000 we secured a working capital line of credit with Wells Fargo Bank's Foothill Capital subsidiary. Our line of credit is secured by substantially all of our assets. Under the terms of the agreement borrowings bear interest at a rate of prime plus 0.75%. The amount that can be borrowed at any given time is determined by the balance of our accounts receivable as well as our compliance with specified financial covenants. Accordingly, this line of credit may not be sufficient to enable us to continue as a going concern. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to seek new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. RESULTS OF OPERATIONS TOTAL NET REVENUES Total net revenue represents sales to customers of hardware and software product and the related service and support. Total net revenues for the third quarters of 2000 and 1999 were $11.1 million and $29.3 million, respectively, representing a decrease of 62%, and $38.0 million and $83.6 million for the first nine months of 2000 and 1999, respectively, representing a decrease of 55%. Our principal customers in the third quarter of 2000 included Adtcom and Ingram Micro, who accounted for 25% and 17% of our revenues, respectively. In the third quarter of 1999 Adtcom, Tech Data, IBM and Ingram Micro, accounted for 19%, 16%, 13% and 10% of our revenues, respectively. For the first nine months of 2000 Adtcom, Tech Data and UCSI Distribution accounted for 22%, 14%, and 11% of our revenues respectively, while in the first nine months of 1999 Adtcom, Tech Data and IBM accounted for 16%, 15% and 12% of our revenue, respectively. HARDWARE REVENUES Hardware revenues are primarily from the sale of thin client products, and to a lesser extent, related service activities. Revenues were $9.6 million and $26.9 million for the third quarters of 2000 and 1999, respectively, and $34.5 million and $75.0 million for the first nine months of 2000 and 1999, respectively. Hardware revenues declined across all product lines. This revenue decline is due in part to a drop in demand for our network computers, lower sales of windows-based terminals to distributors, and continued declines in sales to IBM. SOFTWARE REVENUES Software revenues are primarily from the sale and licensing of THINPATH and other software products and related support services. Revenues from software and related services were $1.5 million and $2.4 million for the third quarters of 2000 and 1999, respectively, and $3.5 million and $8.6 million for the first nine months of 2000 and 1999, respectively. This decrease primarily reflects the transition from the sale of the Citrix-based Wincenter software to the sale of software developed in-house. The third quarter of 2000 included $0.6 million of net revenue related to a single sale of a license to certain of our software. GROSS MARGIN ON HARDWARE REVENUES Gross margin on hardware revenues represents net revenues less cost of revenues related to hardware products and services. Gross margin on hardware revenues was $1.8 million and $9.8 million for the third quarters of 2000 and 1999, respectively, and $4.4 million and $28.1 million for the first nine months of 2000 and 1999, respectively. Our gross margin percentages on 9 hardware revenues were 18% and 36% for the third quarters of 2000 and 1999, respectively, and 13% and 37% for the first nine months of 2000 and 1999, respectively. Most of the decline in margin was due to the lower revenues for the quarter. Continued pricing pressures on our Windows-based terminals and lower overhead absorption due to the lower volumes this quarter also contributed to the decline. GROSS MARGIN ON SOFTWARE REVENUES Gross margin on software revenues represents net revenues less cost of revenues related to software license and services. Gross margin on software revenues was $1.4 million and $1.8 million for the third quarters of 2000 and 1999, respectively, and $3.2 million and $6.2 million for the first nine months of 2000 and 1999, respectively. This decline was across all product lines. Our gross margin percentages on software revenues were 96% and 74% for the third quarters of 2000 and 1999, respectively, and 91% and 72% for the first nine months of 2000 and 1999, respectively. The improvement in gross margin percentage reflects the move from the sale of licensed software product to the sale of our branded software, which sell at higher margins than our licensed software product, and the single sale of a license to certain of our software. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses consist primarily of software and hardware development costs. R&D expenses were $1.4 million and $3.1 million for the third quarters of 2000 and 1999, respectively, and $7.5 million and $9.8 million for the first nine months of 2000 and 1999, respectively. The decrease in spending for R&D was the result of decreased headcount. MARKETING AND SELLING EXPENSES Marketing and selling expenses represent the expenses incurred to promote and sell our product. Marketing and selling expenses were $3.8 million and $7.5 million for the third quarters of 2000 and 1999, respectively, and $17.7 million and $24.4 million for the first nine months of 2000 and 1999, respectively. The decrease in marketing and selling expenses relates to decreasing headcount, lower revenue, and lower spending on advertising, public relations and other marketing costs. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses consist of expenses not directly related to the development, manufacture or sale of our product. G&A expenses were $1.9 million and $1.6 million for the third quarters of 2000 and 1999, respectively, and $6.3 million and $4.8 million for the first nine months of 2000 and 1999, respectively. The increase in the third quarter of 2000 is significantly the result of foreign currency losses of $0.4 million. Bad debt expense of $0.6 million and foreign currency losses of $0.7 million, offset by a reduction in employee based expenses of $0.5 million contributed to the increase in expenses during the first nine months of 2000, when compared to the first nine months of 1999. Intangibles amortization expense, related to the acquisition of Tektronix Inc.'s Network Displays business in December 1998 and Multiplicity LLC in January 2000, was $0.1 million for the third quarters of 2000 and 1999, respectively, and $0.4 million and $0.3 million for the first nine months of 2000 and 1999, respectively. CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with our acquisition of Multiplicity LLC on January 7, 2000, approximately $1.8 million of the total purchase consideration was allocated to the value of in-process research and development. The amounts allocated were determined through established valuation techniques in the high-technology industry and were expensed upon acquisition because technological feasibility had not been established and no alternative uses exist. The in-process research and development project acquired in the acquisition of Multiplicity LLC consisted of development of a line of advanced server management software for Microsoft's Windows NT and Windows 2000 operating systems. During the third quarter of 2000, due to a change in strategic direction and cash constraints, we discontinued the Multiplicity product line and all research and development on these products ceased. 10 INTEREST INCOME (EXPENSE), NET Interest income (expense), net was ($191,000) and $125,000 for the third quarters of 2000 and 1999, respectively, and ($314,000) and $465,000 for the first nine months of 2000 and 1999, respectively. The changes were due to lower average balances in interest-bearing accounts and interest expense on the line of credit with Foothill Capital and note payable to SCI Technology, Inc. INCOME TAXES AND INCOME TAX BENEFIT The provision for income taxes in the third quarter of 2000 is for foreign income taxes. We continue to generate tax net operating loss carryforwards for the United States federal and state jurisdictions. However, no assets have been recognized in respect of these carryforwards because continued losses create uncertainty about our ability to generate sufficient taxable income to realize the related benefits. FINANCIAL CONDITION Total assets of $30.2 million at September 30, 2000 decreased from $56.8 million at December 31, 1999. The change in total assets primarily reflects decreases in cash and short-term investments of $7.3 million, accounts receivable of $11.0 million, and inventories of $5.7 million. Total current liabilities of $22.2 million as of September 30, 2000 increased by $3.3 million, or 18%, from $18.9 million at December 31, 1999. The change was primarily related to increases in accrued expenses of $0.7 million related to the unpaid portion of the restructuring charge and notes payable of $3.9 million related to the line of credit with Foothill Capital and the note payable to SCI Technology, Inc., offset by a decrease in accounts payable and deferred revenue of $0.7 million and $0.7 million, respectively. CAPITAL REQUIREMENTS Capital spending requirements for the remainder of 2000 are estimated at approximately $0.1 million. LIQUIDITY As of September 30, 2000, we had combined cash, cash equivalents and short-term investments totaling $1.0 million, with $3.9 million drawn under our line of credit with Foothill Capital. Cash used in operations was $9.6 million in the first nine months of 2000 compared to $3.0 million in the first nine months of 1999. In the first nine months of 2000, a decrease in accounts payable of $0.7 million and a net loss of $30.7 million were only partially offset by a decrease in accounts receivable and inventories of $11.0 million and $5.7 million, respectively, and an increase in accrued expenses of $0.7 million. In the first nine months of 1999, an increase in inventories of $1.6 million, a decrease in accrued expenses of $1.4 million, and a net loss of $11.2 million were only partially offset by an increase in accounts payable of $3.5 million. Cash flows provided from investing activities in the first nine months of 2000 of $0.9 million are principally the result of sales and maturities of short-term investments of $4.2 million offset by the $2.2 million of cash used to acquire Multiplicity LLC and purchases of short-term investments of $1.0 million. Cash provided by investing activities for the first nine months of 1999 of $6.2 million is primarily the result of sales and maturities of short-term investments of $19.7 million offset by purchases of capital equipment of $2.2 million, and purchases of short-term investments of $10.5 million. Cash flows provided by financing activities of $4.6 million in the first nine months of 2000 primarily reflects $3.9 million in proceeds from the line of credit, net of repayments, and $0.8 million from sales of stock under our employee stock option and stock purchase plans. Based on the factors discussed above, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. On March 30, 2000, we obtained a working capital line of credit from Foothill Capital, which provides us with up to $15.0 million of available credit subject to the conditions described below. Our line of credit is secured by substantially all of our 11 assets. Under the terms of the agreement borrowings bear interest at a rate of prime plus 0.75%. The amount that can be borrowed at any given time is determined by the balance of our qualifying accounts receivable. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. Our capital requirements will depend on many factors, including but not limited to the market acceptance of our product, the response of our competitors to our product and our ability to grow software revenue. These factors, in turn, may be adversely affected by doubts about our ability to continue as a going concern. We will be required to seek additional financing before we achieve positive cash flow or in order to comply with covenants under the line of credit. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain continued financing and ultimately to achieve profitability and positive cash flow. No assurance can be given that additional financing will be available, or that if available, it will be available on terms acceptable to our shareholders or us. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133," establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000. We will adopt the standard no later than the first quarter of fiscal year 2001 and we are in the process of determining the impact that adoption will have on our consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (FIN 44)." The provisions of FIN 44 are effective July 1, 2000. The adoption of this standard did not impact the accounting for any stock-based awards granted to date. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In June 2000, the SEC issued SAB 101B that delayed the implementation date of SAB 101. We must adopt SAB 101 no later than in the fourth quarter of 2000. We have not determined the impact that SAB 101 will have on our financial statements. FUTURE PERFORMANCE AND RISK FACTORS Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below. LIQUIDITY 12 At September 30, 2000 we had cash and cash equivalents and short-term investments of approximately $1.0 million. During the years ended December 31, 1998 and 1999 and the nine months ended September 30, 2000, we incurred losses of approximately $9.1 million, $16.3 million and $30.7 million, respectively, and during those periods our cash and cash equivalents decreased by approximately $11.2 million, $5.3 million and $4.1 million, respectively, while our short-term debt increased by -0-, -0-, and $7.2 million, respectively. Based on these factors, among others, there is substantial doubt about our ability to continue as a going concern. Our ability to continue, as a going concern is dependent on our ability to raise additional capital or obtain continued financing in the near term and ultimately to achieve profitability and positive cash flow. To reduce our operating expenses, in March we implemented a 20% across-the-board reduction in our workforce. Subsequently we reduced our headcount further. Additionally, we obtained a line of credit with Foothill Capital. However, the continued availability of this line of credit is subject to conditions that we may not be able to satisfy. Other sources of financing may not be available in the near future, or may be available only on terms that are highly dilutive to our stockholders. As of October 31, 2000, we owed Foothill Capital approximately $5.9 million and we were in breach of the tangible net worth covenant set forth in our agreement with Foothill Capital. As a result, Foothill Capital has the right to declare an event of default and demand immediate repayment of the loan. Foothill Capital continues to advance funds under the line of credit, however we would not be able to repay the line should Foothill Capital demand repayment. In August 2000 we concluded an agreement with SCI Technology, Inc., ("SCI") a subsidiary of SCI Systems, Inc., to convert $3.3 million of our accounts payable to them into a thirteen-month note. This note bears interest at 6.5% per annum and the outstanding principal can be converted into shares of our common stock at the option of SCI anytime during the note period. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. EVOLVING THIN CLIENT COMPUTING MARKET We derive substantially all of our revenues from the sale of thin client network computing products. Our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of our thin client computing hardware and software products. There can be no assurance that our thin client computing products will compete successfully with alternative desktop solutions or that the thin client computing model will be widely adopted in the rapidly evolving desktop computer market. To date, the market for thin client computing products has not lived up to industry expectations, due in part to competition from low-cost PC's. If new markets fail to develop for our thin client computing products our business could fail. OTHER RISK FACTORS The market for thin client products and similar products that facilitate access to data over networks is highly competitive. We experience significant competition from other network computer manufacturers, suppliers of personal computers and workstations and software developers. Competition within the thin client computing market has intensified over the past several years, resulting in price reductions and reduced profit margins. We expect this intense competition to continue, and there can be no assurance that we will be able to continue to compete successfully against current and future competitors as the desktop computer market evolves and competition increases. There is the possibility that competition in the future could come from companies not currently in the market or with greater resources than ours which could adversely effect our operating results. Concern over our long-term viability could affect potential customers' willingness to purchase products from us, which could adversely effect our operating results. Our success depends to a significant degree upon the continuing contributions of our senior management and other key employees. We believe that our future success will depend in large part on our ability to attract and retain highly skilled engineering, managerial, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting, integrating and retaining such personnel. We believe that concerns about 13 our current financial strength could deter potential hires from seeking employment with us, and has resulted in the loss of a number of management and other employees over the past several months. Failure to attract and retain key personnel could have a material, adverse effect on our business, operating results or financial condition. The market price of our common stock has fluctuated significantly over the past several years and is subject to material fluctuations in the future in response to announcements concerning us or our competitors or customers, quarterly variations in operating results, announcements of technological innovations, the introduction of new products or changes in product pricing policies by us or our competitors, general conditions in the computer industry, developments in the financial markets and other factors. In particular, shortfalls in our quarterly operating results from historical levels or from levels forecast by securities analysts could have an adverse effect on the trading price of the common stock. We may not be able to quantify such a quarterly shortfall until the end of the quarter, which could result in an immediate and adverse effect on the common stock price. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations that have particularly affected the market prices for technology companies and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may adversely affect the future market price of our common stock. Our common stock is currently trading below $1.00 on the NASDAQ National Market (the "NNM"). Should the trading price continue to remain under $1.00, The NASDAQ Stock Market may take action to terminate the listing of our stock on the NNM. Such delisting would adversely affect the liquidity of our common stock in the public markets and could substantially increase the volatility of the trading price. Our operating results have varied significantly, particularly on a quarterly basis, as a result of a number of factors, including general economic conditions affecting industry demand for computer products, the timing and market acceptance of new product introductions by us and our competitors, the timing of significant orders from and shipments to large customers, periodic changes in product pricing and discounting due to competitive factors, and the availability and pricing of key components, such as DRAMs, video monitors, integrated circuits and electronic sub-assemblies, some of which require substantial order lead times. Our operating results may fluctuate in the future as a result of these and other factors, including our success in developing and introducing new products, our product and customer mix, licensing costs, the level of competition which we experience and our ability to develop and maintain strategic business alliances. We operate with a relatively small backlog. Revenues and operating results therefore generally depend on the volume and timing of orders received, which are difficult to forecast and which may occur disproportionately during any given quarter or year. Our expense levels are based in part on our forecast of future revenues. If revenues are below expectations, our operating results may be adversely affected. We have experienced a disproportionate amount of shipments occurring in the last month of our fiscal quarters. This trend increases the risk of material quarter-to-quarter fluctuations in our revenues and operating results. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future results will depend to a considerable extent on our ability to continuously develop, introduce and deliver in quantity new hardware and software products that offer our customers enhanced performance at competitive prices. The development and introduction of new products is a complex and uncertain process requiring substantial financial resources and high levels of innovation, accurate anticipation of technological and market trends and the successful and timely completion of product development. Once a hardware product is developed, we must rapidly bring it into volume production, a process that requires accurate forecasting of customer requirements in order to achieve acceptable manufacturing costs. The introduction of new or enhanced products also requires us to manage the transition from older, displaced products in order to minimize disruption to customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. As we are continuously engaged in this product development and transition process, our operating results may be subject to considerable fluctuation, particularly when measured on a quarterly basis. The inability to finance important research and development projects, delays in the introduction of new and enhanced products, the failure of such products to gain market acceptance, or problems associated with new product transitions could adversely affect our operating results. We rely increasingly on independent distributors and resellers for the distribution of our products. In early 1996, we experienced significant returns of our software products from our distributors. Although controls have since been improved, 14 there can be no assurance that we will not experience some level of returns in the future. In addition, there can be no assurance that our distributors and resellers will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of our competitors. A reduction in sales effort or discontinuance of sales of our products by our distributors and resellers could lead to reduced sales and could adversely affect our operating results. In addition, there can be no assurance as to the continued viability or the financial stability of our distributors and resellers, our ability to retain our existing distributors and resellers or our ability to add distributors and resellers in the future. An increasing percentage of our revenue and accounts receivable are concentrated in a relatively small number of these distributors. We rely on contract manufacturers for virtually all of the manufacture of our thin client computing products. Our reliance on these contract manufacturers limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our suppliers are located abroad. Our reliance on these foreign suppliers subjects us to risks such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. We currently obtain all of the sub-assemblies used for our thin client computing products from a single supplier located in Thailand. Any significant interruption in the supply of products from this contractor would have a material, adverse effect on our business and operating results. Disruptions in the provision of components by our other suppliers, or other events that would require that we seek alternate sources of supply, could also lead to supply constraints or delays in delivery of our products and adversely affect its operating results. A number of components and parts used in our products, including certain semiconductor components, also are currently available from single or limited sources of supply. We have no long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components. We have generally been able to obtain adequate supplies of parts and components in a timely manner from existing sources under purchase orders and we endeavor to maintain inventory levels adequate to guard against interruptions in supplies. However, our inability to obtain sufficient supplies of these parts and components from existing suppliers or to develop alternate supply sources would adversely affect our operating results. Most of our international sales are denominated in Euros. These sales are subject to exchange rate fluctuations which could affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. International sales and operations may also be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of technology, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations and managing accounts receivable. The laws of certain countries do not protect our products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have an adverse effect on our future international sales and, consequently, on our operating results. We continue to explore new sources of equity capital. However, no assurance can be given that any such transaction will result from these activities. Such financing could be highly dilutive to our existing shareholders. Any failure to successfully conclude a financing transaction could result in our inability to continue as a going concern. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our market risk sensitive instruments as of September 30, 2000 are primarily exposed to interest rate risks. Because of the short-term maturity of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value. Effective January 2000, a majority of our international sales are denominated in Euros. These sales are subject to exchange rate fluctuations which could affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. The declining value of the euro against the dollar has had a significant impact on our results during 2000. 15 NETWORK COMPUTING DEVICES, INC. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit 4.1 Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. Exhibit 4.2 Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. Exhibit 10.54 Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.1.) Exhibit 10.55 Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.2) Exhibit 27 Financial Data Schedule (b) The Company filed the following reports on Form 8-K during the three-month period ended September 30, 2000: None 16 NETWORK COMPUTING DEVICES, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Network Computing Devices, Inc. (Registrant) Date: November 14, 2000 By: /s/ Gregory S. Wood --------------------------- Gregory S. Wood Vice President, Chief Financial Officer and Secretary (Duly Authorized and Principal Financial and Accounting Officer) 17 EX-4.1 2 a2030495zex-4_1.txt EXHIBIT 4-1 EXHIBIT 4.1 CONVERTIBLE PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. AMOUNT: $3,300,000 DATE: AUGUST 31, 2000 FOR VALUE RECEIVED, the undersigned, NETWORK COMPUTING DEVICES, INC., a Delaware corporation (hereinafter referred to as the "Company" or the "Maker") unconditionally promises to pay to the order of SCI TECHNOLOGY, INC., an Alabama corporation ("Holder"), at such place as may be designated by Holder, the PRINCIPAL SUM of Three Million Three Hundred Thousand US Dollars ($3,300,000), or so much of such sum as may be due and owing at the time of maturity, together with interest from the date hereof on the unpaid balance hereunder, computed at an annual rate of six and one-half percent (6.5%) based on a 360 day year and the actual number of days elapsed (subject to adjustment pursuant to Section 2). The indebtedness evidenced hereby shall be due and payable as provided for in the terms and conditions set forth below: 1. MAKER. The term "Maker" as used in this Note shall include the Maker and the respective successors and assigns thereto or thereof; provided, however, that neither this Note nor the obligations of Maker hereunder can be assigned without the prior written consent of Holder, such consent to be given or withheld in Holder's sole discretion. 2. INTEREST. During the existence of any Event of Default (as defined in Section 13) under this Note, the unpaid principal of this Note shall bear interest on each day until paid at a per annum rate of the WSJ Prime Rate PLUS 2%, but only to the extent that payment of such interest on such principal or interest is enforceable under applicable law. The "WSJ Prime Rate" is the highest "Prime Rate" as published daily in THE WALL STREET JOURNAL under the heading "Money Rates." The WSJ Prime Rate in effect at any time will change each time and as of the date that a new Prime Rate is published. In the event the WSJ Prime Rate is discontinued, Holder shall substitute an index determined by the Holder to be comparable, in its reasonable discretion. 3. PAYMENT; MATURITY DATE. Unless converted as provided herein, the principal and accrued interest under this Note shall be due and payable in full on September 30, 2001 (the "MATURITY DATE"). Principal and interest shall be payable to Holder when due in lawful money of the United States of America in immediately available funds at such place as Holder may from 1 time to time notify the Maker in writing. The Maker may not prepay this Note, in whole or in part, at any time without the prior written consent of the Holder, such consent to be given or withheld in its sole discretion. 4. USE OF PROCEEDS. This Note evidences the accounts payable of Maker, due and owing to Holder at the date hereof as set forth on EXHIBIT "A" attached hereto. 5. APPLICATION OF PAYMENTS. All payments received hereunder may be applied, at Holder's option, first to the payment of any expenses or charges payable hereunder and accrued interest, with the balance being applied to principal, or in such other order as Holder shall determine. 6. CONVERSION. (a) OPTIONAL CONVERSION. Subject to and in compliance with the provisions of this SECTION 6, the entire outstanding principal amount of this Note, may, at the option of Holder, by notice given to the Maker (a "CONVERSION NOTICE") at any time commencing on the date hereof and ending sixty days after the Maturity Date (the "CONVERSION PERIOD"), be converted into the number of validly issued, fully-paid and nonassessable shares of common stock, par value $.001 per share, of the Company (the "STOCK") equal to (i) the outstanding principal amount of the Note DIVIDED BY (ii) $1.00 (the "CONVERSION PRICE"). Shares of Stock issued upon conversion of this Note or of any note issued in exchange for or upon the transfer of this Note are referred to herein as "CONVERSION SHARES." (b) MECHANICS OF CONVERSION. If the Holder exercises its right to convert this Note, the entire principal balance shall automatically convert into Conversion Shares at the date of the Conversion Notice ("CONVERSION DATE"). As promptly as practicable after the Conversion Date, but in no event later than within 5 days after the Company's receipt of the Conversion Notice, the Maker shall issue and shall cause its transfer agent to issue and deliver to the Holder a certificate or certificates for the number of whole shares of Stock issuable upon the conversion of this Note in the name of the Holder hereof. The conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the Holder as holder of this Note as to the principal balance so converted shall cease, and the Holder shall be deemed to have become the holder of record of the shares of Stock so issued. (c) ADJUSTMENT FOR REORGANIZATION. CONSOLIDATION. MERGER. ETC. In case at any time or from time to time, the Maker shall effect a reorganization, consolidate with or merge into any other person, or transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Maker, then, in each such case, Holder, on the conversion hereof as provided in this Section 6 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if Holder had so converted this Note, immediately prior thereto. 2 (i) DISSOLUTION. In the event of any dissolution of the Maker following the transfer of all or substantially all of its properties or assets, the Maker, if this Note has not been paid in full prior to such dissolution and if this Note is thereafter converted, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash) receivable by the holder of this Note after the effective date of such dissolution. (ii) CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 6, this Note shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the conversion of this Note after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Maker, whether or not such person shall have expressly assumed the terms of this Note. (d) NO FRACTIONAL SHARES. No fractional shares of Stock or scrip representing fractional shares shall be issued upon the conversion of this Note. Instead of any fractional shares of Stock which would otherwise be issuable upon conversion of this Note, the Maker shall pay to the holder of this Note an appropriate cash adjustment in respect of any fractional shares. (e) RESERVATION OF STOCK. The Maker shall at all times reserve and keep available out of its authorized but unissued shares of Stock, solely for the purpose of effecting the conversion of this Note, such number of its shares of Stock as shall from time to time be sufficient to effect the conversion of this Note, and if at any time the number of authorized but unissued shares of Stock shall not be sufficient to effect the conversion of this Note, the Maker shall take such corporate action as may be necessary to increase its authorized but unissued shares of Stock to such number of shares as shall be sufficient for such purpose. (f) TRANSFER RESTRICTION: LEGEND. Each share certificate evidencing the shares of Stock issued as Conversion Shares may bear the following legend (and any additional legend required by (i) any applicable state securities laws and (ii) any securities exchange upon which such shares may, at the time of such exercise, be listed) on the face thereof unless at the time of exercise such shares shall be registered under the Securities Act (as defined in Section 9): "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be sold or transferred in the absence of such registration or any exemption therefrom under said Act and state securities laws." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued under a registration statement of the securities represented thereby) shall also bear such legend unless the Company receives an opinion of 3 counsel for the holder thereof to the effect that the securities represented thereby are not, at such time, required by law to bear such legend. (g) ADJUSTMENT UPON CHANGES IN STOCK. The Conversion Price and the number of shares of Stock issuable hereunder are subject to adjustment from time to time as follows: (i) STOCK ISSUANCE. STOCK DIVIDEND. STOCK SPLIT OR SUBDIVISION OF SHARES. If the number of shares of Stock outstanding at any time after the date hereof is increased by the issuance of Stock, or securities convertible into stock, for a consideration per share of Stock of less than $1.00 per share, or as a result of a stock dividend payable in shares of Stock, or by a subdivision or split-up of shares of Stock, then, upon issuance of such Stock or other securities convertible into Stock or following the record date fixed for the determination of holders of Stock entitled to receive such stock dividend, subdivision or split-up, as the case may be, the Conversion Price shall be appropriately decreased and the number of shares of Stock issuable upon conversion of this Note shall be appropriately increased in proportion to such increase in outstanding shares. No adjustment shall be made as a result of the issuance of shares of Stock pursuant to existing stock option plans of the Company in an amount up to the maximum number of shares of Stock approved for issuance under such plans at the date hereof. (ii) COMBINATION OF SHARES. If, at any time after the date hereof, the number of shares of Stock outstanding is decreased by a combination of the outstanding shares of Stock, then, following the record date for such combination, the Conversion Price shall be appropriately increased and the number of shares of Stock issuable upon conversion of this Note shall be appropriately decreased in proportion to such decrease in outstanding shares. 7. THE COMPANY'S REPRESENTATIONS. The Company represents and warrants to the Holder that: (a) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to do business and is in good standing in each other jurisdiction where the conduct of its business or the ownership of its properties require such qualification and where failure to be so qualified would have a material adverse effect on the Company. The Company has full corporate power and authority and is entitled to own or lease its properties and carry on its business as and in all places where such business is conducted and such properties are owned or leased; (b) as of the date hereof and before giving effect to this Note, the Company's total authorized Stock and total issued and outstanding shares of Stock are as set forth in EXHIBIT B. Except as set forth in EXHIBIT B, there are no options, warrants or rights to acquire shares or other securities of the Company authorized, issued or outstanding, nor is the Company obligated in any other manner to issue shares or other securities. All shares and other securities of the Company presently issued and outstanding are duly authorized, validly issued, fully paid and nonassessable and were authorized, offered, issued and sold without violating the terms of any 4 applicable preemptive or similar statutory or contractual rights to which the Company is a party or that is otherwise binding upon the Company. Neither the execution and delivery of this Note nor conversion and issuance of the Conversion Shares, if and when issued, does or will violate the terms of any applicable preemptive or similar statutory or contractual rights to which the Company is party or that is otherwise binding upon the Company. Except as set forth in the Company's certificate of incorporation, as amended, and bylaws, as amended, there are no restrictions on the transfer of shares of stock or other securities of the Company other than those imposed by relevant federal and state securities laws or Nasdaq stock market rules; (c) the Company has the full corporate power and authority to execute, deliver and perform this Note (and to borrow hereunder), and that certain Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT") dated as of the date hereof. The Company has taken all necessary and appropriate corporate action to authorize the execution, delivery and performance of this Note and the Registration Rights Agreement, each of which has been duly and validly executed and delivered by the Company and constitute the valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and by general equitable principles; (d) the execution, delivery and performance by the Company of this Note and the Registration Rights Agreement do not and will not violate any provision of any applicable law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect and known to the Company, or result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Company is a party or by which its properties may be bound or affected (each such indenture, agreement, lease or instrument, a "MATERIAL AGREEMENT"); (e) there is no fact peculiar to the Company which materially adversely affects (or is reasonably likely to materially adversely affect) the business, property or assets, or financial condition of the Company which has not been disclosed to Holder in writing by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby or by the Registration Rights Agreement; (f) there are no legal proceedings pending or to the Company's knowledge threatened, against, by or affecting the Company before any court or administrative agency which, if adversely determined, could materially adversely affect (or is reasonably likely to materially adversely affect) the business, assets, liabilities, financial condition or results of operations of the Company, the rights or remedies of Holder under, or the legality, validity or enforceability of, this Note and the Registration Rights Agreement; (g) the Company has taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination or other similar anti-takeover provision under the certificate of incorporation or bylaws of the Company which is or could become applicable to the Holder or the issuance of this Note or the Conversion Shares. None of the transactions contemplated by this Note or the Registration Rights Agreement, including the 5 conversion of the Note into shares of Stock, will trigger any poison pill provisions of any of the Company's stockholders' rights or similar agreements; (h) the Company has delivered to the Holder copies of its audited financial statements as of December 31, 1999 and its unaudited financial statements as of June 30, 2000 included in its most current Form 10-K and Form 10-Q, respectively. (the "Financial Statements"). The Financial Statements are true, complete and correct and have been prepared in accordance with generally accepted accounting principles, consistently applied; and (i) the Company is not engaged principally, or as one of its important activities, in the business of purchasing or carrying any "margin stock", as that term is defined in Section 221.2(h) of Regulation U of the Board of Governors of the Federal Reserve System, and no part of the indebtedness evidenced by this Note will be or has been used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X of said Board of Governors. 8. COVENANTS. For so long as any present or future debts, liabilities and obligations of the Company owing to the Holder (including its successors and assigns) arising under or in connection with this Note (collectively, "Obligations") remain outstanding, which Obligations are binding on all of the Company's successors and assigns, the Company covenants and agrees that: (a) the Company shall not (i) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); or (ii) convey, sell, transfer or otherwise encumber or dispose of in one transaction or a series of transactions, all or substantially all of its business or assets; (b) the Company shall not permit to exist or enter into any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any affiliate of the Company or with any director, officer or employee of the Company, (i) except for salaries and other remuneration paid to employees in the ordinary course of business at levels consistent with past practices (subject to annual increases in compensation consistent with past practices); (ii) reimbursement of reasonable bona fide business expenses incurred in the conduct of the Company's business in the ordinary course consistent with its past practices; or (iii) as approved by the Board of Directors of the Company by vote of disinterested directors; (c) as long as Holder holds this Note or owns the Conversion Shares, the Company will cause the Stock to continue at all times to be registered under Section 12 of the Securities and Exchange Act of 1934 ("Exchange Act") or subject to Section 15(d) of the Exchange Act, will timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13, 14 or 15(d) of the Exchange Act and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such reporting and filing obligations. As long as Holder holds this Note or owns the Conversion Shares, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Holder and make publicly available 6 in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as the Holder may reasonably request, all to the extent required from time to time to enable the Holder to sell the Conversion Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act. Upon the request of Holder, the Company shall deliver to Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. (d) the Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the issuance of this Note or the Conversion Shares in a manner that would require the registration under the Securities Act of the issuance of this Note to Holder or the sale of the Conversion Shares to Holder, or to issue securities in such circumstances that is likely to result in such offering being integrated with the issuance of this Note to Holder or the sale of the Conversion Shares in such manner that stockholder approval would be required pursuant to any stockholder approval provision applicable to the Company or its securities. (e) (1) the Company shall (i) not later than twenty (20) business days after the date hereof, prepare and file with Nasdaq (as well as any other national securities exchange or market on which the Stock is then listed) additional shares listing applications or letters acceptable to Nasdaq covering and listing a number of shares of Stock which is at least equal to 100% the maximum number of Conversion Shares then issuable, assuming that the payment of all future dividends on such shares then outstanding were made in shares of Stock, (ii) take all steps necessary to cause the Conversion Shares to be approved for listing on Nasdaq (as well as on any other national securities exchange or market on which the Stock is then listed) as soon as possible thereafter, (iii) maintain, so long as any other shares of Stock shall be so listed, such listing of all Conversion Shares, and (iv) provide to Holder evidence of such listing. The Company shall promptly provide to Holder copies of any notices it receives from Nasdaq regarding the continued eligibility of the Stock for listing on such automated quotation system. The Company shall pay all fees and expenses in connection with satisfying its obligations under this subsection (e)(l). (2) the Company at all times shall reserve a sufficient number of shares of its authorized but unissued Stock to provide for the full conversion of this Note into Stock. If at any time the number of shares of Stock authorized and reserved for issuance is insufficient to cover 100% of the number of Conversion Shares issuable upon conversion of this Note (based on the Conversion Price in effect from time to time) without regard to any limitation on conversions or exercises, the Company will promptly take all corporate action necessary to authorize and reserve 100% of such required shares of Stock, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this subsection (e)(2), in the case of an insufficient number of authorized 7 shares, and using best efforts to obtain stockholder approval of an increase in such authorized number of shares. 9. HOLDER'S REPRESENTATIONS. By its acceptance of this Note, the Holder hereby acknowledges and represents and warrants to the Maker that: (a) Holder is experienced in evaluating and investing in companies such as the Company, and is an "accredited investor" (as such term is defined in Section 2(15) of the Securities Act of 1933 (the "SECURITIES ACT"); (b) Holder is acquiring the Note for investment for Holder's own account and not with a view to, or for resale in connection with, any distribution thereof. Holder understands that the Note has not been registered under the Securities Act by reason of an exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of Holder's investment intent; and (c) The Note must be held indefinitely unless it is subsequently registered under the Securities Act or an exemption from such registration is available. 10. FINANCIAL INFORMATION. The Maker will from time to time deliver to the Holder such information respecting the condition or operations, financial or otherwise, or property of the Maker and its subsidiaries as the Holder may reasonably request, including, without limitation all public filings made with the Securities and Exchange Commission. 11. EXPENSES. Maker herewith agrees to pay, on demand, all costs and expenses of collection of this Note or of any endorsement or guaranty hereof and/or the enforcement of Holder's rights with respect to this Note, including, without limitation, reasonable attorneys fees actually incurred by Holder if this Note is collected by an attorney-at-law. 12. HOLDER. The term "Holder" as used in this Note shall include Holder's successors, endorsees and assigns. 13. EVENTS OF DEFAULT. (a) The occurrence of any one or more of the following events will constitute a default by the Maker hereunder (each, an "Event of Default"): (i) the Maker fails to pay when due any amount payable under this Note and Holder does not deliver a Conversion Notice within the Conversion Period; (ii) Maker fails to perform or breaches a covenant or agreement in this Note or in the Registration Rights Agreement, or the Maker takes or omits to take any action that if taken or not taken by the Maker would constitute a breach of any such covenant or agreement and Maker fails to cure such breach or omission within thirty days after written notice from Holder; (iii) any statement, representation, or warranty made by the Maker or on its behalf in connection with this Note or in the Registration Rights Agreement proves to have been untrue, incorrect, misleading or incomplete in any material respect as of the date made; (iv) the Maker is in default under any other agreement with the Holder (or any of its affiliates) or under any other instrument executed by the Maker in favor of the Holder (or any of its affiliates); (v) the Maker 8 shall fail to pay when due any other indebtedness for borrowed money owed by it to any person in an amount in excess of $1,000,000 and such default shall continue beyond any applicable grace period and is not otherwise waived by such person; (vi) the Maker becomes insolvent as defined in the Uniform Commercial Code or any similar law in its jurisdiction of incorporation or makes an assignment for the benefit of creditors, or an action is brought by the Maker seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property, or the Maker commences a voluntary case under the U.S. Federal Bankruptcy Code or any similar law in any relevant jurisdiction, or a reorganization or arrangement proceeding is instituted by the Maker for the settlement, readjustment, composition or extension of any of its debts upon any terms, or an action or petition is otherwise brought by the Maker seeking similar relief or alleging that it is insolvent or unable to pay its debts as they mature; (vii) an action is brought against the Maker seeking its dissolution or liquidation of any of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property, and such action is consented to or acquiesced in by the Maker or is not dismissed within sixty (60) days of the date upon which it was instituted, or a proceeding under the U.S. Federal Bankruptcy Code or any similar law in any relevant jurisdiction is instituted against the Maker and an order for relief is entered in such proceeding or such proceeding is consented to or acquiesced in by it or is not dismissed within sixty (60) days of the date upon which it was instituted, or a reorganization or arrangement proceeding is instituted against the Maker for the settlement, readjustment, composition or extension of any of its debts upon any terms and such proceeding is consented to or acquiesced in by it or is not dismissed within sixty (60) days of the date upon which it was instituted, or an action or petition is otherwise brought against the Maker seeking similar relief or alleging that it is insolvent, unable to pay its debts as they mature or generally not paying its debts as they become due and such action or petition is consented to or acquiesced in by it or is not dismissed within sixty (60) days of the date upon which it was brought; or (viii) dissolution of or liquidation of the Maker. (b) Subject to Section 6, upon the occurrence of an Event of Default, Holder, at its option, without demand or notice of any kind, may declare this Note immediately due and payable, whereupon the Maturity Date hereunder shall be the date of such declaration and all outstanding principal and accrued interest shall become immediately due and payable; provided, however, that upon the occurrence of any Event of Default described in clause (vi) or (vii) above, this Note, without demand, notice or declaration by the Holder of any kind, shall automatically and immediately become due and payable. (c) Upon the occurrence of an Event of Default hereunder, the Holder, without notice or demand of any kind, may hold and set off against any or all outstanding principal or interest owing under this Note as the Holder may elect, any balance or amount to the credit of the Maker in any deposit, agency, reserve, holdback or other account of any nature whatsoever maintained by or on behalf of the Maker with the Holder or any of its affiliates at any of its offices, regardless of whether such accounts are general or special and regardless of whether such accounts are individual or joint. 14. USURY. In no event shall the amount or rate of interest due and payable under this Note exceed the maximum amount or rate of interest allowed by applicable law and, in the event 9 any such excess payment is made by the Maker or received by the Holder, such excess sum shall be credited as a payment of principal (or if no principal shall remain outstanding, shall be refunded to the Maker). It is the express intent hereof that the Maker not pay and the Holder not receive, directly or indirectly or in any manner, interest in excess of that which may be lawfully paid under applicable law. All interest (including all charges, fees or other amounts deemed to be interest) which is paid or charged under this Note shall, to the maximum extent permitted by applicable law, be amortized, allocated and spread on a pro rata basis throughout the actual term of this Note. 15. TIME OF THE ESSENCE. Time is of the essence with respect to the obligations of the Maker evidenced hereby. Demand, presentment, notice, notice of demand, notice for payment, protest and notice of dishonor are hereby waived by the Maker. The Holder shall not be deemed to waive any of its rights under this Note unless such waiver be in writing and signed by the Holder. No delay or omission by the Holder in exercising any of its rights under this Note shall operate as a waiver of such rights and a waiver in writing on one occasion shall not be construed as a consent to or a waiver of any right or remedy on any future occasion. 16. CHOICE OF LAW. This Note shall be governed by and construed under the internal laws of the State of Alabama without giving effect to conflicts of laws. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. 17. WAIVER OF JURY TRIAL MAKER HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT MAKER MAY HAVE UNDER ANY APPLICABLE LAW TO A TRIAL BY JURY WITH RESPECT TO ANY SUIT OR LEGAL ACTION WHICH MAY BE COMMENCED BY OR AGAINST HOLDER CONCERNING THE INTERPRETATION, CONSTRUCTION, VALIDITY, ENFORCEMENT OR PERFORMANCE OF THIS NOTE OR ANY OTHER AGREEMENT OR INSTRUMENT EXECUTED IN CONNECTION HEREWITH, INCLUDING THE REGISTRATION RIGHTS AGREEMENT. IN THE EVENT ANY SUCH SUIT OR LEGAL ACTION IS COMMENCED BY HOLDER, MAKER HEREBY EXPRESSLY AGREES, CONSENTS AND SUBMITS TO THE PERSONAL JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN THE COUNTY IN WHICH HOLDER'S ADDRESS SHOWN BELOW IS LOCATED WITH RESPECT TO SUCH SUIT OR LEGAL ACTION, AND MAKER ALSO EXPRESSLY CONSENTS AND SUBMITS TO AND AGREES THAT VENUE IN ANY SUCH SUIT OR LEGAL ACTION IS PROPER IN SAID COURTS AND COUNTY AND MAKER HEREBY EXPRESSLY WAIVES ANY AND ALL PERSONAL RIGHTS UNDER APPLICABLE LAW OR IN EQUITY TO OBJECT TO THE JURISDICTION AND VENUE IN SAID COURTS AND COUNTY. THE JURISDICTION AND VENUE OF THE COURTS CONSENTED AND SUBMITTED TO AND AGREED UPON IN THIS PARAGRAPH ARE NOT EXCLUSIVE BUT ARE 10 CUMULATIVE AND IN ADDITION TO THE JURISDICTION AND VENUE OF ANY OTHER COURT UNDER ANY APPLICABLE LAW OR IN EQUITY. 18. NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered to Maker by overnight courier or mailed, first-class postage prepaid, addressed to Maker at the address set forth beneath Maker's signature below. Notice shall be effective upon the earlier of (I) receipt or (ii) five days after mailing as provided above. IN WITNESS WHEREOF, Maker has caused this Note to be executed and sealed by its authorized officers on the date first above written. NETWORK COMPUTING DEVICES, INC. [CORPORATE SEAL] By: ________________________________ Rudolph G. Morin President and Chief Executive Officer Attest: By: Title: Address for notices: 301 Ravendale Drive Mountain View, California 94043-5207 Attn: 11 EX-4.2 3 a2030495zex-4_2.txt EXHIBIT 4-2 EXHIBIT 4.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as of the 31 of August, 2000, by and between NETWORK COMPUTING DEVICES, INC., a Delaware corporation (the "COMPANY"), and SCI TECHNOLOGY, INC., an Alabama corporation (the "HOLDER"). ARTICLE I BACKGROUND SECTION 1.1. BACKGROUND. The Company is indebted to the Holder in the approximate amount of $3,290,000 arising out of certain accounts payable owed to the Holder by the Company. The Holder has requested that the Company issue, and the Company has agreed to issue its Convertible Promissory Note in the original principal amount of $3.300,000 payable to the Holder, dated as of the date hereof (the "NOTE"). The Note is convertible, at the Holder's option and subject to the terms and conditions of the Note, into shares of common stock, par value $.001 per share ("STOCK") of the Company. The Note has been issued to the Holder without registration under the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the shares of Stock issuable upon conversion of the Note likewise have not been registered. The parties desire to provide for the registration of the shares of Stock issuable or issued upon conversion of the Note. ARTICLE II DEFINITIONS SECTION 2.1 DEFINITIONS. For purposes of this Agreement, the following capitalized terms have the respective meanings set forth below: (a) The term "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act. (b) The term "GAAP" means U.S. generally accepted accounting principles consistently applied. (c) The term "EQUITY EQUIVALENTS" means warrants, options or other rights to purchase Stock, or any debt, shares or other securities convertible into or exchangeable for Stock. (d) The term "HOLDER" means any person, including SCI Technology, Inc., owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with this Agreement. (e) The term "REGISTER," "REGISTERED," and "REGISTRATION" refers to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. (f) The term "REGISTRABLE SECURITIES" means (i) the shares of Stock issuable or issued upon conversion of the Note, and (ii) any other Securities issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares of Stock listed in clause (i) above. Notwithstanding the foregoing, Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) effectively registered under the Securities Act and sold or distributed to any Person pursuant to an effective registration statement covering it, or (B) sold in a transaction exempt from the registration and prospectus delivery requirement of the Securities Act so that all transfer restrictions, and restrictive legends with thereto, if any, are removed upon the consummation of such sale. (g) The number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares of Stock that are Registrable Securities which are then issued and outstanding, plus those which are issuable pursuant to then exercisable or convertible securities. (h) The term "REGISTRATION EXPENSES" means all expenses incident to the Company's performance of or compliance with Article 3 including. without limitation, all registration and filing fees; all fees and expenses of complying with securities or blue sky laws; all printing expenses; the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits required by or incident to such performance and compliance; and the reasonable fees and disbursements of one counsel for the Holder. (i) The term "SEC" means the Securities and Exchange Commission. (j) The term "SELLING EXPENSES" means all underwriting discounts, selling commissions and transfer taxes applicable to the sale of Registrable Securities. ARTICLE III REGISTRATION RIGHTS SECTION 3.1 DEMAND REGISTRATION. (a) If at any time after conversion of the Note and issuance of the Stock to the Holder, the Company receives a written request from the Holder that the Company file a registration statement under the Securities Act covering the registration of all or a portion of the Registrable Securities of the Holder then outstanding, then the Company shall as soon as practicable effect such registration of the Registrable Securities of the Holder. Such obligation shall include, without limitation, the execution of an undertaking to file post-effective amendments and to effect appropriate registrations or qualifications under applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations. (b) If the Holder intends to use an underwriter to distribute the Registrable Securities covered by its request, it shall so advise the Company in its request. In such event, the Holder shall (together with the Company) enter into an underwriting agreement with an underwriter selected by the Holder, subject to the approval of the Company which shall not be unreasonably withheld. The Company shall not register any other securities in connection with any such demand registration, other than for its own account. Notwithstanding any other provision of this subsection, if the underwriter advises the Holder and the Company in writing that marketing factors require a limitation of the number of shares to be included in the underwriting, then shares, if any, other than Registrable Securities shall first be excluded from such registration to the extent required by such underwriting limitation. If the number of shares of Registrable Securities so excluded exceeds twenty percent (20%) of the number of shares of Registrable Securities which the Holder has requested be included in such registration, then the Holder shall be entitled either (i) to require that the registration be deferred for such period of time as the Holder, the Company and the underwriter may mutually agree upon, but in no event for more than ninety (90) days from delivery of a written notice of the Holder to the Company requesting such delay, or (ii) to withdraw the registration request, in which case it shall not count as a demand registration for purposes of the limitation in SECTION 3.1(d). The Company shall not effect a sale of any securities of the Company similar to the Registrable Securities being offered in the underwritten offering, or convertible or exercisable for Registrable Securities during the period commencing ten (10) days prior to and ending one hundred twenty (120) days after the effective date of the applicable registration statement. (c) Notwithstanding the foregoing, if the Company shall furnish to the Holder, a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the board of directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period not more than ninety (90) days after receipt of the request of the Holder; PROVIDED, HOWEVER, that the Company may not utilize this right more than once. (d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to SECTION 3.1(a) after the Company has effected two demand registrations and each such registration has been declared or ordered effective and kept effective for at least one hundred twenty (120) days. Notwithstanding the immediately preceding sentence or the provisions of SECTION 3.1(b), a registration will not count as a demand registration under SECTION 3.1(a) unless the Holder was able to sell a minimum of seventy-five (75%) of the shares sought to be registered in such registration. SECTION 3.2. COMPANY REGISTRATION. If at any time the Company proposes to register any of its securities under the Securities Act, whether or not for sale for its own account, on a form and in a manner which would permit registration of its shares for sale to the public under the Securities Act (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan, an offering or sale of securities pursuant to a Form S-4 (or successor form) registration statement, or an SEC Rule 145 transaction), it will each such time give prompt written notice to the Holder of its intention to do so, describing such securities and specifying the form and manner and the other relevant facts involved in such proposed registration, and upon the written request of the Holder delivered to the Company within thirty (30) days after the giving of any such notice, the Company will effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holder to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid). The Company will use its commercially reasonable efforts to cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition by the Holder of such Registrable Securities so registered. If any registration pursuant to this SECTION 3.2 shall be, in whole or in part, an underwritten public offering of securities, then the number of Registrable Securities to be included in such an underwriting may be reduced by the Company if and to the extent that the managing underwriter or underwriters shall be of the opinion that such inclusion would adversely affect the marketing, success or offering price of such offering as follows: first, all shares held by other persons requesting inclusion in such offering shall be reduced pro rata among such persons according to the number of shams requested by each such person to be registered, then all shares held by the Holder shall be reduced, and finally, shares to be sold by the Company shall be reduced. SECTION 3.3 FORM S-3 REGISTRATION. If, at a time when Form S-3 (or any comparable successor form) is available for the registration of Registrable Securities and the Company is eligible to use Form S-3 (or such successor form) for such registration, the Company shall receive from the Holder a written request that the Company effect a registration on Form S-3 (or such successor form) of any of the Holder's Registrable Securities, the Company will promptly give written notice of the proposed registration to the Holder and, as soon as practicable, effect such registration and all such related qualifications and compliances as may be reasonably requested and as would permit or facilitate the sale and distribution of all Registered Securities as are specified in such request. The rights of the Holder to request registration under this SECTION 3.3 shall be in addition to all other registration rights in this Agreement. The Company shall have no obligation to effect a registration under SECTION 3.3 more than three times. SECTION 3.4. REGISTRATION EXPENSES. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to SECTIONS 3.1, 3.2 AND 3.3 shall be borne by the Company; and all Selling Expenses shall be borne by the Holder and any other holders of the securities so registered pro rata on the basis of the number of their shares so registered. SECTION 3.5. REGISTRATION PROCEDURES. (a) When the Company is required to effect the registration of any Registrable Securities under the Securities Act as provided in this ARTICLE 3, the Company shall as expeditiously as possible: (i) prepare and file with the SEC a registration statement on the appropriate form with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective as promptly as practicable, and upon the request of the Holder, keep such registration statement effective to; at least one hundred twenty (120) days; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of: (a) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Holder set forth in such registration statement; or (b) the expiration of one hundred and twenty (120) days after such registration statement becomes effective; (iii) furnish to the Holder such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Holder may reasonably request; (iv) use its best efforts to register and qualify all securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable the Holder to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (v) furnish to the Holder a signed counterpart, addressed to the seller, of (A) an opinion of counsel for the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), and (B) a "cold comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and its accountants' letters delivered to underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, as the Holder may reasonably request; (vi) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement in usual and customary form, with the managing underwriter of such offering; (vii) immediately notify the Holder, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Holder prepare and furnish a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (viii) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. The Company may require the Holder, when any registration is being effected with respect to any of the Holder's Registrable Securities, to furnish the Company such information regarding the Holder and the distribution of the securities as the Company may from time to time request in writing for inclusion in the applicable registration statement as required by law or by the SEC in connection therewith. SECTION 3.6. PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act, the Company will give the Holder and any underwriter, if any, and their counsel and accountants, a reasonable opportunity to participate in the preparation of such registration statement and other documents related thereto, and will give them reasonable access to books and records and personnel such as is reasonably necessary to facilitate preparation of such documents and filing. SECTION 3.7. FURNISH INFORMATION. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this ARTICLE 3 with respect to the Registrable Securities of the Holder that the Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of the Holder's Registrable Securities. SECTION 3.8. INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this ARTICLE 3: (a) The Company will indemnify and hold harmless the Holder, its directors and officers, and each other person, if any, who controls the Holder within the meaning or the Securities Act, against any losses, claims, damages, liabilities and expenses (including reasonable legal fees and expenses and costs of investigation), joint or several, to which the Holder or any such director or officer or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse the Holder, and each such director, officer, and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company shall not be liable to such an indemnified person in any such case to the extent (but only to the extent) that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus summary prospectus, amendment or supplement or any documents incorporated by reference in any of the above in reliance upon and in conformity with written information furnished by such indemnified person to the Company and designated by such person to be for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holder or any such director, officer, or controlling person and shall survive the transfer of such securities by the Holder. (b) To the extent permitted by law, the Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement in or omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto or any documents incorporated by reference in any of the above, if such statement or omission was made solely in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by the Holder specifically stating that it is for inclusion in such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by the Holder; PROVIDED, HOWEVER, that the Holder's liability hereunder shall not exceed the aggregate net offering proceeds received by the Holder. (c) If the indemnification provided for in this SECTION 3.8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or action in respect thereof referred to herein, then the indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, in connection with the statement or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault of the indemnifying party and the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holder agree that it would not be just and equitable if contributions pursuant to this SECTION 3.8(c) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable to an indemnified party as a result of the losses, claims, damages, liabilities or action in respect thereof, referred to above, shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this SECTION 3.8, in no event shall the amount contributed by the Holder exceed the aggregate net offering proceeds received by such seller from the sale of such shares. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (d) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this SECTION 3.8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED, THAT the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this SECTION 3.8. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof; provided, however, that if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties (and the indemnifying party or parties shall bear the reasonable legal and other expenses incurred in connection therewith). No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a full and final release from all liability in respect to such claim or litigation. SECTION 3.9. RULE 144 AND 144A. The Company will file the reports required to be filed by it under the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act') (or, if the Company is not required to file such reports, will, upon the request of the Holder, make publicly available other information necessary to comply with Rule 144(c) and Rule 144A, as applicable), and will take such further action as the Holder may reasonably request, all to the extent required ftom time to time to enable the Holder to sell shares of the Company without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of the Holder, the Company will deliver to the Holder (i) a verified, written statement of the President or Chief Financial Officer as to whether it has complied with such requirements; (ii) if applicable, a copy of the most recent annual or quarterly report of the Company; and (iii) such other reports and documents as the Holder may reasonably request to avail itself of Rule 144, 144A or any other rule or regulation of the SEC allowing the Holder to sell its shares of the Company without registration. ARTICLE IV GENERAL SECTION 4.1. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder. SECTION 4.2 NOTICES. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be delivered, or mailed by first-class mail, postage prepaid, addressed, if to the Holder, to the attention of Michael Ledbetter, addressed in the manner set forth beneath the Holders signature below or at such address, or to the attention of such other officer, as the Holder shall have furnished to the Company in writing a notice properly given hereunder or, if to the Company, to the attention of its Secretary, addressed in the manner set forth beneath the Company's signature below, or at such other address, or to the attention of such other officer, as the Company shall have furnished to the Holder in a notice properly given hereunder. SECTION 4.3. ADJUSTMENTS. This Agreement shall apply to any shares of Stock issued to the Holder with respect to, upon exercise or conversion of, or in exchange for, any Registrable Securities, held by the Holder, by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, except for shares of capital stock which have been distributed by the Holder to the public pursuant to a registration statement or Rule 144 (or any successor provision) under the Securities Act. SECTION 4.4. MISCELLANEOUS. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not. (b) This Agreement, together with the Note, embodies the entire agreement and understanding between the Holder and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof. (c) Terms used but not defined in this Agreement shall have the meaning assigned to such terms in the Note. (d) The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. (e) This Agreement may be executed in two or more counterparts (including by facsimile), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) Time is of the essence under this Agreement. (g) This Agreement shall be governed by and construed under the internal laws of the State of Delaware without giving effect to conflicts of laws. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. [The remainder of this page left intentionally blank] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective duly authorized corporate officers as of the date first written above. NETWORK COMPUTING DEVICES, INC. Seal By: /S/ ---------------------------------- Print Name: ------------------------- Title: ------------------------------ Attest: /S/ Print Name: Title: ------------------------------ Address for notices: 301 Ravendale Drive Mountain View, California 94043-5207 SCI TECHNOLOGY, INC. By: /S/ ----------------------------------- Print Name: -------------------------- Title: ------------------------------- Attest: /S/ Print Name: Title: ------------------------------- Address for notice: 2101 West Clinton Avenue Post Office Box 1000 Huntsville, Alabama 35807 EX-27 4 a2030495zex-27.txt EXHIBIT 27
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 704 333 17,739 6,792 11,654 25,213 19,976 17,626 30,217 22,228 0 0 0 62,147 (54,158) 30,217 37,978 37,978 30,350 30,350 37,551 647 398 (30,237) 448 (30,685) 0 0 0 (30,685) (1.85) (1.85) Includes revenues from licensing of software and support services Includes costs from licensing of software and support services
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