-----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, HN6C4PuzscCS6yoK554+AmqRs3nuZ84aUeYMCGPQNnOMqyrrbV8uNiwwF+1eNPRy yWZStN4d/UNir398EZttlw== 0000912057-01-506031.txt : 20010409 0000912057-01-506031.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK COMPUTING DEVICES INC CENTRAL INDEX KEY: 0000886138 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 770177255 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20124 FILM NUMBER: 1589102 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-K 1 a2043237z10-k.txt 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------- FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2000 / / 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 DRIVE, MOUNTAIN VIEW, CALIFORNIA 94043 (Address of principal executive offices) (Zip Code) (650) 694-0650 (Registrant's telephone number, including area code) Securities registered pursuant to 12(b) of the Act: None Securities registered pursuant to 12(g) of the Act: COMMON STOCK, $0.001 PAR VALUE (Title of class) 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 28, 2001, as reported on the Nasdaq Stock Market, was approximately $4,313,645. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2001, 17,613,237 shares of the registrant's Common Stock and 220,000 shares of Convertible Preferred Stock, Series B, were outstanding. Documents Incorporated by Reference Portions of the Proxy Statement for the Annual Meeting of Stockholders of Network Computing Devices, Inc. (the "Proxy Statement") scheduled to be held on or about May 23, 2001, are incorporated by reference in Part III of this Report on Form 10-K. PART I THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS, WHICH REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. ITEM 1. BUSINESS. GENERAL Network Computing Devices, Inc. provides thin client hardware and software that delivers 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 line includes the NCD THINSTAR line of Windows-based terminals, the NCD EXPLORA, NC200, NC400 AND NC900 network computers. On the software side we offer 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. Some of the software products were part of the NCD THINSTAR software family in 1998; they have been re-named and were announced in March 1999 as part of the THINPATH software family. Our thin clients, THINPATH software, and installation and support services are a combination that delivers a fully integrated desktop solution to companies seeking a low-cost, easy to manage, simple to use, high performance user experience. Since introducing our first product in 1989, we have installed over 1,000,000 thin clients worldwide. Network Computing Devices, Inc. is a Delaware corporation. We were originally incorporated in California in February 1988 and were reincorporated in Delaware in October 1998. Unless the context otherwise requires, the terms "the Company" and "NCD" refer to Network Computing Devices, Inc. and its consolidated subsidiaries. INDUSTRY BACKGROUND THIN CLIENT COMPUTING Computing environments made a pendulum-like swing from the highly centralized mainframe and minicomputer systems of the 1970s to the fully distributed personal computer- and workstation-based systems of the 1980s. While the earlier approach benefited from centralized system administration and security, users had to compete for under-powered, centralized processors on a timesharing basis, using low-performance, character-based "dumb" terminals. During the 1980s, microprocessor-based systems improved in price and performance, and graphical user interfaces ("GUIs") with easy-to-use windows, menus, and icons, became widely available. User groups within large organizations began implementing their own solutions, using personal computers and workstations on the desktop to give each individual user a dedicated computing resource. The need to interconnect these computing resources led to the development of local area networks ("LANs"), which resulted in processing, data and applications being spread across many desktops. This approach brought with it new problems: the high cost of installing, maintaining and upgrading a computer on every desktop; under-utilization of individual computing resources; and complex system management requiring large IT staffs. 2 As the 1990s approached, businesses developed networks and highly efficient networked servers that could provide the information required to remain competitive. Since this data was being accessed and used by unsophisticated non-technical individuals, it became important to provide simple, high-performance graphics devices to access the data, and the tools that made it easy to manage the information and the devices that accessed it. A new computing environment evolved and came to be referred to as "thin client computing" which combines the cost-effectiveness, manageability and security of the original centralized model with the performance, GUIs and network accessibility of the later distributed model. The original development of thin client computing came in the UNIX environment using the X Windows System (often simply called X). It was followed in the Microsoft Windows environment by Citrix's Independent Computing Architecture ("ICA") and then by Microsoft's Remote Desktop Protocol ("RDP"). All three technologies allow applications to run on centrally-administered servers, taking advantage of enterprise-level resources. The applications' graphical user interface ("GUI") is then sent over the network to the user's desktop or viewing appliance. This separation of the display of applications from the computing they require enables organizations to deploy, manage and upgrade one or a small number of servers instead of hundreds or thousands of individual personal computers. The result is faster access to new technology, higher productivity, longer use of both client and server capital investments, and greatly improved use of information technology staff resources. Over the last several years, a number of important developments occurred which expanded the potential markets for network computing systems. First, the availability of the powerful Pentium microprocessor enabled the development of complex Windows-based systems. The thin client model was solidified by the introduction of the "lean client" initiative, Intel's thin client architecture, demonstrating its support for thin clients and its investment in us to work on the realization of the lean client initiative. Second, Microsoft NT Server software, combined with Microsoft-authorized multi-user software such as Citrix MetaFrame and NCD THINPATH, became available to support multi-user Windows applications. In September 1998, Microsoft demonstrated its support of the thin client computing model with its introduction of Windows NT 4.0 server, Terminal Server Edition (Windows Terminal Server) and its support of the development of Windows CE-based thin clients to access these servers. This has been followed and significantly enhanced by their subsequent integration of Terminal Services into Windows 2000, enabling thin clients to more easily access Windows applications from any Windows server. Third, the rapid growth of the Internet and Internet-based computing has popularized the concept of remote computing and created new interest in the thin client computing model. With the centralization of applications in this client computing model, much greater emphasis is placed on the management of servers that support increasing numbers of users for their mission critical applications. This has created new market opportunities for server monitoring and management software products. Looking further forward, the emphasis on development of a "web services" model for computing where programs and objects are distributed across the internet will allow a new class of desktop device based on a browser to become a dominant force in the access device market and provide opportunities for the NCD ThinSTAR and NC products which contain a local browser. With the rapid evolution of the internet, more companies are looking at deploying thin client applications through web-based interfaces which is driving the deployment of distributed web servers based on various technologies such as Intel and National Semiconductor microprocessors, operating systems from Microsoft and Sun, as well as the Linux operating system. With the move of applications to the server in thin client computing, there has been a rapid rise in the interest in Application Service Providers ("ASPs"), companies that rent application time to end users to save them the administrative costs of running their own IT department. 3 INFORMATION ACCESS AND INFRASTRUCTURE MANAGEMENT SOFTWARE Software is key to information access and infrastructure management. The physical connection to the intranet or Internet is relatively simple; but the simple, well managed, cost-effective operation of network-wide computing resources requires sophisticated software. The market for enterprise information access and infrastructure management software is large and comprised of a number of segments, many of which are expanding rapidly. Segments of the information access market include: PC software for accessing remote UNIX and Windows applications and Internet integration software. The server management software market is also large, with the Windows server management segment experiencing the highest rate of growth. With the continuing proliferation of increasingly powerful and low-cost PCs in large organizations, we identified a demand for software products to enable DOS-based and Windows-based PCs to emulate X terminals for use in predominantly UNIX environments. In order to address this market, in 1992 we acquired Graphic Software Systems, a pioneer in the development of X software for PCs. In 1993, we introduced PC-XWARE, its initial PC-UNIX integration software product. PC-XWARE is based on our NCDWARE X terminal operating environment and provides network connectivity using an NCD-developed TCP/IP software stack. NCD now offers versions of PC-XWARE for WINDOWS 3.1 through WINDOWS 2000 as well as WINDOWS NT users in addition to its new version, NCD THINPATH X-WARE, a part of its NCD THINPATH software family. In 1995, we introduced NCD WINCENTER software that included Microsoft Windows NT as its basic operating system and WinFrame, Microsoft-authorized multi-user software that we licensed from Citrix Systems, Inc. NCD WINCENTER also included NCD-developed graphics and network features that make it compatible with the X Windows protocol supported by our thin clients and UNIX workstations. NCD WINCENTER allowed a single server to provide Windows applications to many users simultaneously. In September of 1998, the licensing agreement with Citrix was terminated. Building on this core competency, in 1999 we introduced the NCD THINPATH family of software that includes three types of functionality--connectivity, management and desktop support. The software includes emulators that allow any desktop to access virtually any host environment, management tools to remotely administer desktops and to optimize server performance and support of local printers, peripheral devices and audio input/output. These products deliver features that enhance the performance of Microsoft's Windows Terminal Server without adding a layer of protocol software. In January 2000, we acquired Multiplicity LLC, a provider of strategic performance, capacity and service level management software for Windows NT server environments. In August 2000, we repositioned our ThinPATH software to concentrate on client-side management and feature extension, re-establishing a strategic relationship with Citrix Systems. As a result, we deemphasized products which were centered on a server-based software strategy, including the Multiplicity product, and we discontinued Multiplicity's operations in September 2000. MARKETS AND APPLICATIONS Our thin clients are used in a broad range of industries for a wide variety of applications. Thin clients are widely used in task-based applications like order-entry and point-of-sale. Our main target industries are healthcare, retail, finance and education. Initially, our X-terminal systems were sold as alternatives to high-priced UNIX workstations required to 4 access applications on UNIX servers. Later, emulators were added to give them the additional functionality of an ASCII terminal or IBM 3270 terminal replacement. By mid-1996, server software existed that made them an enhancement of, or alternative to, personal computer networks. X-terminals were developed to allow multiple users to access UNIX applications on servers without the burden of expensive UNIX workstations on their desktop. When Windows applications became a requirement, these users were required to add a bulky and expensive PC to their desk space. We introduced NCD WINCENTER to provide Windows NT access from the already existing X-terminal of the UNIX users. With Microsoft Windows NT Server 4.0, Terminal Server Edition ("TSE"), UNIX users can still access Windows applications through Citrix Metaframe protocol with NCD WINCENTER for Metaframe. Microsoft's Terminal Services in Windows 2000 includes the Remote Desktop Protocol ("RDP") that allows Windows CE-based desktop devices to access Windows NT applications without the addition of Citrix MetaFrame. While the integrated RDP protocol does not include many of the features supported by Citrix MetaFrame (the ICA protocol), NCD THINPATH software includes enhancements to Terminal Services with RDP that gives it the most important features required by major implementers of Windows-based terminals in a Windows 2000 environment. This delivers a low cost solution without the expense and complexity of adding a non-Microsoft protocol layer of software. TERMINAL REPLACEMENT. A principal market for X-based thin clients is replacement of character-based terminals, such as ASCII and 3270 terminals. Many commercial users in transaction processing applications are upgrading their centralized systems to achieve the productivity advantages of GUIs and windowing as well as the flexibility of "open" systems based on industry-standard operating systems such as UNIX. Our thin client products offer such customers the ability to have a single desktop device that gives them access to both existing legacy applications as well as new GUI-based versions while maintaining the central administration they have come to depend upon. WORKSTATION ENVIRONMENTS. Many of the early buyers of X-terminals were also early users of workstation technology and viewed X-based thin clients primarily as a low-cost alternative for expanding their workstation networks. In these environments, thin clients can access the excess processing power of existing workstations, supplying users with a GUI at a considerably lower cost than a workstation with equivalent display characteristics. Thus, organizations can provide windowing and graphics for uses that previously could not justify the cost of a full workstation. Many users of X-terminals in UNIX workstation or minicomputer environments have developed an optimized configuration of workstations and X-terminals. In these environments, rather than providing some users with workstations and others with X-terminals, every user is given an X-terminal, and compute servers based on high-performance workstations (without monitors) that are shared among all users. The organization thereby realizes cost advantages by centralizing processing, memory and disk requirements into fewer, high-performance servers. PERSONAL COMPUTER ENVIRONMENTS. With Microsoft's introduction of Windows NT Server 4.0, Terminal Server Edition, we introduced the NCD THINSTAR family of thin clients that are optimized to access Windows NT and NCD THINPATH software that enhances the capabilities of TSE. For task-based users, like data entry clerks and call center specialists, we believe that this integration of thin client hardware and software is a viable alternative to PCs. With the addition of NCD THINPATH emulators, these Windows-oriented desktops can also access legacy systems environments like AS/400s and mainframes. INTRANET ENVIRONMENTS. Many companies employ multiple operating environments on their corporate network, including intranet and Internet connectivity. This capability facilitates employee collaboration and allows access to the enormous information resources that exist around the company and around the world. NCD thin clients and NCD THINPATH software are offered as a means of providing cost-effective, easy to maintain access to all of these resources. NCD THINSTAR Windows-based terminals are optimized to access all resources through 5 Microsoft Windows Terminal Server, while the NCD NC200 and NCD NC400 network computers are optimized for browser access. The NCD EXPLORA class of network terminals provide cost-effective access to X-based applications. The NCD THINPATH family of software provides emulators to permit PCs and NCD THINSTAR terminals to access virtually any server, to permit easy network management and to provide support for local peripheral devices on NCD THINSTAR and desktop PCs. PRODUCTS THIN CLIENT HARDWARE PRODUCTS We offer a broad line of thin client products that provide businesses and other enterprises with an open systems approach to network computing based on our Network Computing Architecture. Our thin client devices include NCD THINSTAR Windows-based terminals, NC200, NC400 AND NC900 network computers and EXPLORA network terminals. THIN CLIENTS. Our thin client products are desktop devices that are used to access information and applications residing on compute servers in a local area network or wide area network. With our thin clients, applications can be executed on the powerful networked servers, and the results displayed on simple, cost-effective desktop devices. As discussed above, the thin clients were initially introduced to access UNIX applications; later the software was added to allow these same devices to access mainframes and other non-UNIX servers. With the growing popularity of Windows environments, we have introduced the NCD THINSTAR Windows-based terminals and NCD THINPATH software to optimize access to networked Windows NT servers. Our thin client product line includes models with various performance characteristics, various screen sizes and a range of software extensions and network interfaces. Hardware platforms are based on different microprocessors, addressing a wide range of price and performance requirements. Custom ASICs used in the design of most of our products help reduce the cost of connection logic and provide hardware acceleration for certain graphics functions. Our thin clients feature single-board electronics and incorporate current ergonomic standards in monitor technology. Our thin clients come with a full line of peripherals, including mouse and several keyboard options. NCD THINSTAR 200, THINSTAR 300 AND THINSTAR 400. Windows-based terminals were the first family of thin clients introduced with the Windows CE operating system kernel. The THINSTAR 300 was the first thin client to employ the Intel lean client architecture that we developed under an agreement with Intel. This model provides higher performance than the THINSTAR 200, and can support a greater number of peripheral devices. THINSTAR 400 is the first Windows-based terminal to provide an internal PCI slot for expendability and offers increased performance over the THINSTAR 300. The THINSTAR 450 PRO will support Microsoft WBT Professional with Windows NT Embedded. In January 2001, we announced plans to bring a new family of Windows-based terminal products to market based on the National Semiconductor Geode integrated chipset. Our NCD NC200, NC400, AND NC900 network computers, and the EXPLORA 700 devices, are high-performance network computers that are targeted at customers who want browser access to the network or who have a Java requirement. The NC200/400 are a line of network computers acquired in the 1998 acquisition of the Tektronix Network Displays business unit. In June 2000, we introduced the NC900 to be a replacement and upgrade for the NC200 and NC400 products. This new product is intended to consolidate and simplify our NC product offering while providing improved performance to the user. All of these models are based on powerful MIPS processors. 6 The NCD EXPLORA 400/450 family are our entry level network terminal product. They target the low end UNIX workstation replacement market. They are based on the 32-bit PowerPC RISC processor. SOFTWARE PRODUCTS NCDWARE AND NCD NCBRIDGE. Our UNIX based thin clients run NCDWARE and NCD NCBRIDGE, our proprietary operating systems. These products incorporate extensive enhancements to the basic X server software to improve performance, system manageability and robustness. NCD THINPATH SOFTWARE. We offer a family of client-based and server-based software products that deliver capabilities that are important to enterprises deploying the emerging thin client computing model. The series of software modules allows Windows-based terminals and PCs to emulate virtually any desktop device so that they can access any server on the network, regardless of its operating system. This software is designed to make centralized management and support of the network easier, and to permit support of local printers and other peripheral devices on Windows-based terminals and PCs without adding protocol software to Microsoft's Terminal Server. NCD PC-XWARE. NCD PC-XWARE is software for Windows PCs that provides connectivity to X Windows applications running on UNIX host systems. We offer versions of NCD PC-XWARE for WINDOWS 3.1, WINDOWS 95 and WINDOWS NT. NCD PC-XWARE is based on our NCDWARE network computing software and offers many of the same local applications and network management features. PRODUCT DEVELOPMENT We believe that we must simplify and enhance our existing line of thin client and software products and continue developing new hardware and software products that incorporate the latest improvements in technology in order to maintain our position as a major supplier of thin client solutions and expand the market for this class of computing and information access products. Accordingly, we are committed to investing resources in software and hardware development activities. Our current development programs include: o Server and client software for making thin client devices and PCs easy to deploy and manage in multi-user Windows NT environments, o Server and client software for connecting thin client devices and PCs to a broad range of applications running on Windows NT and legacy systems, o Windows-based terminals with and without integrated browsers based on the National Semiconductor Geode chipset, o Extension of the browser capability on the ThinSTAR Windows-based terminals and support for future Microsoft embedded operating systems including Windows CE 3.0, 4.0 and NT Embedded, and o Continued feature enhancements of network computer platforms. 7 There can be no assurance that any of these development efforts will result in the introduction of new products or that any such products will be commercially successful. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Future Performance and Risk Factors--New Product Development and Timely Introduction of New and Enhanced Products." During 2000, 1999 and 1998, the Company's research and development expenditures were $8,393,000, $12,935,000, and $13,213,000, respectively. The significant decrease in R&D expenses resulted from our reduction in R&D personnel. We expect to spend approximately $3.3 million in R&D in 2001. THE FOREGOING DISCUSSION CONCERNING OUR PRODUCT DEVELOPMENT PROGRAM INCLUDES FORWARD-LOOKING STATEMENTS. ACTUAL PRODUCT DEVELOPMENT RESULTS MAY DIFFER SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK FACTORS." MARKETING AND SALES Our marketing and sales objectives are two-fold. The first is to position thin client computing within enterprise IT architectures as an approach that is easy-to-implement and support and meets users' performance goals and the corporate desire for centralized management. Equally important is our aim to maintain our position as a recognized leader in the thin client industry and differentiate our integrated hardware and software offerings from competitors' products. Both of these objectives need to be addressed through our focus on indirect channels of distribution. A key strategy is the education of our channel partners regarding our value proposition of making access simple and making our integrated hardware and software solution easy to sell. Other significant strategies are our work in cooperation with industry leaders like Intel and Microsoft, and greater focus on vertical industries and applications like healthcare, retail and call centers. Our marketing team is organized around our channel market program, participation in selected trade shows, conferences and seminars, significant press and analyst contacts both in the technology and business areas, telemarketing activities and an increasing focus on web-based activities, including electronic commerce. International sales, including sales to foreign OEM customers, represented approximately 40%, 40% and 35% of our net revenues during 2000, 1999 and 1998, respectively. International sales may be subject to government controls and other risks, including export licenses, federal restrictions on the export of critical technology, changes in demand resulting from currency exchange fluctuations, political instability, trade restrictions and changes in tariffs. To date, we have experienced no material difficulties due to these factors. We also sell our products to OEMs who combine our products with computers and peripherals, add application software and sell complete computer systems to end-users. OEM sales represented approximately 2%, 9%, and 29% of our revenues for the years ended December 31, 2000, 1999 and 1998, respectively. In 2000 Adtcom and Tech Data accounted for 31% and 11%, respectively of our net revenues. In 1999 Adtcom and Tech Data accounted for 18% and 15%, respectively of our net revenue. IBM accounted for 29% of our net revenues in 1998. 8 SERVICE AND SUPPORT We believe that our ability to provide service and support is and will continue to be an important element in the marketing of our products. We maintain in-house repair facilities and also provide telephone and e-mail access to our technical support staff. Our six technical support engineers not only provide assistance in diagnosing problems but work closely with customers to address system integration issues and to assist customers in increasing the efficiency and productivity of their systems. We provide system level software support through our factory-based technical maintenance organization and field system engineers, and also offer software update services that allow customers to purchase subsequent releases of our software products. Teleplan, a leading European service organization, provide repair services for our European customers. Cybersource, a leading Australian service organization, provides certain repair services for our Australian customers. COMPETITION The market for thin client products and similar products is characterized by rapidly changing technology and by evolving industry standards. Although we are a major supplier of thin client computing systems and software, we experience significant competition from other thin client manufacturers, suppliers of personal computers and workstations and from software developers. In the Windows-based terminal area, our major competitor is Wyse Technology, Inc. We believe that our principal competitive advantages are our integrated hardware and software offerings and our networking core competence and our recognized product reliability. Server manufacturers who offer thin client products may have advantages over independent thin client vendors, including us, based on their ability to "bundle" their thin clients, personal computers and servers in certain large sales opportunities. We are addressing this competitive threat by forming marketing partnerships with suppliers of the various pieces of such solutions not provided by us. We also compete with private label products based on the Wyse offering from Compaq Computer Corp. Other competitors selling windows-based terminals include Boundless Technologies and Neoware. At the low end of the commercial segment of the computer market, we compete with suppliers of lower-cost ASCII and 3270 terminals. These products do not offer the graphics and windowing capabilities offered by our thin client systems, but are still appealing to certain price sensitive customers. Moreover, PC networks offer an alternate means of upgrading from ASCII and 3270 terminal systems in many commercial applications. Our NCD ThinPATH family of products faces competition from Microsoft and Citrix, which have added functionality such as printing and audio to their thin client software products, as well as from other terminal vendors that have enhanced their [network] management offerings. While we believe that our products' features give them a competitive advantage over these other companies' products, we believe this gap is narrowing and are seeking to add capabilities in additional areas to maintain our competitive advantage. NCD PC-XWARE software products face direct competition from several software companies that offer similar products, including Hummingbird Communications, Ltd., a Canadian company, Visionware, a subsidiary of The Santa Cruz Operation, Inc., NetManage, Inc., and Walker, Ritchie, Quinn, a privately-held company. In general, competition in the thin client computing market has intensified over the past few years, resulting in price reductions, reduced profit margins and increased efforts to maintain market share, which have adversely affected our operating results. In addition, intense competition from alternative desktop computing products, particularly personal computers, has slowed the growth of the thin client computing market. We expect this intense competition to continue. 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. 9 MANUFACTURING AND SUPPLIES We conduct certain thin client production activities at our Mountain View, California facility. These operations consist primarily of final reconfiguration of systems and shipping consolidation and logistics. With respect to early production of new products, we also conduct assembly and configuration, testing and quality control of material, components, sub-assemblies and systems on a small scale to monitor and ensure product quality and ease of manufacture of a new design. NCD ships its product to a third party logistics center located in The Netherlands who in turn ships to our European distributors. We currently obtain substantially all of our thin client products from a single supplier located in Thailand. That manufacturer tests our thin clients in a network environment using a NCD internally developed, computer integrated manufacturing ("CIM") system. In addition, they employ a statistical process control system ("SPC") to maintain quality control Our products incorporate memory components, such as video random access memory chips ("VRAMs") that are available from multiple sources but have been subject to substantial fluctuations in availability and price. Certain other components, including microprocessors and ASICs, though generally available from multiple sources, are subject to industry-wide demand that could result in limited availability or significant fluctuations in pricing. To date, these fluctuations have not had a material effect on our operating results and we have been able to obtain an adequate supply of such components. We currently outsource the reproduction and packaging of our software to vendors located in California. BACKLOG We schedule the manufacture of our thin client products based upon our projections of near-term demand. Orders from large end-users and OEMs are generally placed by the customer on an as-needed basis, and we typically ship products within 45 days after receipt of a firm purchase order. We do not generally have a significant backlog, and our backlog at any particular time, or fluctuations in backlog from time to time, may not be representative of actual sales for any succeeding period. Because of the ease of manufacturing software products, we are able to effect the manufacture and shipment of these products quickly in response to customer orders without maintaining significant inventories, and, as a result, have historically had little, if any, backlog at any particular time. We do not, therefore, consider backlog for these products to be a significant measure of actual sales for any succeeding period. INVENTORY We sell our products primarily through channels and thus have placed inventory of our products into distribution. Efforts are made to have the inventory in distribution reflect the expected pattern of near-term demand from reseller partners. The Company provides its distributors with certain programs including stock rotation and sales protection. Under these programs, the distributor, for a limited time may return a limited amount of inventory to the Company for replacement or obtain credits for inventory still on hand in the event of a price change. In addition, it is possible that the inventory mix will not be correct, causing a delay in the shipment of products to end user customers and possible loss of orders. 10 PROPRIETARY RIGHTS AND LICENSES We rely primarily on a combination of copyright, trademark and trade secret laws, employee and third-party non-disclosure agreements and other intellectual property protection methods to protect our proprietary technology. We hold ten U.S. patents. Although we intend to pursue a policy of obtaining patents for appropriate inventions, we believe that our success will depend primarily on the innovative skills, technical competence and marketing abilities of our personnel rather than upon the ownership of patents. There can be no assurance that patents will issue from any pending or future patent applications or that any claims allowed will be sufficiently broad to protect our technology. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide adequate protection to us. Certain technology used in our product is licensed from third parties on a royalty-bearing basis. The costs associated with such royalties were a significant component of total software cost of sales through 1998. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Generally, such licenses grant to us non-exclusive, worldwide rights with respect to the subject technology and terminate only in the event of material breach. Our software products are generally licensed on a right-to-use basis. We rely primarily on "shrink wrap" or "break the seal" licenses. Certain provisions of such licenses, including provisions protecting against unauthorized copying and reverse engineering, may not be enforceable under the laws of some jurisdictions. In addition, the laws of some foreign countries in which our software products are distributed do not protect our intellectual property rights to the same extent as U.S. law. There can be no assurance that third parties will not assert infringement claims against us or our suppliers with respect to current or future products. Although we have historically been able to resolve all asserted claims on terms which have not had a material effect on our operations, there is no assurance that any future claims may not require us to enter into unfavorable royalty arrangements or result in costly litigation. EMPLOYEES As of December 31, 2000, we had 138 full-time employees, of whom 10 were primarily engaged in research and development, 21 in service and technical support, 50 in marketing and sales, 33 in operations and 24 in administration and finance. None of our employees are represented by a collective bargaining agent. We have experienced no work stoppages and believe that our employee relations are good. Competition for employees in the computer and software industries is intense. We believe that our future success will depend, in part, on our ability to continue to attract and retain highly skilled technical, marketing and management personnel. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to our executive officers, and their ages as of March 30, 2001:
NAME AGE POSITION Rudolph G. Morin......................... 63 President and Chief Executive Officer Michael A. Garner........................ 54 Chief Financial Officer
11 Mr. Morin has served as President and Chief Executive Officer since August 1999. Prior to that Mr. Morin had served as Executive Vice President, Operations & Finance and Chief Financial Officer since joining us in May 1996. Prior to joining us, Mr. Morin served as Senior Vice President, Finance and Administration for Memorex Telex Corporation from 1993 to 1996. Prior thereto, he worked at Data Switch, where he was Executive Vice President. Mr. Morin's background also includes more than ten years with Thyssen Bornemisza Inc. as head of corporate development and general manager of several of its subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard. Mr. Garner joined us as Chief Financial Officer in November 2000. He is also a partner with Tatum CFO Partners, LLP. From 1990 to 1999, Mr. Garner served as Senior Vice President, CFO and member of the Board of Directors for Direct Energy, Inc., a high technology manufacturer of lasers for medical and industrial applications. Prior to this, he served in various executive level capacities at several high tech companies. His earlier experience includes positions with KPMG LLP, in both Orange County, California and Kansas City, Missouri offices. Mr. Garner graduated with honors from Northwest Missouri State University with a BS in Accounting and a minor in Economics. He is a CPA and a member of the American Institute of Certified Public Accountants. ITEM 2. PROPERTIES. During the second quarter of 2000 we consolidated our principal administrative, marketing, manufacturing and research and development operations to a single location in Mountain View, California. The facility, which comprises 67,000 square feet, is under a lease which provides for a gross rent of approximately $651,000 and expires February 2003. During the second quarter of 2000 we also consolidated our software operations to a single location in Portland, Oregon. The facility, which comprises 16,817 square feet, is under a lease which provides for an annual gross rent of approximately $164,000 and expires in October 2003. We also lease a 20,000 square foot facility in Novato, California which expires in July 2001. The entire facility which is currently being subleased to third parties, provides for an annual gross rent of approximately $564,000. We believe that our existing facilities are adequate for our present requirements and that suitable additional space will be available as needed. Our field sales and service offices worldwide consist of leased office space totaling approximately 14,000 square feet, with current aggregate gross rents of approximately $530,000. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. MARKET PRICE DATA Our Common Stock was traded on the Nasdaq Stock Market under the symbol "NCDI" since our initial public offering in June 1992 through March 20, 2001. Our Common Stock is currently traded over-the-counter and is listed on the OTC Bulletin Board. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock on such market:
HIGH LOW ---- --- 2000: First Quarter $ 8.8750 $ 4.6250 Second Quarter 5.1875 1.2500 Third Quarter 2.5320 0.8125 Fourth Quarter 0.8750 0.1250 1999: First Quarter $ 8.00 $ 4.50 Second Quarter 7.00 4.25 Third Quarter 5.4375 4.25 Fourth Quarter 9.00 3.875
The closing sale price for the Common Stock on February 28, 2001 was $0.2812. As of February 28, 2001, we had 189 holders of record and approximately 4,500 beneficial holders of our Common Stock and 17,613,237 shares of Common Stock were outstanding. On March 20, 2001, our Common Stock was delisted from the Nasdaq National Market due to the failure to maintain a minimum bid price of $1.00 per share. Our Common Stock is now trading on the OTC Bulletin Board, which is considered to be less liquid and more volatile than the Nasdaq National Market. The market price of our Common Stock has fluctuated significantly and is subject to significant fluctuations in the future. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Future Performance and Risk Factors." RECENT SALES OF UNREGISTERED SECURITIES In September 2000 we issued a $3,300,000 convertible promissory note to SCI Technology, Inc. in exchange for SCI's cancellation of a like amount of accounts receivable owed by us. The note is due and payable in October 2001, and the principal is convertible into shares of our Common Stock at the holder's election at the rate of one share for each $1.00 in principal converted. In December 2000 we issued 750,000 shares of Common Stock to Tektronix, Inc. as part of a mutual settlement of claims. Also in December 2000, we sold 220,000 shares of Series B Preferred Stock and warrants to purchase 600,000 shares of Common Stock to Guenther Pfaff for an aggregate sale price of $1,500,000 in cash. Each share 13 of Preferred Stock is convertible into 10 shares of our Common Stock at any time upon the election of the holder. The warrants have an exercise price of $.75 per share and expire in December 2005. No underwriters were involved in any of the foregoing transactions. All of the foregoing issuances were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. DIVIDEND POLICY We have never paid cash dividends on our Common Stock. We currently expect that we will retain our future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future on Common Stock. On December 28, 2000, we issued 220,000 shares of Series B Preferred Stock which calls for an annual cumulative dividend of $.41 per share. Dividends are payable when and as declared by the Board of Directors but accrue semi-annually if not paid. 14 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data."
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues ...................................... $ 49,263 $ 109,030 $ 105,596 $ 133,400 $ 120,608 Operating income (loss) ........................... (32,697) (9,707) (13,446) 1,736 (17,241) Income (loss) before income taxes ................. (32,377) (9,143) (9,761) 3,831 (8,721) Net income (loss) ................................. (32,652) (16,259) (9,103) 2,681 (5,232) Net income (loss) per share--basic ................ (1.96) (1.00) (0.56) 0.16 (0.32) Net income (loss) per share--diluted .............. (1.96) (1.00) (0.56) 0.15 (0.32) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.. $ 1,758 $ 8,339 $ 21,359 $ 31,480 $ 35,671 Working capital ................................... 3,641 31,052 41,097 53,811 60,981 Total assets ...................................... 26,852 56,764 75,146 86,514 85,693 Capital lease obligations, less current portion ... -- -- 69 160 314 Total shareholders' equity ........................ 7,773 37,876 52,523 60,519 67,425
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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." Network Computing Devices, Inc. provides thin client hardware and software that delivers 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 line includes the NCD THINSTAR line of Windows-based terminals, the NCD EXPLORA network terminals and NCD NC 200 and NCD NC400 network computers. On the software side, our products are 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. Some of the software products were part of the NCD THINSTAR software family in 1998; they have been re-named and were announced in March 1999 as part of the NCD THINPATH software family. These products are sold through OEMs, system integrators and distributor/VAR channels worldwide. 15 RECENT DEVELOPMENTS In prior years significant revenues were generated under an Agreement with IBM. In 1999, the Agreement was modified to reduce sales to IBM and fiscal year 2000 saw continuing declines in the revenue generated under the IBM Agreement as that relationship wound down. 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 was accounted for using the purchase method. The purchase price was approximately $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-progress research and development and $.4 million was allocated to other intangible assets. On March 30, 2000, we finalized a working capital line of credit with a major financial institution, which provides us with up to $15.0 million of available credit. 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% (10.25% on December 31, 2000). The amount that can be borrowed at any given time is determined by the balance of aging, location and other factors of our accounts receivable. The total available and total outstanding loan was approximately $4.6 million at December 31, 2000. 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 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 certain intangibles attributable to our purchase of Multiplicity LLC. During the year ended December 31, 2000 we paid $2.9 million of the accrued restructuring liability leaving unpaid cash charges of $0.4 million included in accrued liabilities as of December 31, 2000. After a revaluation of the remaining cash liability, a credit to restructuring expense of $.5 million was recorded in the fourth quarter. The restructuring plan is expected to be completed by the fourth quarter of 2001. In April 2000, we finalized an alliance agreement with Hewlett- Packard Company (HP) 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 terminal and related software. 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 SCI 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 rate of $1.00 per share at the option of SCI anytime during the note period. In December 2000, we raised $1,500,000 in capital through a private placement of 220,000 shares of Series B Convertible Preferred Stock with an investor who was elected a member of the Company's board of directors on January 11, 2001. The Preferred shares are entitled to dividends of $.41 per annum, which accrue semi-annually if not paid. Each share of Preferred Stock is convertible into ten shares of Common Stock at the election of the holder. In connection with this private placement, the purchaser also received warrants to purchase 600,000 shares of Common Stock at $.75 per share. The warrants expire on December 28, 2005. The fair value of the warrants was clearly not significant and the entire $1,500,000 was 16 allocated to the fair value of the Preferred Stock. In December 2000, we entered into a mutual settlement of all claims with Tektronix. The claims represented unpaid commitments for both parties. As part of the settlement, we issued 750,000 shares of Common Stock to Tektronix (as a vendor). A gain on the settlement of $821,000 was recorded in December 2000. RESULTS OF OPERATIONS The following table sets forth certain items in our consolidated statements of operations as a percentage of net revenues for the periods indicated. Figures are rounded to the nearest whole percentage, and line items presenting subtotal and total percentages may therefore differ, due to rounding, from the sum of the percentages for each line item.
YEARS ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ---- ---- ---- Net revenues: Hardware products and services....................................................... 90% 90% 77% Software licenses and services....................................................... 10% 10% 23% --- --- --- Total net revenues................................................................ 100% 100% 100% ---- ---- ---- Cost of revenues: Hardware products and services....................................................... 78% 58% 56% Software licenses and services....................................................... 2% 3% 7% -- -- -- Total cost of revenues............................................................ 80% 61% 63% --- --- --- Gross profit............................................................................ 20% 39% 37% Operating expenses: Research and development............................................................. 17% 12% 13% Marketing and selling................................................................ 43% 30% 29% General and administrative........................................................... 15% 6% 5% Business restructuring............................................................... 7% -- 1% Acquired in-process research and development......................................... 4% -- 1% Gain on settlement................................................................... (2%) -- -- ---- -- -- Total operating expenses.......................................................... 84% 48% 49% --- --- --- Operating loss......................................................................... (65)% (9)% (13)% Non-operating income, gains and (losses), net......................................... (1)% 1% 3% ---- -- -- Income (loss) before income taxes....................................................... (66)% (8)% (9)% Provision for income taxes (income tax benefit)......................................... -- 7% (1)% -- -- ---- Net loss................................................................................ (66)% (15)% (9)% ===== ===== ====
TOTAL NET REVENUES Total net revenues for 2000 were $49.3 million, a decrease of 55% from 1999 net revenues of $109.0 million. Net revenues for 1999 increased by 3% compared to 1998 net revenues of $105.6 million. International revenues were 40% of total net revenues for 2000 and 1999, representing an increase from 35% in 1998. Sales to Adtcom and Tech Data accounted for 31% and 11% in 2000 and for 18% and 15% in 1999 revenues, respectively. Sales to IBM accounted for 29% of revenues in 1998. 17 HARDWARE REVENUES Hardware revenues consist primarily of revenues from the sale of thin client products, related hardware, and to a lesser extent, fees for related hardware service activities. Hardware revenues were $44.6 million in 2000, a decrease of 55% from $98.5 million for 1999. The decrease in hardware revenues is due to a significant drop in the demand for our network computers, reduced sales of Windows-based terminals to distributors, and continued decline in sales to IBM. 1999 hardware revenues represented an increase of 21% compared to revenues of $81.2 million in 1998. The increase in revenues in 1999 compared to 1998 reflects increased shipments of Windows-based terminals and NC's partially offset by a decrease in shipments under the IBM Agreement. The increase in shipments of NC's was a result of the acquisition of product lines acquired from Tektronix. SOFTWARE REVENUES Software revenues consist primarily of revenues from the licensing of software products and related support services. Software products that are included in revenue for the periods presented are (i) NCD THINPATH, (ii) NCD WINCENTER, our multi-user WINDOWS NT application server software, (iii) NCD PC-XWARE, our thin client software for PCs, and (iv) NCDWARE, our proprietary thin client software. Revenues from software and related services were $4.7 million in 2000, a decrease of 55% compared to $10.5 million for 1999. 1999 software revenues decreased by 57% compared to revenues of $24.4 million in 1998. The most significant decrease in 2000 and 1999 was in the NCD WINCENTER product line because of the loss of our OEM relationship with Citrix ended on September 30, 1998. GROSS MARGIN ON HARDWARE REVENUES Our gross margin percentages on hardware revenues were 14%, 36% and 27% for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in gross margin percentages in 2000 is attributed to lower revenues, and continued pricing pressures on our Windows-based terminals. The increase in margin in 1999 primarily reflects the decrease in sales of products to IBM on an OEM basis, and an increase in sales of higher margin NCD branded products. GROSS MARGIN ON SOFTWARE REVENUES Our gross margin percentages on software revenues were 77%, 75% and 68% for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in 2000 and 1999 when compared to 1998 is the result of a move to our branded products that do not rely on licensed technology and therefore have lower costs. We still have a few products that use technology licensed from third parties on a royalty-bearing basis. Software cost of sales includes royalties, packaging, materials and shipping costs. RESEARCH AND DEVELOPMENT EXPENSES Research and development ("R&D") expenses were $8.4 million, $12.9 million and $13.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in R&D spending was the result of reduced salary and employee benefit expenses associated with the reduction in our R&D personnel. As a percentage of net revenues, R&D expenses were 17%, 12% and 13% for 2000, 1999 and 1998, respectively. The higher percentage in 2000 resulted from the significant decline in net revenues. MARKETING AND SELLING EXPENSES Marketing and selling expenses were $21.2 million, $33.0 million and $31.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in 2000, resulted from our cost reduction plans and 18 the closure of a number of our U.S. and foreign sales offices. The increase of $1.9 million in 1999 compared to 1998 was the result of increased employee based expenses that resulted from the Tektronix acquisition. As a percentage of net revenues, marketing and selling expenses were 43%, 30% and 29% for 2000, 1999 and 1998, respectively. The higher percentage in 2000 resulted from the significant decline in net revenues. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses were $7.2 million, $6.9 million and $5.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. As a percentage of net revenues, G&A expenses were 14%, 6%, and 5% for the years ended December 31, 2000, 1999 and 1998, respectively. The higher percentage in 2000 resulted from the significant decline in net revenues coupled with a $0.8 million loss on foreign currency translation due to the weakening of the Euro in comparison to the US dollar and a $0.2 million loss on the disposal of assets in connection with the downsizing of our operations. BUSINESS RESTRUCTURING On December 31, 1998, we acquired the Network Displays business unit of Tektronix Inc ("NWD"). As a result of the acquisition, we reduced its workforce and discontinued certain activities that were overlapping with the acquired business. Accordingly, during the fourth quarter of 1998, we recorded a charge of $1.0 million for costs of employee severance benefits and to discontinue overlapping activities. See Note 5 of the "Notes to Consolidated Financial Statements" contained herein. 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 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. After a revaluation of the remaining cash liability, a credit to restructuring expense of $.5 million was recorded in the fourth quarter of 2000. During the year ended December 31, 2000 we paid $2.9 million of the accrued restructuring liability leaving unpaid cash charges of $0.4 million included in accrued liabilities as of December 31, 2000. The restructuring plan is expected to be completed by the fourth quarter of 2001. As a result of the restructuring, We reduced our workforce by over 200 employees and our leased facilities in Mountain View, California were reduced by approximately 86,000 square feet. CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with our acquisition of NWD on December 31, 1998, approximately $1.4 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. Research and development costs to bring the products to technological feasibility are not expected to have a material impact on our future operating results. The in-process research and development projects acquired in the acquisition of NWD consisted of 19 development of a Windows-based terminal and related software, browser terminal software and token ring support for the NC line of network computers. Further development on the Windows-based terminal was discontinued during 1999 since the project overlapped with existing products. There was no significant impact on operating results as a result of this action. The Windows-based terminal software was integrated into our existing line of THINPATH software and is currently being shipped. A new version of browser terminal software was released and is being shipped as part of the NCBRIDGE software product family. Token ring support was added to our NC line of network computers and began shipping in 1999. During the first quarter of 2000, we incurred a charge of $1.8 million of in-progress research and development associated with the acquisition of Multiplicity LLC in January, 2000. The amount allocated to in-progress research and development was determined by a third party assessment using established techniques for the high-technology industry. INTEREST INCOME (EXPENSE), NET Interest income, net of interest expense, was $(500,000), $600,000 and $1,600,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The continuing decrease in interest income relates primarily to decreased average balances in interest-earning accounts. Interest expense increased to $600,000 in 2000 as a result of our working capital line of credit and convertible note payable while interest income decreased to $100,000. OTHER INCOME, NET Other income includes non-operating income, net of non-operating expense. A $0.8 million gain on the settlement of claims and counter claims with Tektronix was recorded in the year ended December 31, 2000. Other income for 1998 reflects the sale of our interest in Precept Software, Inc. after Precept was acquired by Cisco Systems in March 1998, resulting in a net gain of approximately $2.1 million. INCOME TAXES AND INCOME TAX BENEFIT We recognized an income tax provision of $.3 million and $7.1 million in 2000 and 1999, respectively, compared to an income tax benefit of $0.7 million in 1998. During 2000 and 1999, we increased the valuation allowance to provide a full reserve against all of our gross deferred tax assets because operating losses created uncertainty about our ability to generate sufficient taxable income to utilize our deferred tax assets. This charge, which was recorded in 2000 and 1999 and foreign income taxes, comprise the 2000 and 1999 tax provision. See Note 8 of the "Notes to Consolidated Financial Statements." FINANCIAL CONDITION Total assets of $26.9 million at December 31, 2000 decreased $29.9 million from $56.8 million at December 31, 1999. The change in total assets reflects decreases in cash and equivalents of $3.4 million, short-term investments of $3.2 million, accounts receivable of $12.8 million, inventory of $7.4 million, prepaid assets of $1.9 million and property and equipment of $2.1 million. Total liabilities as of December 31, 2000 increased by $200,000 to $19.1 million from $18.9 million at December 31, 1999. CAPITAL REQUIREMENTS Capital spending requirements for 2001 are estimated at equal to or less than $0.4 million, and at December 31, 2000, we had no commitments for capital expenditures. We expect to finance these capital additions with financing leases. 20 LIQUIDITY As of December 31, 2000, we had combined cash and equivalents and short-term investments totaling $1.8, and $7.9 million in bank ($4.6 million) and other debt ($3.3 million). Cash used in operations was $11.3 million and $10.9 million in 2000 and 1999, respectively, compared to cash used in operations of $5.8 million in 1998. Cash used in operations in 2000 primarily reflects our net loss of $32.7 million plus decreases in accrued expenses and deferred service revenue totaling $3.2 million offset in part by decreases in accounts receivable, inventories and prepaid expenses totaling $21.8 million, an increase in accounts payable of $2.3 million, non-cash expenditures for depreciation and amortization of $2.8 million, and a write-off of acquired in-process R&D of $1.8 million. Cash used in operations in 1999 primarily reflects our net loss of $16.3 million plus decreases in accrued expenses and deferred revenues of $3.9 million, deferred income taxes of $6.6 million and depreciation and amortization of $3.6 million. Cash used in operations in 1998 reflects our net loss of $9.1 million and decreases in accrued expenses and deferred revenues of $3.2 million and $2.2 million, respectively, partially offset by decreases in inventories and accounts receivable of $5.8 million and $3.6 million net of provisions, respectively. Cash flows from investing activities in 2000 came from the net sales of short-term securities offset by the purchase of property and equipment of $0.7 million. Cash provided by investing activities in 1999 of $4.1 million primarily came from the net sales of short-term investments offset by purchases of property and equipment of $2.7 million. Cash used in investing activities in 1998 of $3.6 million primarily reflects the cash portion of the acquisition of NWD of $3.0 million. Cash from financing activities in 2000 result from the working capital line of credit of $4.6 million and proceeds from the issuance of Common Stock of $0.8 million. The proceeds from the sale of Preferred Stock of $1.5 million was received on January 2, 2001 and is included as a receivable in other current assets as of December 31, 2000. Cash provided by financing activities of $1.5 million in 1999 were provided mainly from the proceeds from the issuance of common stock. Cash used in financing activities in 1998 of $1.7 million reflects repurchases of $10.7 million of our common stock, partially offset by investments in our common stock. On March 30, 2000, we finalized a working capital line of credit with a major financial institution, which provides us with up to $15.0 million of available credit. 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% (10.25% at December 31, 2000). The amount that can be borrowed at any given time is determined by the balance of our aging, location and other factors of accounts receivable. The outstanding loan was approximately $4.6 million, which represented the maximum available to borrow at December 31, 2000. We are currently negotiating its draw down terms with the lender to provide additional funds. 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 continue to grow software revenue. In addition to the financing we received in March 2000 and January 2001, we may be required to seek additional financing before we achieve positive cash flow. In that event, no assurance can be given that additional financing will be available, or that if available, it will be available on terms acceptable to us, or our shareholders. If adequate funds are not available to satisfy our short-term or long-term capital requirements we may be required to limit our operations significantly. Our auditors have included a paragraph in their report indicating that substantial doubt exists as to our ability to continue as a going concern. Our line of credit requires that at and only at June 30, 2000 we meet certain financials covenants for which we were not in compliance. The lender waived compliance at that date. Based on the factors discussed above, among other things, 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 enhanced or additional financing, and ultimately achieve profitability and/or positive cash flow. 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," established accounting and reporting standards for derivative instruments and requires recognition of all 21 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 have determined that the impact will not have a material effect on our financial statements. 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 adopted SAB 101 in the fourth quarter of 2000. We determined that SAB 101 had no impact on our 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. FUTURE PERFORMANCE AND RISK FACTORS OUR FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW. EVOLVING THIN CLIENT COMPUTING MARKET We derive substantially all of our revenues from the sale of thin client network computing products and related software. Until several years ago, our thin client product offerings primarily focused on the UNIX marketplace using our X protocol. Our introduction of WINCENTER multi-user Windows NT application server software and new, lower-priced thin client network computing devices allowed us to offer thin client network computing systems that provide users with access to Windows applications. Our expansion of our thin client computing model into the Windows-based environment was limited because of our inability to offer an endorsed Microsoft solution within the Windows market prior to the introduction of the Windows-based terminal in June 1998 and intense competition from alternative desktop systems, particularly personal computers, whose selling prices are at historic lows for relatively high performance configurations. Our future success will depend substantially upon increased acceptance of the thin client computing model and the successful marketing of our new thin client computing hardware and software products. There can be no assurance that our new 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. The failure of new markets to develop for our thin client computing products would have a material, adverse effect on our business, operating results and financial condition. COMPETITION The market for thin client products and similar products that facilitate access to data over networks are characterized by rapidly changing technology and evolving industry standards. 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 quarters, resulting in price reductions and reduced profit margins. We expect this intense competition and pricing pressure 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 would adversely affect our operating results. 22 FLUCTUATIONS IN OPERATING RESULTS 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. NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS 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. RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS We rely significantly 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, 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 23 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. RELIANCE ON INDEPENDENT CONTRACTORS We rely on independent contractors for virtually all of the manufacture of our thin client computing products and accessories. Our reliance on these independent contractors limits our control over delivery schedules, quality assurance and product costs. In addition, a number of our independent 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 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 us to seek alternate sources of supply, could also lead to supply constraints or delays in delivery of our products and adversely affect our operating results. However, the manufacturing process could be relocated to one of their other factories if necessary within a few weeks. The operations of certain of our foreign suppliers were briefly disrupted during 1992 due to political instability in Thailand. 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 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. INTERNATIONAL SALES During 2000 substantially all of our international sales were denominated in Euros. These sales were subject to exchange rate fluctuations which adversely affected our operating results. 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. In addition, 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. Beginning in 2001, all of our international sales are denominated in U.S. dollars. 24 The following represents international sales, through our international distribution channels to end-users in each of the following countries:
2000 1999 ---- ---- France 20% 26% Germany 17% 14% United Kingdom 12% 18% Switzerland 11% 3% Scandanavia 10% 9% Netherlands 8% 6% Australia and New Zealand 6% 11% Other countries 16% 13% ---- ---- Total 100% 100% ==== ====
DEPENDENCE ON KEY PERSONNEL 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. Failure to attract and retain key personnel could have a material, adverse effect on our business, operating results or financial condition. VOLATILITY OF STOCK PRICE On March 20, 2001, our Common Stock was delisted from the Nasdaq National Market due to the failure to maintain a minimum bid price of $1.00 per share. Our Common Stock is now trading on the OTC Bulletin Board, which is considered to be less liquid and more volatile than the Nasdaq National Market. 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. LIQUIDITY On March 30, 2000, we finalized a working capital line of credit with a major financial institution, which provides us with up to $15.0 million of available credit. 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% (10.25% at December 31, 2000). The amount that can be borrowed at any given time is determined by the balance of our 25 aging, location and other factors of accounts receivable. The outstanding balance and maximum availability on the loan was approximately $4.6 million at December 31, 2000. In addition to the financing we received in March 2000, we may be required to seek additional financing before we can achieve positive cash flow. In that event, no assurance can be given that additional financing will be available or that, if available, it will be available on terms acceptable to us, or our shareholders. If adequate funds are not available to satisfy our short-term or long-term capital requirements, we may be required to limit our operations significantly. ITEM 7A. MARKET RISK Our market risk sensitive instruments as of December 31, 2000 are primarily exposed to interest rate risks. Because of the short-term maturities of these instruments, a 100 basis point change in related interest rates would not have a material effect on their fair value. Effective January 2001 all of our international sales are denominated in US dollars. We have Euro denominated accounts receivable as of December 31, 2000 which are subject to exchange rate fluctuations when the customer pays in Euros. This will affect our operating results negatively or positively, depending on the value of the U.S. dollar against the Euro. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 26 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Reports of Independent Public Accountants .......................................................... 28 Consolidated Balance Sheets as of December 31, 2000 and 1999 ....................................... 30 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 ......... 31 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 32 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 ......... 33 Notes to Consolidated Financial Statements ......................................................... 34 Supplementary Data: Quarterly Financial Data (Unaudited) ........................................... 46
27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Network Computing Devices, Inc. and Subsidiaries Mountain View, California We have audited the accompanying consolidated balance sheet of Network Computing Devices, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2000. We have also audited Item 14 - Valuation and Qualifying Accounts and Reserves (the Schedule). These consolidated financial statements and the Schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the Schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and Schedule. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Network Computing Devices, Inc. and subsidiaries at December 31, 2000, and the results of its operations and its cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Schedule presents fairly in all material respects the information set forth therein. As discussed in Note 9 in the consolidated financial statements, the Company has one significant vendor that manufacturers a substantial majority of the Company's inventory. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has sustained recurring losses from operations and net capital deficiencies at December 31, 2000. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans as to these matters are also discussed in Note 1. The consolidated financial statements do not include any adjustments related to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP San Francisco, California February 28, 2001 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Network Computing Devices, Inc. We have audited the accompanying consolidated balance sheet of Network Computing Devices, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Network Computing Devices, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Mountain View, California February 10, 2000 29 NETWORK COMPUTING DEVICES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, -------------------------------------- 2000 1999 ----------------- ---------------- Current assets: Cash and cash equivalents $ 1,419 $ 4,781 Short-term investments 339 3,558 Accounts receivable, net of allowances of $5,629 and $5,301 as of December 31, 2000 and 1999, respectively 9,160 21,987 Inventories 7,635 15,082 Prepaid assets 2,667 4,332 Other current assets 1,500 200 ----------------- ---------------- Total current assets 22,720 49,940 Property and equipment, net 1,530 3,651 Other assets 2,602 3,173 ----------------- ---------------- $ 26,852 $ 56,764 ================= ================ Current liabilities: Accounts payable $ 5,545 $ 10,419 Accrued expenses 4,047 4,739 Deferred revenue 1,297 3,384 Notes payable 7,947 - Income taxes payable 243 277 Current portion of capital lease obligations - 69 ----------------- ---------------- Total current liabilities 19,079 18,888 Commitments Shareholders' equity: Undesignated preferred stock: 3,000,000 shares authorized; no shares issued and outstanding - - Convertible preferred stock, $0.001 par value: 290,000 shares authorized; 220,000 shares issued and outstanding as of December 31, 2000 1,500 - Common stock, $0.001 par value: 30,000,000 shares authorized; 17,613,237 and 16,432,921 shares issued and outstanding as of December 31, 2000 and 1999, respectively 18 16 Capital in excess of par value 91,027 89,980 Treasury stock (28,647) (28,647) Accumulated deficit (56,125) (23,473) ----------------- ---------------- Total shareholders' equity 7,773 37,876 ----------------- ---------------- $ 26,852 $ 56,764 ================= ================
See accompanying notes to consolidated financial statements. 30 NETWORK COMPUTING DEVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 --------------- ---------------- --------------- Net revenues: Hardware products and services $ 44,578 $ 98,500 $ 81,194 Software licenses and services 4,685 10,530 24,402 --------------- ---------------- --------------- Total net revenues 49,263 109,030 105,596 Cost of revenues: Hardware products and services 38,583 63,402 59,337 Software licenses and services 1,063 2,626 7,693 --------------- ---------------- --------------- Total cost of revenues 39,646 66,028 67,030 --------------- ---------------- --------------- Gross profit 9,617 43,002 38,566 Operating expenses: Research and development 8,393 12,935 13,213 Marketing and selling 21,245 33,027 31,124 General and administrative 7,197 6,885 5,231 Business restructuring 3,679 (138) 996 Acquired in-process research and development 1,800 - 1,448 --------------- ---------------- --------------- Total operating expenses 42,314 52,709 52,012 --------------- ---------------- --------------- Operating loss (32,697) (9,707) (13,446) Interest income 100 564 1,609 Interest expense (601) - (14) Other income, net 821 - 2,090 --------------- ---------------- --------------- Loss before income taxes (32,377) (9,143) (9,761) Provision for income taxes (income tax benefit) 275 7,116 (658) --------------- ---------------- --------------- Net loss $ (32,652) $ (16,259) $ (9,103) =============== ================ =============== Basic and diluted earnings per share: Net loss per share $ (1.96) $ (1.00) $ (0.56) =============== ================ =============== Weighted average shares used in per share computations 16,686 16,192 16,393 =============== ================ ===============
See accompanying notes to consolidated financial statements. 31 NETWORK COMPUTING DEVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
Retained Preferred Stock Common Stock Capital Earnings Total ---------------------------------- In Excess Treasury (Accumulated Shareholders' Shares Amount Shares Amount Of Par Stock Deficit) Equity ------ ------- ------ ------ --------- --------- ------------ ------------ Balances as of December 31, 1997 - $ - 16,284 $ 16 $ 75,887 $ (17,273) $ 1,889 $ 60,519 Issuance of common stock under Stock Option Plan and Employee Stock Purchase Plan, including related tax benefit - - 384 - 2,150 - - 2,150 Sale of common stock - - 750 1 6,937 - - 6,938 Fair value of warrants issued for business acquisition - - - - 2,690 - - 2,690 Repurchase and retirement of common stock for treasury - - (1,369) (1) - (10,670) - (10,671) Net loss - - - - - - (9,103) (9,103) ------ ------- ------ ------ --------- ---------- ----------- ------------ Balances as of December 31, 1998 16,049 16 87,664 (27,943) (7,214) 52,523 Issuance of common stock under Stock Option Plan and Employee Stock Purchase Plan - - 335 - 1,560 - - 1,560 Sale of common stock - - 184 - 756 - - 756 Repurchase and retirement of common stock for treasury - - (135) - - (704) - (704) Net loss - - - - - - (16,259) (16,259) ------ ------- ------ ------ --------- ---------- ----------- ------------ Balances as of December 31, 1999 16,433 16 89,980 (28,647) (23,473) 37,876 Sale of Convertible Preferred Stock 220 1,500 - - - - - 1,500 Issuance of common stock under Stock Option Plan and Employee Stock Purchase Plan - - 430 1 837 - - 838 Issuance of common stock in Tektronix settlement - - 750 1 210 - - 211 Net loss - - - - - - (32,652) (32,652) ------ ------- ------ ------ --------- ---------- ----------- ------------ Balances as of December 31, 2000 220 $1,500 17,613 $ 18 $ 91,027 $ (28,647) $ (56,125) $ 7,773
See accompanying notes to consolidated financial statements. 32 NETWORK COMPUTING DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, --------------------------------------------------- 2000 1999 1998 -------------- --------------- -------------- Cash flows from operating activities: Net loss $ (32,652) $ (16,259) $ (9,103) Reconciliation of net loss to net cash used in operating activities: Non-cash restructuring charges (credit) 389 (138) 96 Depreciation and amortization 2,830 3,618 3,022 Deferred income taxes - 6,622 (820) Gain on settlement (821) Gain on sale of investment - - (2,090) Loss on disposal of fixed assets 543 Impairment charge on notes receivable - 300 - Acquired in-process research and development 1,800 - 1,448 Provision for doubtful accounts, sales returns & allowances, net 328 1,751 (734) Changes in: Accounts receivable, net 12,499 (2,148) 4,292 Inventories 7,447 (720) 5,782 Prepaid expenses 1,865 (71) (278) Accounts payable (2,342) (19) (1,729) Accrued expenses (1,081) (2,081) (3,195) Deferred revenue (2,087) (1,765) (2,182) Income taxes payable (34) 3 (323) -------------- --------------- -------------- Net cash used in operating activities (11,316) (10,907) (5,814) -------------- --------------- -------------- Cash flows from investing activities: Purchases of short-term investments (1,359) (26,010) (16,229) Sales and maturities of short-term investments 4,578 33,766 15,155 Changes in other assets (135) (230) Issuance of notes receivable (839) Net proceeds from sale of investment - 2,402 Acquisition of business - (3,037) Property and equipment purchases (681) (2,661) (1,704) -------------- --------------- -------------- Net cash provided by (used in) investing activities 2,538 4,121 (3,643) -------------- --------------- -------------- Cash flows from financing activities: Principal payments on capital lease obligation (69) (90) (155) Repurchases of common stock (704) (10,671) Proceeds from line of credit 37,676 Payments on line of credit (33,029) Proceeds from issuance of stock, net 838 2,316 9,088 -------------- --------------- -------------- Net cash provided by (used in) financing activities 5,416 1,522 (1,738) -------------- --------------- -------------- Decrease in cash and cash equivalents (3,362) (5,264) (11,195) Cash and cash equivalents: Beginning of year 4,781 10,045 21,240 -------------- --------------- -------------- End of year $ 1,419 $ 4,781 $ 10,045 ============== =============== ============== Noncash investing and financing activities: Fair value of warrants issued for acquisition of business $ - $ - $ 2,690 ============== =============== ============== Income tax benefit from employee stock transactions $ - $ - $ 263 ============== =============== ============== Exchange of inventory for note receivable $ - $ 160 $ - ============== =============== ============== Issuance of preferred stock for subscriptions receivable $ 1,500 $ - $ - ============== =============== ============== Conversion of accounts payable to note payable $ 3,300 $ - $ - ============== =============== ============== Issuance of common stock to extinguish liability $ 221 $ - $ - ============== =============== ==============
See accompanying notes to consolidated financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES GOING CONCERN UNCERTAINTY Network Computing Devices, Inc. (the "Company") has incurred losses from continuing operations for the year ended December 31, 2000 of approximately $32.7 million. If the Company fails to maintain profitable operations, the Company will need to obtain additional financing. If additional financing is necessary, there is no assurance that the Company will be able to obtain the necessary funds, resulting in an adverse effect on the Company's financial condition. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or refinancing as may be required and ultimately to attain profitability. The Company is actively marketing its existing and new products, which it believes will ultimately lead to profitable operations. However, no assurance can be given that these available funds will meet the Company's cash requirements in the future. DESCRIPTION OF BUSINESS The Company was incorporated on February 17, 1988. We provide thin client hardware and software that delivers simultaneous, high-performance, easy-to-manage and cost effective access to any application from thin client, UNIX and PC desktops. Our product line includes the NCD ThinSTAR Windows-based terminals and NCD Explora, NC200, NC400 and NC900 network computers. On the software side we offer 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. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The functional currency for the Company and its subsidiaries is the U.S. dollar. All significant intercompany balances and transactions have been eliminated in consolidation. CASH EQUIVALENTS We consider all highly liquid investments purchased with a maturity date of three months or less to be cash equivalents. Cash equivalents at December 31, 2000 and 1999 consist of bank deposits and commercial paper. SHORT-TERM INVESTMENTS We have classified all of our short-term investments as "available-for-sale" securities. The carrying value of such securities equals the fair market value. The fair value of all securities equals the cost basis, consequently, there are no unrealized gains or losses. INVENTORIES Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market (net realizable value). PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method. Useful lives of two to five years are used for equipment and furniture; demonstration equipment is depreciated over an 18-month period. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the respective assets. INTANGIBLE ASSETS Intangible assets are included in other assets and are amortized over the economic life of the asset, which is assumed to be a seven year period, on a straight-line basis. Intangible assets include customer lists, workforce in place, non-compete agreements and goodwill associated with acquisitions accounted for under the purchase method. REVENUE RECOGNITION Revenues on the sale of hardware products and from the licensing of software products are recognized when the title to the products has passed to the customer, generally upon shipment, provided that 34 no significant obligations remain and collection of the resulting receivable is deemed probable. Software license revenues are recognized when a non-cancelable license agreement is in force, the product has shipped, the license fee is determinable and collectibility is reasonably assured. A provision for estimated product returns and warranty costs is established at the time of the sale based on historical return rates adjusted for current economic conditions. Service contract revenues are recognized ratably over the contract period. RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to expense when incurred. Costs incurred in the development of new software products and enhancements to existing software products are also expensed as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, and included in other assets. Capitalized software is amortized to operations over eighteen months to three years, based on the expected life of the product. Capitalization ceases when the product is available for release to customers. We had unamortized software licenses of $0 and $126,000 at December 31, 2000 and 1999, respectively. Amortization expense of capitalized software licenses was $126,000, $150,000, and $215,000 for the years ended December 31, 2000, 1999 and 1998, respectively. INCOME TAXES Under the asset and liability method of SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and liabilities are established to recognize the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES Our management has made a number of estimates and assumptions relating to the valuation and reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Significant items subject to such estimates include the valuation of allowances for receivables, inventories, warranties and deferred tax assets. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents- the carrying amount approximates the fair value Accounts receivable- the carrying amount approximates the fair value Notes payable- the fair value of notes payable approximates cost due to the short period until maturity At December 31, 2000 and 1999, the fair value of the Company's instruments approximate their historical carrying amounts. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF We evaluate our long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Recoverability of intangible assets is measured by a comparison of the carrying amount to the assets' fair value calculated using discounted future cash flows with a discount rate commensurate with the risks involved with the cash flow stream. NET LOSS PER SHARE Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares and potential common shares from stock options and warrants 35 outstanding, when dilutive, using the treasury stock method. At December 31, 2000, 1999 and 1998 there were 4,724,498, 4,676,490 and 4,757,098 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 years. STOCK-BASED COMPENSATION We account for our stock-based compensation plans using the intrinsic value method. As such, compensation expense is recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement 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 quarters of all fiscal years beginning after June 15, 2000. We will adopt the standard no later than the first quarter of fiscal year 2001 and we have determined that the impact will not have a material effect on our financials statements. 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 adopted SAB 101 in the fourth quarter of 2000. We determined that SAB 101 had no impact on our 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with current year presentation. NOTE 2. ACQUISITIONS On December 31, 1998, we acquired Tektronix' Network Displays Business unit ("NWD") for $3.0 million in cash and warrants to purchase one million shares of our common stock over a term of five years at an exercise price of $8.00 per share. The fair value of the warrants issued in the acquisition was calculated using the Black-Scholes pricing model with the following assumptions: contractual life of 5 years, dividend yield of 0%, risk free interest rate of 4.85% and expected volatility of 61.5%. Direct costs of the acquisition totaled approximately $200,000. The acquisition was accounted for as a purchase business combination with a total purchase price of $5.9 million. The purchase price was allocated to $1.7 million of net assets acquired (primarily inventory), $1.4 million to in-process research and development and $2.8 million to other intangible assets are being amortized over a 7 year useful life. In addition to acquiring certain assets of NWD, approximately 83 former NWD employees, primarily in sales, marketing and engineering roles, joined NCD. In conjunction with this acquisition, we undertook various restructuring activities to eliminate redundancies with the acquired business. During 1998, we recorded a charge of approximately $1.0 million related to these restructuring activities. NWD's results of operations have been included in the accompanying financial statements from December 31, 1998. See Note 5 contained herein. 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 36 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. Of the purchase price, $1.8 million 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. We expect no additional payments to be made for the acquisition resulting from the contingencies on future revenues. NOTE 3. SHORT-TERM INVESTMENTS The fair value of short-term investments consisted of the following as of December 31 (in thousands):
2000 1999 ---- ---- Corporate debt securities $ 339 $3,558 ------ ------ $ 339 $3,558 ====== ======
There were no material unrealized gains or losses at December 31, 2000 and 1999. All investments are available-for-sale securities as of December 31, 2000 and mature within one year. NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
2000 1999 ---- ---- Inventories as of December 31 consisted of (in thousands): Purchased components and sub-assemblies $ 5,642 $ 9,825 Work in process 657 826 Finished goods 1,336 4,431 ------- ------- $ 7,635 $15,082 ======= ======= 2000 1999 ------- ------- Property and equipment as of December 31 consisted of (in thousands): Office equipment $ 7,204 $10,039 Machinery and equipment 3,300 5,718 Demonstration equipment 1,785 3,008 Furniture and fixtures 1,105 1,757 Leasehold improvements 439 1,552 ------- ------- 13,833 22,074 Less accumulated depreciation and amortization 12,303 18,423 ------- ------- $ 1,530 $ 3,651 ======= =======
37
2000 1999 ---- ---- Accrued expenses as of December 31 consisted of (in thousands): Payroll-related costs $1,388 $2,465 Royalties 234 215 Warranty 493 760 Restructuring reserve 390 -- Other accrued expenses 1,542 1,299 ------- ----- $4,047 $4,739 ====== ======
Income taxes paid were $308,000, $496,000 and $283,000 for 2000, 1999 and 1998, respectively. Interest paid was $601,000, $13,000 and $14,400 for 2000, 1999 and 1998, respectively. NOTE 5. BUSINESS RESTRUCTURING On December 31, 1998, we acquired the Network Displays Business unit of Tektronix, Inc. ("NWD"). As a result of this acquisition, we reduced our workforce and discontinued certain activities that were redundant with the acquired business. As a result of the restructuring action, a charge to operations of $1.0 million was recorded for 1998. The charge, comprising employee severance benefits ($546,000), facility exit costs ($153,000), the write-off of prepaid royalties ($96,000) and the termination of a sales consulting agreement ($201,000), has been reported as an operating expense for 1998. The restructuring plan included the termination of approximately 40 employees, primarily in sales and engineering roles, and the closure of four of our offices in the United States. Total cash charges amounted to $900,000, none of which had been paid as of December 31, 1998 and are included in accrued expenses. By the end of 1999 it was determined that the plan was substantially complete, and an operating credit of $138,000 was recorded. 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 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 year ended December 31, 2000 we paid $2.9 million of the accrued restructuring liability leaving unpaid cash charges of $0.4 million included in accrued liabilities as of December 31, 2000. After a revaluation of the remaining cash liability, a credit to restructuring expense of $0.5 million was recorded in the fourth quarter. As a result of the restructuring, we reduced our workforce by over 200 employees and our leased manufacturing and office space in Mountain View, California by approximately 86,000 square feet. The restructuring plan is expected to be completed by the fourth quarter of 2001. 38 NOTE 6. NOTES 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. The note was issued in September 2000. 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. The conversion price is $1.00 per share. 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% (10.25% at December 31, 2000 and throughout the period). 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 December 31, 2000, the total amount available and outstanding to Foothill Capital was approximately $4.6 million. The lender waived breaches in covenants that were in effect at and only at June 30, 2000. We were in compliance with established covenants at December 31, 2000. NOTE 7. SHAREHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In December 2000, through a private placement, 220,000 shares of Convertible Preferred Stock, Series B, were purchased for a $1,500,000 receivable from an investor who was elected to the board of directors on January 11, 2001. The proceeds from the receivable were received by the Company on January 2, 2001. . The Preferred shares are entitled to cumulative dividends of $.41 per annum, which accrue semi-annually if not paid. Each share of Preferred Stock is convertible into ten shares of Common Stock at the election of the holder. In connection with this private placement, 600,000 warrants to purchase share of Common Stock at $.75 per share were issued to the investor. The warrants expire on December 28, 2005. TEKTRONIX SETTLEMENT In December 2000, we entered into a mutual settlement of all claims with Tektronix. As part of the settlement, we issued 750,000 shares of our Common Stock to Tektronix. A gain on the settlement of $821,000 was recorded in December 2000. STOCK REPURCHASE PROGRAM In April 1997, our Board of Directors adopted a program to repurchase up to 1,000,000 shares of our common stock during the 12-month period ended April 30, 1998. Repurchases were made under the program using our cash resources. Shares repurchased are available for issuance under our stock plans and for other corporate purposes. In September 1997, the repurchase program was completed with an aggregate of 1,000,000 shares repurchased at prices ranging from $8.38 to $12.00 per share for a total purchase price of $10.7 million. In November 1997, our Board of Directors adopted an additional program to repurchase up to 1,000,000 shares of our common stock during the 12-month period ended October 31, 1998. In July 1998, the second repurchase program was completed with an aggregate of 1,000,000 shares repurchased at prices ranging from $6.50 to $9.63 at a total aggregate price of $8.5 million. In June 1998, we announced an additional program to repurchase up to 750,000 shares of our common stock. Repurchases of 694,800 shares had been made as of December 31, 1999 under the third program at prices ranging from $4.94 to $8.25 at a total aggregate price of $4.4 million. Total repurchases of 2,694,800 shares were made under all three programs at prices ranging from $4.94 to $12.00 per share for a total purchase price of $23.6 million. STOCK PURCHASE PLAN In 1992, we established the 1992 Employee Stock Purchase Plan and have reserved 1,650,000 shares of common stock for issuance thereunder. During 2000, our Board of Directors increased the amount of shares reserved to 1,850,000. The plan permits eligible employees to purchase common stock through payroll deductions of up to 10 percent of their base earnings. The purchase price of the stock is equal to the lesser of 85% of the fair market value of such shares at the beginning of each six-month offering period (or the 39 commencement of the employee's participation, if later) or the end of such offering period. As of December 31, 2000, 1,752,507 had been issued under this Plan from inception and 284,066 shares were issued in 2000. The per share weighted-average fair value of employee stock purchase rights during 2000, 1999 and 1998 was $1.87, $3.10 and $4.95, respectively, on the date of grant using the Black-Scholes model with the following weighted-average assumptions: 2000 - dividend yield of 0%, expected volatility of 124%, risk-free interest rate of between 5.92% and 6.25%, and an expected life of 1 year; 1999 - dividend yield of 0%, expected volatility of 83%, risk-free interest rate of between 4.53% and 5.99%, and an expected life of 1 year; 1998 - dividend yield of 0%, expected volatility of 84%, risk-free interest rate of between 4.53% and 5.85%, and an expected life of 1 year. STOCK OPTION PLANS As of December 31, 2000, we had reserved 1,098,000 shares, 800,000 shares and 300,000 shares of common stock for issuance under our 1999 Stock Option Plan, the 1999 Non-Qualified Stock Option Plan and the 1994 Outside Directors' Stock Option Plan, respectively ("the Plans"). During 1999 the 1989 Stock Option Plan expired and was replaced by the 1999 Stock Option Plan. A total of 548,000 shares that were still available for grant at the time the 1989 Stock Option Plan expired were used to fund the 1999 Stock Option Plan. Under the 1999 Stock Option Plan, options are granted to employees, officers, directors and consultants to purchase shares of our common stock at not less than the fair market value of common stock at the grant date (for incentive stock options) or 85% of the fair market value of such common stock (for nonstatutory stock options). Options generally vest and become exercisable to the extent of 25% one year from grant date with the remainder vesting ratably over the 36-month period thereafter. Prior to August 1994, the options generally expired five years from grant date. Since August 1994, the options expire ten years from grant date. Under the 1994 Outside Directors' Stock Option Plan, options are granted to outside directors to purchase shares of our common stock at not less than the fair market value of common stock at the grant date. Options vest and become exercisable to the extent of 25% three months from the grant date, 25% on the first anniversary of the grant date with the remainder vesting ratably over the 24 month period thereafter. As of December 31, 2000, 1,999,847 options were exercisable under the Plans. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $1.64, $5.91, and $7.96, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2000 - dividend yield of 0%, expected volatility of 124%, risk-free interest rate of between 5.17% and 6.69%, and an expected life of 5 years; 1999 - dividend yield of 0%, expected volatility of 83%, risk-free interest rate of between 4.68% and 6.41%, and an expected life of 5 years; 1998 - dividend yield of 0%, expected volatility of 84%, risk-free interest rate of between 4.68% and 4.71%, and an expected life of between 3 and 5 years. We apply Accounting Principles Board ("APB") Opinion No. 25 in accounting for our stock options issued to employees and, accordingly, no compensation cost has been recognized for our stock plans in the accompanying consolidated financial statements. Had we determined compensation cost based on the fair value at the grant dates for the Plans under SFAS No. 123, our net loss and loss per share would have been changed to the pro forma amounts indicated below:
2000 1999 1998 --------- --------- --------- Net loss (in thousands): As reported $ (32,652) $ (16,259) $ (9,103) Pro forma (34,655) (19,056) (12,396) Basic and diluted loss per share: As reported $ (1.96) $ (1.00) $ (0.56) Pro forma (2.08) (1.18) (0.76)
40 The effects of applying SFAS No. 123 in this pro forma disclosure is not indicative of the effects on reported results for future years. SFAS No. 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. A summary of option transactions under the Plans follows:
Weighted- Options Average Available Options Exercise For Grant Outstanding Price ---------- ---------- ------------- Balances as of December 31, 1997 234,781 3,597,286 $ 5.18 Options authorized 500,000 -- -- Options granted (594,100) 594,100 7.96 Options cancelled 217,899 (217,899) 8.29 Options exercised -- (216,389) 3.98 ---------- ---------- ------------- Balances as of December 31, 1998 358,580 3,757,098 $ 5.50 Options authorized 1,098,000 -- -- Options granted (1,029,400) 1,029,400 5.91 Options expired (841,979) -- -- Options cancelled 765,259 (765,259) 7.30 Options exercised -- (344,749) 4.17 ---------- ---------- ------------- Balances as of December 31, 1999 350,460 3,676,490 $ 5.37 Options authorized 800,000 -- -- Options granted (1,450,990) 1,450,990 1.64 Options expired (885,887) -- -- Options cancelled 1,856,732 (1,856,732) 5.82 Options exercised -- (146,250) 4.22 ---------- ---------- ------------- Balances as of December 31, 2000 670,315 3,124,498 $ 3.43
The following table summarizes information about options outstanding as of December 31, 2000:
Options Outstanding Options Exercisable - ------------------------------------------------------------ ------------------------- Weighted- Weighted- Range of Average Average Exercise Remaining Exercise Exercise Prices Number Contractual Life Price Number Price - ------ ------ ---------------- ----- ------ ----- $0.88 to 1.00 70,500 9.86 $ 0.99 0 $0.00 1.09 to 1.09 948,400 9.72 1.09 249,288 1.09 1.63 to 3.50 1,249,289 5.52 3.46 1,216,889 3.50 3.88 to 5.47 438,286 7.07 4.65 226,712 4.39 5.50 to 7.98 271,010 7.17 7.08 171,661 7.10 8.25 to 9.88 134,613 6.69 8.77 126,388 8.79 9.88 to 12.63 12,400 6.74 11.76 8,909 11.82 --------- ---- ----- --------- ----- $0.88 to 12.63 3,124,498 7.31 $3.43 1,999,847 $3.98 ========= =========
41 WARRANTS We have warrants outstanding to purchase up to 1,000,000 shares of our common stock at an exercise price of $8.00. The warrants are exercisable until they expire on December 31, 2003. On December 28, 2000, in connection with the sale of 220,000 shares of Convertible Preferred Stock, we issued 600,000 warrants to purchase shares of our Common Stock at $.75 per share. The warrants are exercisable until they expire December 28, 2005. NOTE 8. INCOME TAXES The components of our provision for income taxes (income tax benefit) for the years ended December 31 are as follows (in thousands):
2000 1999 1998 ---- ---- ---- Current Federal $ -- $ -- $ (202) State and other 275 494 101 ------- ------- ------- Total current 275 494 (101) ------- ------- ------- Deferred Federal -- 5,433 (710) State and other -- 1,189 (110) ------- ------- ------- Total deferred -- 6,622 (820) ------- ------- ------- Charge in lieu of income taxes associated with the exercise of stock options -- -- 263 ------- ------- ------- $ 275 $ 7,116 $ (658) ======= ========= ==========
Total income tax expense (benefit) differs from the expected tax expense (benefit) (computed by applying the U.S. federal income tax rate of 34% to loss before income taxes) as follows (in thousands):
Tax expense (benefit) at federal statutory rate $(11,102) $ (3,109) $ (3,319) State income taxes, net of federal benefit 20 805 67 Tax exempt investment income -- -- -- Research and experimental credit (37) (342) (438) Net operating losses and temporary differences for which No tax benefit is recognized 11,419 9,799 2,995 Other (25) (37) 37 -------- -------- -------- $ 275 $ 7,116 $ (658) ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31 are as follows (in thousands):
2000 1999 ---- ---- Deferred tax assets: Accruals, allowances and reserves $ 6,017 $ 5,534 Net operating loss and tax credit carryforwards 22,391 12,453 Property and equipment, principally due to differences in depreciation and capitalized leases 182 196 42 Intangible assets 674 627 ------- ------- Total gross deferred tax assets 29,264 18,810 Less valuation allowance 29,264 18,810 ------- ------- Deferred tax asset, net -- -- ------- ------- Deferred tax liabilities -- -- ------- ------- Net deferred tax assets $ -- $ -- ======= =======
In light of our recent history of operating losses, we continue to provide a valuation allowance for all of our deferred tax assets as we are unable to conclude that it is more likely than not that the deferred tax assets will be realized. Accordingly, the deferred tax valuation allowance increased by $11.4 million from 1999. As of December 31, 2000, we have a net operating loss carryover for federal and California income tax purposes of approximately $48.1 million and $10.0 million, respectively. These amounts reflect the tax net operating losses incurred in 2000 less the utilization of prior year net operating losses in settlement of an audit by the Internal Revenue Service. The audit was completed through the tax year 1997 and identified approximately $7.2 million in adjustments which have no impact to future periods. In addition, we have federal and California research and development credit carryforwards of $1.7 million and $1.6 million, respectively. Our federal net operating loss and research and development credit carryforwards will expire in the years 2010 through 2020 if not utilized. Our California net operating loss carryovers will expire in the years 2001 through 2005. The California research and development credit can be carried forward indefinitely. Pursuant to Federal income tax rules and regulations, utilization of the tax net operating loss carryovers may also be subject to annual limitation due to any greater than 50% change in ownership of the Company within a three year period. NOTE 9. CREDIT AND OTHER CONCENTRATIONS Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and trade receivables. We place our cash equivalents and short-term investments with high-credit qualified financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables have increased as we have moved to a two tier distribution model. Three customers, Adtcom (39%), Tech Data (15%) and, Ingram Micro (11%) comprise approximately 65% of our gross trade receivables as of December 31, 2000. A majority of our manufacturing is performed by SCI Inc., Thailand. Should SCI breach performance requirements under terms of our agreement, we could be adversely effected and unable to deliver our products. NOTE 10. COMMITMENTS AND CONTINGENCIES We lease our principal facilities under noncancellable operating lease agreements that expire through 2003. We also lease office facilities in several locations in the United States, and in locations in Australia, Canada, France, Germany, Japan, Sweden and the United Kingdom, which are used as sales offices. During 2000, we closed our offices in Canada and Japan. Rent expense was approximately $2,607,000, $2,440,000 and $2,377,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 43 As of December 31, 2000, minimum lease payments under all noncancellable lease agreements were as follows (in thousands):
Operating Year Ending December 31, 2001 $1,329 2002 870 2003 314 2004 130 Thereafter 10 ------ Total minimum lease payments $2,653 ======
The above future operating lease payments are anticipated to be offset by the following sublease contract income:
2001 307 --- Total sublease income $307 ======
NOTE 11. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION We have adopted the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way management organizes data for making operating decisions and assessing financial performance. Our chief operating decision maker is considered to be its executive staff, consisting of the Chief Executive Officer and the Chief Financial Officer. Primarily because we operate in one industry, thin client computing, including related hardware and software, the executive staff reviews financial information presented on a basis consistent with that presented in the Consolidated Statements of Operations. Sales to Adtcom represented 31% and 18% and sales to Tech Data represented 11% and 15%, respectively, of net revenue for the years ended December 31, 2000 and 1999, respectively. Sales to IBM accounted for 29% of net revenues for the year ended December 31, 1998. Original Equipment Manufacturers (OEM) sales represented approximately 12%, 9% and 29% of the Company's net revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Export sales to our international customers outside North America, primarily Europe, comprised approximately 40%, 40% and 35% of net revenues for the years ended December 31, 2000, 1999 and 1998, respectively. 44 International revenues by country are as follows as a percentage of total international revenues:
2000 1999 1998 ---- ---- ---- Germany* 63% 51% 23% France 4% 16% 15% United Kingdom 4% 12% 40% Other 29% 21% 22% --- --- --- Total 100% 100% 100% === === ===
Net property and equipment by region are as follows:
2000 1999 ---- ---- United States $1,154 $2,841 Europe 348 754 Other 28 56 ------ ------ Total $1,530 $3,651 ====== ======
* Includes sales to Adtcom, our largest European distributor. NOTE 12. RELATED PARTY TRANSACTIONS. On December 28, 2000, in a private placement, Dr. Guenther Pfaff purchased 220,000 shares of Convertible Preferred Stock, Series B, plus warrants and options for additional preferred shares and warrants for $1.5 million. Each share of Preferred Stock is convertible to 10 shares of Common Stock. Shares may be converted in the event of a Qualified Public Offering. Each share is entitled to an annual dividend of $.41 and dividends are paid semi-annually. In connection with this purchase, Dr. Pfaff was issued 600,000 warrants to acquire shares of Common Stock at $.75 per share. As the value of the warrants was not significant, the entire proceeds of $1.5 million was allocated to the Preferred Stock. The warrants expire December 28, 2005. On January 11, 2001 Dr. Pfaff was appointed to the Board of Directors. Dr. Pfaff is the principal owner of GTS Gral which is one of several resellers to which our products are sold to through our major European distributors. In the year ended December 31, 2000, sales to GTS Gral accounted for 4% of our total net revenue. Management believes that all transactions between the Company and GTS Gral are done on an arms'-length basis. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On January 16, 2001 a Form 8-K was filed with the Securities and Exchange Commission reporting our dismissal of KPMG LLP and appointment of BDO Seidman LLP as our independent auditors. 45 Quarterly Financial Data (Unaudited - in thousands, except per share data)
Quarters Ended ------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2000 - ---- Hardware products and services $ 12,820 $ 12,036 $ 9,611 $ 10,112 Software licenses and services 927 1,117 1,467 1,173 -------- ------- ------------ ----------- Total net revenues 13,747 13,153 11,078 11,285 Gross profit 1,168 3,292 3,168 1,989 Operating loss (16,960) (7,379) (5,584) (1,890) Loss before income taxes (16,951) (7,511) (5,775) (2,140) Net loss (17,194) (7,619) (5,872) (1,967) Net loss per share (1): Basic and diluted (1.00) (0.46) (0.35) (0.12) Shares used in per share computations: Basic and diluted weighted average 17,233 16,667 16,710 16,927 1999 - ---- Hardware products and services $ 22,785 $ 25,341 $ 26,859 $ 23,515 Software licenses and services 3,639 2,533 2,433 1,925 -------- ------- ------------ ----------- Total net revenues 26,424 27,874 29,292 25,440 Gross profit 11,250 11,513 11,545 8,694 Operating loss (2,232) (1,879) (588) (5,008) Loss before income taxes (1,988) (1,783) (463) (4,909) Net loss (1,988) (1,783) (7,414) (5,074) Net loss per share (1): Basic and diluted (0.12) (0.11) (0.46) (0.31) Shares used in per share computations: Basic and diluted weighted average 16,054 16,135 16,219 16,356
(1) Loss per share is computed independently for each quarter presented. The sum of the quarterly loss in 2000 does not equal the total computed for the year because the weighted average shares are specific to each quarter. PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to our directors is incorporated by reference to the information under the caption "Election of Directors - Nominees" in our Proxy Statement. Information with respect to our executive officers is set forth in "Item 1. Business - Executive Officers" in this Annual Report on Form 10-K. Information required by Item 405 of Regulation S-K is incorporated by reference to the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the information under the captions "Executive Compensation - Summary of Cash and Certain other Compensation," Executive Compensation - Stock Option Grants, " "Executive Compensation - Option Exercises and Year-End Holdings," Executive Compensation - Compensation Directors" and "Executive Compensation - Employment, Severance and Change of Control Arrangements' contained in our Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the information under the caption "Principal Shareholders and Share Ownership by Management" contained in our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information under the caption "Executive Compensation - Employment, Severance and Change of Control Agreements" and "Certain Transactions" contained in our Proxy Statement. 46 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as a part of this Report: (1) Financial Statements: See Index to Consolidated Financial Statements at page 27 of this Report. (2) Financial Statement Schedule: Page Schedule Title S-1 II Valuation and Qualifying Accounts and Reserves All other financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements and Notes thereto which are included herein. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index are filed as part of, or are incorporated by reference into, this Report. (b) Reports on Form 8-K during the quarter ended December 31, 2000: None. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Network Computing Devices, Inc. By: Rudolph G. Morin President and Chief Executive Officer Dated: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date President, Chief Executive Officer and Director Rudolph G. Morin (Principal Executive Officer) March 30, 2001 Chief Financial Officer and Secretary (Principal Michael A. Garner Financial and Accounting Officer) March 30, 2001 Robert G. Gilbertson Chairman of the Board of Directors March 30, 2001 Douglas Klein Director March 30, 2001 Stephen A. MacDonald Director March 30, 2001 Guenther Pfaff Director March 30, 2001
48 SCHEDULE II NETWORK COMPUTING DEVICES, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended December 31, 2000, 1999 and 1998 (in thousands)
Additions ------------------------------ Charged to Charged to Balance at Gross Other Balance Beginning Revenues and Accounts - Deductions - at End of Period Expenses Describe Describe of Period -------------- ------------- --------------- ---------------- ------------- 2000 - ---- Allowance for doubtful accounts $ 485 $ 318 $ - $ 103 (1) $ 700 Sales returns and allowances 4,816 9,294 - 9,181 (2) 4,929 Warranty reserve 760 923 - 1,190 (3) 493 1999 - ---- Allowance for doubtful accounts $ 487 $ - $ 2 (4) $ 485 Sales returns and allowances 3,063 8,871 - 7,118 (5) 4,816 Warranty reserve 906 1,009 - 1,155 (3) 760 1998 - ---- Allowance for doubtful accounts $ 646 $ 203 $ - $ 362 (6) $ 487 Sales returns and allowances 3,638 3,196 $ - 3,771 (7) 3,063 Warranty reserve 631 389 - 114 (3) 906
(1) Includes accounts written off of $103 (2) Includes amounts credited to income of $1,800 and accounts written off of $7,381 (3) Warranty costs incurred (4) Includes accounts written off of $2 (5) Includes amounts credited to income of $3,062 and accounts written off of $4,056 (6) Includes amounts credited to income of $210 and accounts written off of $152 (7) Includes amounts credited to income of $2,396 and accounts written off of $1,375 S-1 INDEX TO EXHIBITS
Exhibit Description Number 3.1(1) Certificate of Incorporation of Registrant. 3.2(1) Bylaws of Registrant. 4.1(2) Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. 4.2(2) Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. 4.3 Certificate of Designations, Preferences and Rights of the Series B Preferred Stock. 10.8(3) Lease Agreement dated August 18, 1988, as amended, between Registrant and Mountain View Industrial Associates for premises at 350-360 North Bernardo Avenue, Mountain View, California. 10.9(3) Lease Agreement dated September 21, 1989, as amended, between Registrant and Mountain View Industrial Associates for premises at 380 North Bernardo Avenue, Mountain View, California. 10.11(4)* 1989 Stock Option Plan, as amended. 10.12(3)* Form of Stock Option Agreements for use with the 1989 Stock Option Plan. 10.13(3)* Employee Stock Purchase Plan (revised). 10.14(3)* Form of Indemnification Agreement between the Registrant and its officers and directors. 10.15(3)* Registrant's 401(k) Retirement Plan. 10.23(3) Form of Registrant's standard purchase order. 10.24(6)* Registrant's Incentive Bonus Plan. 10.29(3) Full Service Lease dated October 20, 1993 between Z-Code and Novato Gateway Associates for premises at 101 Rowland Way, Suite 300, Novato, California. 10.31(4)* 1994 Outside Directors Stock Option Plan. 10.32(4)* Form of Nonstatutory Stock Option Agreement for Outside Directors. 10.34(5) Lease agreement by and between Registrant and Ravendale Investments dated September 20, 1995. 10.36(5)+ Client/Server Software License Agreement dated March 29, 1996 between Registrant and Citrix Systems, Inc. 10.37(5)+ Software Licensing Agreement dated as of June 30, 1995 between Registrant and Evans & Sutherland Computer Corporation. 10.38(5)+ License and Development Agreement dated December 18, 1995 between Registrant and Software.com, Inc. 10.39(5)+ Cooperative Hardware Marketing Agreement dated November 29, 1995 between Registrant and International Business Machines Corporation ("IBM"), as amended December 20, 1995. 10.40(5)+ X-Station Terminal Transition Agreement dated November 29, 1995 between Registrant and IBM, as amended December 13, 1995. 10.42(6)+ Alliance Agreement dated June 27, 1996 by and between the Registrant and IBM. 10.44(7) IBM Letter of Intent and Funding Agreement. 10.45(7)+ Attachment 2 to Article 1--Development of the Alliance Agreement dated November 4, 1997 between Registrant and IBM. 10.46(7) Attachment 3 to Article 2--Manufacturing of the Alliance Agreement dated November 4, 1997 between Registrant and IBM. 10.47(8)+ Development and License Agreement dated March 6, 1998 between Registrant and Intel Corporation. 10.48(9) Asset Purchase Agreement dated December 31, 1998 between Registrant and Tektronix, Inc. 10.49(10) Asset Purchase Agreement dated January 7, 2000 by and between the Registrant and Multiplicity LLC 10.50(10) Global Procurement Agreement dated January 30, 2000 by and between Registrant and Hitachi 10.51(10)* Incentive Stock Option Agreement. 10.52(10)* 1999 Stock Option Plan. 10.53(11) Loan and Security Agreement by and between Network Computing Devices, Inc. and Foothill Capital Corporation dated as of March 31, 2000, Copyright Security Agreement, General Continuing Guarantee, Guarantor Security Agreement, Intercompany Subordination Agreement, Patent Security Agreement, Stock Pledge Agreement and Trademark Security Agreement. 10.54(12) Convertible Promissory Note dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.1) 10.55(12) Registration Rights Agreement dated August 31, 2000 with SCI Technology, Inc. (Reference is made to Exhibit 4.2) 10.56 Tektronix Settlement Agreement and Mutual Release dated December 8, 2000 10.57 Tektronix- Amendment 1 to Registration Rights Agreement dated December 8, 2000 10.58 Securities Purchase Agreement with Dr. Guenther Pfaff dated December 28, 2000 10.59 Warrant Agreement with Dr. Guenther Pfaff dated December 28, 2000 10.60 Registration Rights Agreement with Dr. Guenther Pfaff dated December 28, 2000 11.1 Statement Regarding Computation of Shares 21.1 List of subsidiaries of Registrant. 23.1 Consent of BDO Seidman, LLP. 23.2 Consent of KPMG LLP - -----------
* Constitutes a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. + Confidential treatment has been granted as to a portion of this exhibit. (1) Incorporated by reference to identically numbered exhibit to Registrant's Form 8-A Registration Statement filed on January 14, 1999. (2) Incorporated by reference to identically numbered exhibit to Registrant's Form S-1 Registration Statement (No. 33-47246) which became effective on June 4, 1992 (the "1992 Registration Statement"). (3) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1993. (4) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1994. (5) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1995. (6) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1996. (7) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1997. (8) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-Q Report for the quarter ended March 31, 1998. (9) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1998. (10) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-K Report for the year ended December 31, 1999. (11) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-Q Report for the quarter ended March 31, 2000. (12) Incorporated by reference to identically numbered exhibit to Registrant's Form 10-Q Report for the quarter ended September 30, 2000. EX-4.3 2 a2043237zex-4_3.txt EXHIBIT 4.3 EXHIBIT 4.3 NETWORK COMPUTING DEVICES, INC. AMENDED AND RESTATED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE TERMS OF THE SERIES B PREFERRED STOCK (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) The undersigned President and Chief Executive Officer of Network Computing Devices, Inc., organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: 1. That, pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the said Board of Directors on December 14, 2000 adopted a resolution creating a series of 290,000 shares of Preferred Stock designated as Series B Preferred Stock, pursuant to which the Corporation filed a Certificate of Designations, Preferences and Rights of the Terms of the Series B Preferred Stock with the Secretary of State of the State of Delaware. 2. That, pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the said Board of Directors on March 30, 2001 adopted the following resolution changing the designations, preferences and rights of the terms of the Series B Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby amends and restates the designations, preferences and rights of the Series B Preferred Stock as follows: Section 1: DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock"), par value $.001 per share. The number of shares initially constituting the Series B Preferred Stock shall be Two Hundred Ninety Thousand (290,000) Shares. Section 2: DIVIDENDS AND DISTRIBUTIONS. (a) DIVIDENDS. The holders of the Series B Preferred Stock (the "Series B Holders each a Holder") shall be entitled to receive when, as and if declared by the Board of Directors, out of any assets legally available therefor, dividends not less than, and in preference and priority to any payment of, any dividend or distribution on the Common Stock or any other class or series of stock of the Corporation ranking junior to the Series B Preferred Stock and PRO RATA with payment of any dividend on any class or series of stock of the Corporation ranking on a parity with the Series B Preferred Stock as to dividends. Such dividends on the Series B Preferred Stock shall accrue at the rate of forty-one cents ($.41) per share per annum from the date of issuance to the date of payment, based on the actual number of days elapsed, and shall be payable on the payment date fixed by the declaration or, if no payment date is fixed, shall accrue semi-annually on May 31st, and November 30th of each year, and upon any Liquidation (as hereinafter defined). (b) DISTRIBUTIONS. As used in this Section 2, the term "distribution" shall mean a transfer of cash, property or securities without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of the Corporation. (c) NECESSARY ACTIONS. The Corporation shall take any and all corporate action necessary to declare and pay the dividends required. Section 3: LIQUIDATION. (a) LIQUIDATION DEFINED. "Liquidation" means any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, other than any dissolution, liquidation or winding up in connection with any reincorporation of the Corporation in another jurisdiction. A Corporate Transaction (as hereinafter defined) shall be deemed to be a Liquidation. As used herein, "Corporate Transaction" shall mean (i) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization own less than fifty percent (50%) of the Corporation's voting power immediately after such consolidation, merger or reorganization, or (ii) a sale, lease, transfer or other disposition of all or substantially all of the assets of the Corporation. (b) RIGHTS. Upon a Liquidation, as hereinabove defined, after payment or provision for payment of the debts and other liabilities of the Corporation, and prior to any distribution to the holders of Series A Participating Preferred Stock or Common Stock of the Corporation, the Series B Holders shall be entitled to receive, out of the remaining assets of the Corporation available for distribution to its stockholders, with respect to each share of Series B Preferred Stock an amount equal to Seven Dollars ($7.00) per Share plus accrued and unpaid dividends, if any, in accordance with Section 3(a) above (the "Series B Liquidation Preference"). Following the payment of the full amount of the Series B Liquidation Preference and any preference that is payable to the holders of Series A Participating Preferred Stock, the holders of Series B Preferred Stock and Common Stock and, to the extent provided for in the Certificate of Incorporation, the Series A Participating Preferred Stock, shall receive their ratable and proportionate share, on a per share and as-converted to Common Stock basis, of the remaining assets to be distributed with respect to such Series B Preferred Stock, Series A Participating Preferred Stock and Common Stock, respectively. If the Corporation has outstanding a class of capital stock ranking on a parity with the Series B Preferred Stock, distributions upon a Liquidation shall be made ratably on the Series B Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon Liquidation, which in the case of the holders of shares of Series B Preferred Stock shall be the Series B Liquidation Preference. If upon any Liquidation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series B Holders the full Series B Liquidation Preference to which they shall be entitled, the Series B Holders shall share pro rata in any distribution of assets in accordance with such full Series B Liquidation Preference amounts. 2 Section 4: VOTING RIGHTS. In addition to other rights provided herein or by law, the Series B Holders shall be entitled to vote on all matters submitted to the stockholders of the Corporation for vote or consent and, except when a single class vote is required, will vote with the holders of Common Stock as one class. Each Series B Holder shall be entitled to one vote per share of Common Stock issuable upon conversion of the shares of Series B Preferred Stock then held by such Series B Holder. Section 5: CONVERSION. (a) RATE. The Series B Shares shall be convertible, at the option of the Series B Holder, at a rate of ten (10) shares of Common Stock for each share of Series B Preferred Stock, subject to appropriate adjustment in the event of any stock split, stock dividend or reverse stock split affecting the Common Stock where the Series B Preferred Stock is not treated in an equivalent manner. (b) MECHANICS OF CONVERSION. Upon delivery to the Company of the certificate or certificates for the shares of Series B Preferred Stock to be converted, duly endorsed or assigned in blank to the Company (if required by it), the Company shall issue and deliver to or upon the written order of a Series B Holder, to the place designated by such holder, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled. Section 6: REDEMPTION. The Series B Preferred Stock may not be redeemed by the Corporation without the consent of the holders of all of the Series B Preferred Stock then outstanding. Section 7: NO REISSUANCE. No shares of Series B Preferred Stock acquired by the Company by reason of exchange, conversion or otherwise shall be reissued and all such shares shall be canceled, retired and eliminated from the shares of Series B Preferred Stock which the Company shall be authorized to issue. Section 8: PROTECTIVE PROVISIONS. (a) REQUIRED CONSENTS. In addition to any other vote or consent required herein or by law, the affirmative vote or written consent of the Series B Holders owning a majority of the outstanding Series B Preferred Stock, voting together as a separate class, shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, repeal, or waiver of any provision of the Certificate of Incorporation of the Company (including the filing of any Certificate of Designations), as in effect from time to time (the "Certificate of Incorporation"), or the Bylaws of the Company, that affects adversely the voting powers, preferences, priorities or other special rights or privileges, qualifications, limitations, or restrictions of the Series B Preferred Stock; 3 (ii) Any redemption or repurchase of capital stock of the Company (except for acquisitions of Common Stock by the Company under stock option or restricted stock agreements with employees approved by the Board of Directors); (iii) Any material disbursement of funds outside of the ordinary course of the Company's business; (iv) Any consolidation or merger of the Company with or into any other Company or other entity or person, or the entering into any other corporate reorganization; (v) Any termination of the Company's line of business as of the date of the first issuance of Series B Preferred Stock or substitution of an unrelated line of business as its principal focus of the Company's activities; (vi) Any voluntary dissolution, liquidation winding-up or partial liquidation of the Company, or any distribution or transaction in the nature of a partial liquidation or distribution, or any sale or other transfer of all or substantially all of the assets of the Company (including shares, or all or substantially all of the assets, of any subsidiary of the Company); or (vii) Any increase or decrease in the authorized number of Series B Preferred Stock or in the number of shares of any series or class of the Company's capital stock which is authorized or outstanding. (b) FINANCIAL REPORTS. The Company will furnish to the Series B Holders, as soon as practicable, and in any case within 75 days after the end of each fiscal quarter, unaudited quarterly financial statements, and within 90 days after the end of each fiscal year, annual audited financial statements (all prepared in accordance with generally accepted accounting principles consistently applied). Section 9: NO IMPAIRMENT The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Preferred Stock set forth herein, and will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Series B Holders against impairment. Without limiting the generality of the foregoing, the Company will take all such action as may be necessary or appropriate in order that the Company may reserve for issuance, and validly and legally issue fully paid and non-assessable Company Shares on the conversion of all Series B Preferred Stock from time to time outstanding. Section 10: NOTICES. All notices, requests and other communications shall be in writing addressed to the Company at its principal office or to the Series B Holders at their addresses appearing on the stock ownership records of the Company and delivered by a nationally recognized overnight 4 mail carrier, certified mail return receipt requested or facsimile. Any notice sent by nationally-recognized overnight mail carrier shall be deemed to be delivered on the expected date of delivery. Any notice sent by certified mail, return receipt requested, shall be deemed to be delivered 3 days after mailing. Any notice sent by facsimile shall be deemed delivered upon the receipt by sender of written confirmation of transmission. 3. That the foregoing amendment has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware. [Remainder of page intentionally left blank.] 5 IN WITNESS WHEREOF, I have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this 30th day of March, 2001. _________________________________ Rudolph G. Morin, President and Chief Executive Officer 6 EX-10.56 3 a2043237zex-10_56.txt EXHIBIT 10.56 EXHIBIT 10.56 SETTLEMENT AGREEMENT AND MUTUAL RELEASE This Settlement Agreement and Mutual Release (the "Agreement") is entered into as of December 8, 2000, between Network Computing Devices, Inc., a Delaware corporation ("NCD"), and Tektronix, Inc., an Oregon corporation ("Tek"). RECITALS A. NCD and Tek are parties to that certain Asset Purchase Agreement, dated as of December 31, 1998 (the "Purchase Agreement"). B. In connection with the Purchase Agreement and the transactions and agreements contemplated thereby or entered in connection therewith, each of NCD and Tek have asserted certain claims against the other. C. Each of NCD and Tek desires to settle and release all claims each party may have against the other party. THEREFORE, the parties agree as follows: AGREEMENT 1. SETTLEMENT PAYMENT. In settlement of the Claims (as defined in Section 2), NCD agrees to issue to Tek 750,000 shares of NCD common stock within five business days of the date hereof. 2. RELEASE AND COVENANT NOT TO SUE. This Agreement is a settlement between Tek and NCD and is in full accord and satisfaction of any and all claims related to the Purchase Agreement and all agreements contemplated thereby or entered in connection therewith, and any demands, damages, losses, liabilities, actions, costs or expenses, known or unknown, existing now or arising in the future, between Tek and NCD related to such claims (collectively, the "Claims"). NCD releases and covenants not to sue Tek, its directors, officers, employees and agents with respect to the Claims. Tek releases and covenants not to sue NCD, its directors, officers, employees and agents with respect to the Claims. Notwithstanding the above, this release shall not release any claims that any party may have arising from this Agreement, under the Warrant to Purchase Common Stock, dated December 31, 1998, issued by NCD to Tek, or under that certain Registration Rights Agreement, dated as of December 31, 1998, between NCD and Tek, as amended the date hereof. 3. CONFIDENTIALITY. Each of the parties hereto shall keep this Agreement and the terms hereof confidential, and will not disclose this Agreement or the terms hereof to any person except to the extent required by disclosure laws related to publicly traded securities. Neither NCD nor Tek shall make a public announcement of any nature relating to this 1 Agreement, its terms or the transactions contemplated herein or related thereto, except as may be required by law, or as mutually agreed among the parties. 4. REPRESENTATIONS AND WARRANTIES OF NCD. NCD represents and warrants to Tek as follows: 4.1 AUTHORIZATION. The execution, delivery and performance of this Agreement by NCD are within the corporate power NCD and have been duly authorized by all necessary corporate action by NCD. This Agreement is the valid and binding obligation of NCD, enforceable against NCD in accordance with its terms, except as the enforcement of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting the rights of creditors and subject to general equity principles. The Settlement Shares to be issued pursuant to this Agreement will be when issued duly authorized, validly issued, fully paid and nonassessable. 4.2 NCD SEC REPORTS. (a) DEFINITION. As used in this Agreement, "NCD SEC Reports" shall mean all reports, registration statements, definitive proxy statements, prospectuses and amendments thereto filed by NCD with the Securities and Exchange Commission (the "SEC") since September 30, 1999. (b) NCD SEC REPORTS. The NCD SEC Reports: (i) complied or will comply, as the case may be, in all material respects with the then applicable requirements of the Exchange Act of 1934, as amended, and the Securities Act, as amended (the "Act"), as the case may be, and the rules and regulations of the SEC issued thereunder; and (ii) did not or will not, as the case may be, contain as of their respective filing dates any 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, in light of the circumstances under which they were made, not misleading. 5. REPRESENTATIONS AND WARRANTIES OF TEK. Tek represents and warrants to NCD as follows: 5.1 AUTHORIZATION. The execution, delivery and performance of this Agreement by Tek are within the corporate power Tek and have been duly authorized by all necessary corporate action by Tek. This Agreement is the valid and binding obligation of Tek, enforceable against Tek in accordance with its terms, except as the enforcement of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting the rights of creditors and subject to general equity principles. 5.2 ACCREDITED INVESTOR. Tek is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D promulgated under the Act. 2 6. GENERAL. 6.1 ATTORNEYS' FEES. In the event suit or action is instituted to enforce any of the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees at trial and on any appeal, in addition to all other sums provided by law. 6.2 BINDING AGREEMENT; SUCCESSION. This Agreement and its terms and provisions shall be binding upon and shall inure to the benefit of the respective successors and assigns of the parties to this Agreement. 6.3 GOVERNING LAW. This Agreement shall be interpreted under and enforced in accordance with the laws of the state of Oregon, exclusive of choice of law rules. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, which together shall constitute a single instrument. Facsimile signatures shall be incorporated as original signatures. 6.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the matters set forth herein, and supersedes all prior discussions or agreements of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above, effective as of the date first written above. NETWORK COMPUTING DEVICES, INC. By__________________________________ Title_______________________________ TEKTRONIX, INC. By__________________________________ Title_______________________________ 3 EX-10.57 4 a2043237zex-10_57.txt EXHIBIT 10.57 EXHIBIT 10.57 AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT This Amendment No. 1 to Registration Rights Agreement (this "Amendment") is made and entered into as of December 8, 2000 by and between Network Computing Devices, Inc., a Delaware corporation (the "Company"), and Tektronix, Inc., an Oregon corporation (the "Investor"). The Company and Investor are parties to that certain Registration Rights Agreement dated as of December 31, 1998. Capitalized terms used in this Amendment which are not defined herein shall have the meanings ascribed to them in the Original Agreement. RECITALS A. The Company and Investor propose to enter into a Settlement Agreement and Mutual Release dated of even date herewith (the "Settlement Agreement") pursuant to which the Company is issuing to Investor 750,000 shares of the Company's common stock (the "Settlement Stock"); B. As a condition of entering the Settlement Agreement, Investor has requested that the Company amend the Original Agreement to include the Settlement Stock. NOW, THEREFORE, in consideration of the usual promises hereinafter set forth, the parties hereto agree as follows: AGREEMENT 1. Section 1.1(b) of the Original Agreement shall be amended and restated in its entirety as follows: (b) REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means: (1) the Settlement Stock and all of the shares of Common Stock of the Company issued or issuable upon exercise of the Warrant, and (2) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any such shares of Common Stock described in clause (1) of this subsection (b). Notwithstanding the foregoing, "Registrable Securities" shall exclude any securities sold by a person in a transaction in which rights under this Section 1 are not assigned in accordance with this Agreement or any securities sold in a public distribution, whether sold pursuant to Rule 144 promulgated under the Securities Act, or in a registered offering, or otherwise. 2. Except as set forth in Section 1 hereof, the terms of the Original Agreement are unchanged and remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and effective as of the date first written above. NETWORK COMPUTING DEVICES, INC., a Delaware Corporation By:___________________________________ Name:_________________________________ Title:________________________________ TEKTRONIX, INC. an Oregon Corporation By:___________________________________ Name:_________________________________ Title:________________________________ EX-10.58 5 a2043237zex-10_58.txt EXHIBIT 10.58 EXHIBIT 10.58 SECURITIES PURCHASE AGREEMENT by and between DR. GUENTHER E. PFAFF Buyer, and NETWORK COMPUTING DEVICES, INC. As Issuer and Seller Dated December 28, 2000 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into as of December 28, 2000, by and between Network Computing Devices, Inc., a Delaware corporation ("Seller"), and Dr. Guenther E. Pfaff, a citizen, resident and domicile of Zug Canton, Switzerland ("Buyer"). (Buyer and Seller each a "Party" and together "Parties"). RECITALS Buyer desires to purchase from Seller, on the following terms and conditions, certain newly issued Shares (as defined below) and Warrants (as defined below) of the Seller, from the Seller; a publicly-traded corporation; and Seller desires to issue and deliver the Shares and Warrants to Buyer, each on the following terms and conditions, set forth herein. NOW, THEREFORE, in consideration of the recitals and the mutual covenants, representations, warranties, conditions, and agreement hereinafter expressed, the Parties agree as follows: ARTICLE I - PURCHASE AND SALE 1.1. THE SHARES. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below), the Seller shall issue and deliver to Buyer free and clear of all security interests, claims, and restrictions, and Buyer shall purchase and accept from Seller, an aggregate of Two Hundred Twenty Thousand (220,000) shares of Convertible Preferred Stock of the Seller having the rights, privileges, and designations set forth on Exhibit A hereto (the "Preferred Shares"). The Preferred Shares shall be convertible into Common Stock (the "Conversion Shares") on the terms and conditions set forth in Exhibit A. The Buyer understands that the Shares and the Conversion Shares, when issued, have not been registered under the Securities Act of 1933, as amended (the "Act") and will bear a legend restricting retransfer in accordance with the Act. 1.2 WARRANTS. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined below), the Seller shall issue and deliver to Buyer free and clear of all security interests, claims, and restrictions, and Buyer shall purchase and accept from Seller, an aggregate of Six Hundred Thousand (600,000) Warrants to purchase additional Shares of Common Stock (the "Warrant Shares") of the Seller on the terms, and subject to the conditions, of the form of Warrants (the "Warrants") annexed hereto as Exhibit B hereof. The Buyer understands that neither the Warrants nor the Warrant Shares have been registered under the Act, and that the Warrants, and Warrant Shares when issued, will bear a legend restricting retransfer in accordance with the Act. 1.3 CONSIDERATION. The consideration that Buyer shall pay, and the Seller shall accept, for the Preferred Shares and Warrants is One Million Five Hundred Thousand (U.S. $1,500,000). 1.4 CLOSING; COOPERATION. The Closing shall take place at the office of the Seller at 10:00 A.M. local time on December 28, 2000, or, if the conditions to the Closing are not by then satisfied, upon satisfaction of such conditions, the date on which the Closing actually occurs being referred to herein as the "Closing Date." Each Party shall reasonably cooperate, as to matters under such Party's control, in the satisfaction of conditions to the obligations of the Parties at the Closing; provided, that the foregoing shall not require either Party to waive any condition herein to its obligations at the Closing or to incur any substantial cost not otherwise required hereunder. 1.5 OPTION TO INCREASE SHARES AND WARRANTS. The Buyer shall have the option by written election prior to February 15, 2001 to increase the number of Preferred Shares, and the number of Warrants to be purchased, by it hereunder. The Buyer may purchase an additional 70,000 Preferred Shares and 200,000 Warrants ("Additional Shares and Additional Warrants") for an aggregate Purchase Price of Five Hundred Thousand ($500,000) Dollars. This option may be exercised by the Buyer by delivering its notice of election to exercise such option to the Seller. If the option is exercised at least Twenty-Four (24) hours prior to the Closing Date, the Closing of Additional Shares and Additional Warrants shall take place contemporaneous with the initial Closing. Upon any later election of such Option, the Closing as to the Additional Shares and Additional Warrants shall be scheduled by Seller as soon as reasonably practicable, but not earlier than Seventy-Two (72) hours after notice of election is received, and not later than the fifth (5th) business day following such receipt. 1.6 DELIVERIES OF SELLER AT CLOSING. Subject to the conditions to Seller's obligations in Article V, at each Closing, Seller shall deliver to Buyer a certificate or certificates evidencing the Preferred Shares and the Warrants duly endorsed or accompanied by a duly executed stock power, together with such other documents identified in Article IV, duly executed by Seller. 1.7 DELIVERIES OF BUYER AT CLOSING. Subject to the conditions to Buyer's obligations in Article IV, at each Closing, Buyer shall deliver to Seller the Purchase Price by wire transfer of immediately available funds, and the documents identified in Article V, duly executed by Buyer. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby makes the following representations and warranties to Buyer, each of which is true and correct on the date hereof and each of which shall survive the Closing: 2.1 POWER AND AUTHORITY. The Seller has the power and capacity to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. 2 2.2 SHARES AND WARRANTS. The Preferred Shares, Conversion Shares, Warrants, and Warrant Shares (collectively the "Securities") will be, when issued, fully paid, non-assessable securities of the Seller, free and clear of all security interests, claims, restrictions and voting agreements of any kind. The Seller will transfer good and marketable title to the Shares and Warrants at the Closing, free and clear of all liens, security interests, claims, liens and voting agreements subject to (i) laws of general application relating to specific performance, injunctive relief and other equitable remedies; (ii) applicable laws of general application relating to or affecting creditor rights generally; and (iii) to the extent that the indemnification provisions in Section 7.2 hereof may be limited by State or Federal Law. 2.3 ENFORCEABILITY. This Agreement has been duly executed and delivered by the Seller and constitutes a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, subject to (i) laws of general application relating to specific performance, injunctive relief and other equitable remedies; (ii) applicable laws of general application relating to or effecting creditor rights generally; and (iii) to the extent that the indemnification provisions in Section 7.2 hereof may be limited by State or Federal Law. 2.4 NO VIOLATION; CONSENTS. The execution and delivery of this Agreement by Seller, the performance by Seller of its obligations hereunder and the consummation by Seller of the transactions contemplated by this Agreement will not (i) contravene any provision of the certificate of incorporation or bylaws of the Seller, (ii) violate or conflict with any law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment or order of any governmental authority or of any arbitration award which is either applicable to, binding upon or enforceable against the Seller, (iii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any contract which is applicable to, binding upon or enforceable against the Seller, or (v) require the consent, approval, authorization or permit of, or filing with or notification to, any filings with the Securities and Exchange Commission (the "SEC")required to be made subsequent to the consummation of the transactions contemplated hereunder. 2.5 CORPORATE EXISTENCE AND QUALIFICATION. The Seller is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Delaware; it is duly qualified and in good standing in each foreign jurisdiction where its failure to so qualify would materially adversely effect such entity. The Seller has the corporate power and authority to own and use its properties and to transact the business in which it is engaged. 2.6 CAPITALIZATION. The authorized capital stock of the Seller consists of 30,000,000 shares of common stock, par value $ 0.001 per share, and 3,000,000 shares of preferred stock. As of the date hereof, there are 16,710,509 Common Shares issued and outstanding, all of which have been duly authorized and validly issued and are fully paid and non-assessable, and no Shares of preferred stock outstanding prior to the transactions contemplated hereunder. 2.7 PROPERTY AND PERMITS. Except as set forth in the Seller's filings in accordance with the Securities Exchange Act of 1934 (the "Exchange Act") including the Seller's 10-K for the 3 fiscal year ended December 31, 1999 and 10-Q for the fiscal quarter ending September 30, 2000, (collectively the "Filings") the Seller is the sole owner of all right, title, and interest in and to all assets reflected on its most recent balance sheet, free and clear of all mortgages, security interests, claims, restrictions and other encumbrances, except as set forth in the Filings, and there exists no restriction on the use or transfer of such assets or property. No such assets or property are in the possession of others and the Seller holds no property on consignment. The Seller holds all permits, licenses and other approvals necessary to conduct the business in which it is engaged. 2.8 FINANCIAL INFORMATION. The audited and unaudited financial information set forth in the Filings (the "Financial Information"), and has been prepared in accordance with generally accepted accounting principles consistently applied during the periods involved ("GAAP"), and fairly presents the financial condition and results of operations of the Seller as of the dates and for the periods presented therein. The books and records of the Seller have been, and are being, maintained in all material respects in accordance with the GAAP. 2.9 CHANGES SINCE SEPTEMBER, 2000. Except as set forth in the Filings, since September 30, 2000, the Seller has not (i) issued any capital stock or other securities; (ii) made any distribution of or with respect to its capital stock or other securities or purchased or redeemed any of its securities; (iii) sold, leased or transferred any of its properties or assets other than in the ordinary course of business consistent with past practice; (iv) made or obligated itself to make capital expenditures out of ordinary course of business consistent with past practice; (v) made any payment in respect of its liabilities other than in the ordinary course of business consistent with past practice; or (vi) agreed to do or authorized any of the foregoing. 2.10 NO BREACH OF LAW OR GOVERNING DOCUMENT. The Seller is not and has not been in default under or in breach or violation of any applicable statute, law, treaty, convention, ordinance, decree, order, injunction, rule, directive, or regulation of any Government ("Law") or the provisions of any Government permit, franchise, or license, or any provision of its certificate of incorporation or its bylaws. The Seller has not received any notice alleging such default, breach or violation. Neither the execution of this Agreement nor the Closing thereof constitute or will constitute or result in any such default, breach or violation. 2.11 LITIGATION. Except as reflected in the Filings, there is no action, suit, or other legal or administrative proceeding or governmental investigation pending, or threatened against or by Seller, or any of its properties or assets which alone or in the aggregate would have a material adverse effect upon the Seller, or which questions the validity or enforceability of this Agreement or the transactions contemplated hereby. There are no outstanding orders, injunctions, decrees or stipulations issued by any governmental authority in any proceeding to which the Seller is a party which have not been complied with in full or which continue to impose any material obligations on the Seller. 2.12 INTELLECTUAL PROPERTY. (a) Except as disclosed in the Filings, to its knowledge, the Seller is the sole and exclusive owner of each patent, trademark, trade name, service mark, and copyrighted work, and 4 registrations thereof and applications therefor, trade secret, software program, invention, proprietary process, and item of proprietary know-how and other intellectual property necessary for the conduct of its business as currently conducted; (b) To its knowledge, the Seller is the exclusive owner of all internally developed prospect lists, customer lists, projections, analyses, and market studies, free and clear of all restrictions whatsoever, and has the unrestricted right to use any other such materials used by the Seller but not internally developed; (c) To its knowledge, the ownership, use, licensing, purchase, or sale by or to the Seller of any of the Intellectual Property or of the other technology used in the business of the Seller does not conflict with, contravene, infringe upon, interfere with, or violate any patent, trademark, copyright or other intellectual property right of any third person or require the acquiescence, agreement or consent of any third person; and (d) To its knowledge, the Intellectual Property and the other technology used in the business of the Seller are not subject to a challenge or claim of infringement, interference or unfair competition or other claim and, to the knowledge of Seller or the Seller, the Intellectual Property is not being infringed upon or violated by any third person. 2.15 DISCLOSURE. No representation or warranty by Seller in this Agreement or in any other document or agreement to be delivered hereunder, and no information furnished to Buyer by or on behalf of Seller pursuant to or in connection with this Agreement, contains or will contain as of the Closing Date any untrue statement of a material fact or any omission of a material fact necessary to make the respective statements contained herein or therein, in light of the circumstances under which the statements were made, not misleading. 2.16 BROKERS; FINDERS. Seller has not incurred any obligation for any finder's or broker's or agent's fees or commissions or similar compensation in connection with the transactions contemplated hereby. 2.17 RESTRICTIVE DOCUMENTS. Seller is not subject to any charter, by-law, mortgage, lien, lease, agreement, instrument, order, law, rule, regulation, judgment or decree or any other restriction which would prevent consummation of the transactions contemplated by this Agreement. ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby makes the following representations and warranties to Seller, each of which is true and correct on the date hereof and each of which shall survive the Closing: 3.1 INDIVIDUAL STATUS. Buyer is an individual with the power and authority to enter into this transaction, and execute and deliver this Agreement, perform his obligations hereunder, and to consummate the transactions contemplated hereby. Buyer has taken all action necessary to authorize his execution and delivery of this Agreement, the performance of its respective obligations hereunder and the consummation of the transactions contemplated hereunder. 5 3.2 ENFORCEABILITY. This Agreement has been duly executed and delivered by Buyer and constitutes a legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. 3.3 NO VIOLATION. The execution and delivery of this Agreement by Buyer, the performance by Buyer of the obligations hereunder and the consummation by Buyer of the transactions contemplated by this Agreement will not (i) violate or conflict with any law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment or order of any governmental authority or of any arbitration award which is either applicable to, binding upon or enforceable against Buyer, (ii) conflict with, result in any breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any contract which is applicable to, binding upon or enforceable against Buyer, (iii) result in or require the creation or imposition of any lien upon or with respect to the Securities being acquired by Buyer, or (iv) require the consent, approval, authorization or permit of, or filing with or notification to, any governmental authority, except any filings with the SEC and other filings required to be made by Buyer subsequent to the consummation of the transaction. 3.4 FINANCIAL CONDITION. Buyer has sufficient assets to enter into this Agreement and to consummate the transactions contemplated hereby. 3.5 INVESTMENT EXPERIENCE. The Buyer acknowledges that it can bear the economic risk and complete loss of its investment in the Shares and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment contemplated hereby. 3.6 INVESTMENT REPRESENTATION. Buyer is acquiring the Shares for his own account, for investment and without any view to resale or distribution of the Shares or any portion thereof. Buyer acknowledges that the sale of the Securities hereunder has not been registered or qualified under the Act, or under any state securities laws, and that any retransfer of the Shares by the Buyer will accordingly be restricted. The certificates representing the Shares will bear a legend to the effect that the Shares may not be transferred except in a transaction registered or qualified under applicable securities laws or in a transaction exempt from such registration or qualification, as evidenced by an opinion of counsel or other evidence satisfactory to the Seller and its counsel. 3.6.1 RESTRICTIONS ON TRANSFER. Buyer acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or the Company receives an opinion of counsel satisfactory to the Company that such registration is not required. Buyer is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of stock purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the stock. In the absence of a prior registration of the Common Shares underlying the securities being sold, the Buyer agrees to be bound by any applicable restrictions, and acknowledges that the Buyer may be required to hold 6 the Shares for an indefinite period of time, subject to prior registration of the Common Stock into which the Shares are convertible. 3.6.2 EXEMPTION FROM REGISTRATION. Buyer further acknowledges that, in the event all of the requirements of Rule 144 are not met, compliance with another registration exemption will be required; and that, although Rule 144 is not exclusive, the staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and other than pursuant to Rule 144, will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, that such persons and the brokers who participate in the transactions do so at their own risk. There is no assurance that any exemption from registration under the Securities Act will be available or, if available, will allow such person to dispose of, or otherwise transfer, all or any portion of the Securities. 3.7 DISCLOSURE OF INFORMATION. The Buyer has had access to such financial and other information concerning the Seller and the Shares as the Buyer deems necessary in order to make a decision to acquire the Shares, including an opportunity to ask questions of and receive information from the Seller. Neither such inquiries nor any other due diligence investigation conducted by the Buyer shall modify, amend or affect the Buyer's right to rely on the Seller's representations and warranties contained in this Agreement. 3.8 BROKERS, FINDERS. Buyer has not incurred any obligation for any finder's or broker's or agent's fees or commissions or similar compensation in connection with the transactions contemplated hereby. 3.9 RESTRICTIVE DOCUMENTS. Buyer is not subject to any agreement, instrument, order, law, rule, regulation, judgment or decree or any other restriction which would prevent consummation of the transactions contemplated by this Agreement. ARTICLE IV - CONDITIONS TO BUYER'S OBLIGATIONS The obligations of Buyer at the Closing shall be subject to the satisfaction at or prior to the Closing of each of the following conditions (unless waived in writing by Buyer): 4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Seller's representations and warranties set forth in Article II shall have been true and correct in all material respects when made and shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made at and as of such date and time. 4.2 PERFORMANCE OF AGREEMENT. Seller shall have fully performed and complied with all covenants, conditions, and other obligations under this Agreement to be performed or complied with by them at or prior to the Closing. 4.3 NO ADVERSE CHANGE. There shall have been no material adverse change in the Seller's business, prospects or financial condition between the date hereof and Closing. 7 4.4 CERTIFICATE. Seller shall have delivered to Buyer at the Closing a certificate of Seller, dated the Closing Date, to the effect that the conditions set forth in Sections 4.1, 4.2 and 4.3 have been satisfied. Such certificate shall be deemed an additional representation and warranty of Seller hereunder. 4.5 REGISTRATION RIGHTS AGREEMENT. Seller shall have entered into, executed and delivered a Registration Rights Agreement, in form and substance satisfactory to Buyer, providing for at least one demand registration of the Conversion Shares and the Warrant Shares, and an unlimited number of piggyback registrations of such Conversion Shares and Warrant Shares. ARTICLE V - CONDITIONS TO SELLER'S OBLIGATIONS The obligations of Seller at the Closing shall be subject to the satisfaction at the Closing of the following conditions (unless waived in writing by Seller): 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Buyer's representations and warranties set forth in Article III shall have been true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date as though such representations and warranties were made at and as of such date and time. 5.2 PERFORMANCE OF AGREEMENT. Buyer shall have fully performed and complied with all covenants, conditions, and other obligations under this Agreement to be performed or complied with by it at or prior to the Closing. 5.3 CERTIFICATE. Buyer shall have delivered to Seller at the Closing a certificate of Buyer, dated the Closing Date, to the effect that the conditions set forth in Sections 5.1 and 5.2 have been satisfied. Such certificate shall be deemed an additional representation and warranty of Buyer hereunder. 5.4 REGISTRATION RIGHTS AGREEMENTS. Buyer shall have entered into, executed and delivered a Registration Rights Agreement, as provided in Section 4.5 hereof. ARTICLE VI - ADDITIONAL COVENANTS OF THE PARTIES 6.1 CONDUCT OF BUSINESS BEFORE CLOSING. From the date hereof, until Closing, Seller shall (a) cause the business of the Seller to be operating in the ordinary course of business and (b) not take any action which would require a change or addition to or deletion from the disclosures of Seller pursuant to Article II hereof, without the prior written consent of Buyer. 6.2 PUBLIC DISCLOSURE. No Party to this Agreement shall make any public disclosure of the terms hereof or the transactions contemplated hereby without the prior written consent of the other Party, except as required by law. In the event circumstances shall change requiring, in the opinion of either Party, a public release, the Party proposing to make the 8 announcement will advise the other in advance and will give the other Party the opportunity to comment on the form of the proposed announcement. Buyer shall not disclose to any third person any confidential information relating to the Seller, without the prior written consent of the Seller. Notwithstanding the foregoing, Buyer may disclose such information, as may be reasonably required, to his attorneys, accountants, and advisors, financial and otherwise, in order to evaluate the investment opportunity presented herein. 6.3 FURTHER ASSURANCES. From and after each Closing, the Parties shall do such acts and execute such documents and instruments as may be reasonably required to make effective the transactions contemplated hereby. 6.4 DIRECTOR. If Buyer is willing to serve as a member of the Board of Directors of Seller, Seller's existing Directors have advised Buyer of their intentions to elect Buyer to the Seller's Board of Directors promptly following the Closing scheduled hereunder. ARTICLE VII - INDEMNIFICATION 7.1 SURVIVAL. The respective representations and warranties made by the Parties in Articles II and III and certificates under Sections 4.4 and 5.3 shall survive the Closing Date but the right to bring a claim for indemnification under this Article VII shall expire on the first anniversary of the Closing Date unless a claim with respect thereto shall have been made against the Party responsible for indemnification hereunder (the "Indemnifying Party"). 7.2 INDEMNIFICATION OF BUYER. Seller shall hold Buyer, and each of his advisors ("Buyer Indemnified Persons"), harmless and indemnify each of them from and against, and waives any claim for contribution or indemnity with respect to, any and all claims, losses, damages, liabilities, expenses or costs ("Buyer Losses"), plus reasonable attorneys' fees and expenses incurred in connection with Buyer Losses and/or enforcement of this Agreement. ("Buyer Indemnified Losses") incurred or to be incurred by any of them to the extent resulting from or arising out of any breach or violation of Seller's representations, warranties, covenants, or agreements contained in this Agreement, including provisions of this Article VII. 7.3 INDEMNIFICATION OF SELLER. Buyer shall hold Seller, its officers, directors, and affiliates ("Seller Indemnified Persons"), harmless and indemnify each of them from and against, and waives any claim for contribution or indemnity with respect to, any and all claims, losses, damages, liabilities, expenses or costs ("Seller Losses"), plus reasonable attorneys' fees and expenses incurred in connection with Seller Losses and/or enforcement of this Agreement. ("Seller Indemnified Losses") incurred or to be incurred by any of them to the extent resulting from or arising out of any breach or violation of Buyer's representations, warranties, covenants, or agreements contained in this Agreement, including provisions of this Article VII. 7.4 NOTICE OF CLAIM. In the event that Buyer seeks indemnification on behalf of a Buyer Indemnified Person, or Seller seeks indemnification on behalf of a Seller Indemnified Person, such Party seeking indemnification (the "Indemnified Party") shall give written notice to the other party (the "Indemnifying Party") specifying the facts constituting the basis for such claim and 9 the amount, to the extent known, of the claim asserted. The Indemnifying Party shall pay the amount of any valid claim not more than thirty days (30) after the Indemnified Party provides notice to the Indemnifying Party of such amount, or otherwise take the entire burden, including all legal fees and expenses, of defending and holding harmless the Indemnified Party against such claim or liability. ARTICLE VIII - MISCELLANEOUS PROVISIONS 8.1 NOTICE. All notices, requests, demands, and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given and made upon being delivered either by courier or telecopier delivery to the Party for whom it is intended, provided that if delivered by telecopier, a copy thereof is deposited, postage prepaid, certified or registered mail, return receipt requested, bearing the address shown in this Agreement for, or such other address as may be designated in writing hereafter by, such Party: 8.2 ENTIRE AGREEMENT. This Agreement embodies the entire understanding of the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings relative to such subject matter. 8.3 ASSIGNMENT; BINDING AGREEMENT. This Agreement and various rights and obligations arising hereunder shall inure to the benefit of and be binding upon Buyer, its successors, and permitted assigns and Seller, its successors and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be transferred, delegated, or assigned (by operation of law or otherwise) by either of the Parties hereto without the prior written consent of the other Party. Notwithstanding the foregoing, if the Buyer desires that a related person or a related entity purchase the Additional Shares, and Additional Warrants available to Buyer pursuant to Section 1.5 hereof, Seller agrees to cooperate therein, and so contract with the related party or related entity, on the same terms and conditions provided for herein except without election of such related Party to the Sellers Board of Directors. 8.4 COUNTERPARTS. This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 8.5 HEADINGS; INTERPRETATION. The article and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of the Agreement. 8.6 EXPENSES. Seller and Buyer shall each pay all costs and expenses incurred by either of them in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, fees and expenses of attorneys, investment bankers and accountants. 10 8.7 GOVERNING LAW. This Agreement shall in all respects be construed in accordance with and governed by the substantive laws of the State of California, without reference to its conflict of law rules. IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed as of the date first above written. BUYER: DR. GUENTHER E. PFAFF __________________________________ SELLER: NETWORK COMPUTING DEVICES, INC. By: __________________________________ Name: Title: 11 EXHIBIT A 12 NETWORK COMPUTING DEVICES, INC. CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE TERMS OF THE SERIES B PREFERRED STOCK (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) The undersigned President and Chief Executive Officer of Network Computing Devices, Inc., organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, the said Board of Directors on December 14, 2000 adopted the following resolution creating a series of 290,000 shares of Preferred Stock designated as Series B Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), a series of Preferred stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1: DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock"), par value $.001 per share. The number of shares initially constituting the Series B Preferred Stock shall be Two Hundred Ninety Thousand (290,000) Shares. Section 2: DIVIDENDS AND DISTRIBUTIONS. (a) DIVIDENDS. The holders of the Series B Preferred Stock (the "Series B Holders each a Holder") shall be entitled to receive when, as and if declared by the Board of Directors, out of any assets legally available therefor, dividends not less than, and in preference and priority to any payment of, any dividend or distribution on the Common Stock or any other class or series of stock of the Corporation ranking junior to the Series B Preferred Stock and PRO RATA with payment of any dividend on any class or series of stock of the Corporation ranking on a parity with the Series B Preferred Stock as to dividends. Such dividends on the Series B Preferred Stock shall accrue at the rate of forty-one cents ($.41) per share per annum from the date of issuance to the date of payment, based on the actual number of days elapsed, and shall be payable on the payment date fixed by the declaration or, if no payment date is fixed, shall accrue semi-annually on May 31st, and November 30th of each year, and upon any Liquidation (as hereinafter defined). 13 (b) DISTRIBUTIONS. As used in this Section 2, the term "distribution" shall mean a transfer of cash, property or securities without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of the Corporation. (c) NECESSARY ACTIONS. The Corporation shall take any and all corporate action necessary to declare and pay the dividends required. Section 3: LIQUIDATION. (a) LIQUIDATION DEFINED. "Liquidation" means any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, other than any dissolution, liquidation or winding up in connection with any reincorporation of the Corporation in another jurisdiction. A Corporate Transaction (as hereinafter defined) shall be deemed to be a Liquidation. As used herein, "Corporate Transaction" shall mean (i) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization own less than fifty percent (50%) of the Corporation's voting power immediately after such consolidation, merger or reorganization, or (ii) any transaction or series of related transactions approved by the Corporation's Board of Directors in which in excess of fifty percent (50%) of the Corporation's voting power is transferred, or (iii) a sale, lease, transfer or other disposition of all or substantially all of the assets of the Corporation. (b) RIGHTS. Upon a Liquidation, as hereinabove defined, after payment or provision for payment of the debts and other liabilities of the Corporation, and prior to any distribution to the holders of Series A Participating Preferred Stock or Common Stock of the Corporation, the Series B Holders shall be entitled to receive, out of the remaining assets of the Corporation available for distribution to its stockholders, with respect to each share of Series B Preferred Stock an amount equal to Seven Dollars ($7.00) per Share plus accrued and unpaid dividends, if any, in accordance with Section 3(a) above (the "Series B Liquidation Preference"). Following the payment of the full amount of the Series B Liquidation Preference and any preference that is payable to the holders of Series A Participating Preferred Stock, the holders of Series B Preferred Stock and Common Stock and, to the extent provided for in the Certificate of Incorporation, the Series A Participating Preferred Stock, shall receive their ratable and proportionate share, on a per share and as-converted to Common Stock basis, of the remaining assets to be distributed with respect to such Series B Preferred Stock, Series A Participating Preferred Stock and Common Stock, respectively. If the Corporation has outstanding a class of capital stock ranking on a parity with the Series B Preferred Stock, distributions upon a Liquidation shall be made ratably on the Series B Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon Liquidation, which in the case of the holders of shares of Series B Preferred Stock shall be the Series B Liquidation Preference. If upon any Liquidation the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series B Holders the full Series B Liquidation Preference to which they shall be entitled, the Series B Holders shall share pro rata in any distribution of assets in accordance with such full Series B Liquidation Preference amounts. 14 Section 4: VOTING RIGHTS. In addition to other rights provided herein or by law, the Series B Holders shall be entitled to vote on all matters submitted to the stockholders of the Corporation for vote or consent and, except when a single class vote is required, will vote with the holders of Common Stock as one class. Each Series B Holder shall be entitled to one vote per share of Common Stock issuable upon conversion of the shares of Series B Preferred Stock then held by such Series B Holder. Section 5: CONVERSION. (a) RATE. The Series B Shares shall be convertible, at the option of the Series B Holder, at a rate of ten (10) shares of Common Stock for each share of Series B Preferred Stock, subject to appropriate adjustment in the event of any stock split, stock dividend or reverse stock split affecting the Common Stock where the Series B Preferred Stock is not treated in an equivalent manner. (b) MECHANICS OF CONVERSION. Upon delivery to the Company of the certificate or certificates for the shares of Series B Preferred Stock to be converted, duly endorsed or assigned in blank to the Company (if required by it), the Company shall issue and deliver to or upon the written order of a Series B Holder, to the place designated by such holder, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled. Section 6: REDEMPTION. The Series B Preferred Stock may not be redeemed by the Corporation without the consent of the holders of all of the Series B Preferred Stock then outstanding. Section 7: NO REISSUANCE. No shares of Series B Preferred Stock acquired by the Company by reason of exchange, conversion or otherwise shall be reissued and all such shares shall be canceled, retired and eliminated from the shares of Series B Preferred Stock which the Company shall be authorized to issue. Section 8: PROTECTIVE PROVISIONS. (a) REQUIRED CONSENTS. In addition to any other vote or consent required herein or by law, the affirmative vote or written consent of the Series B Holders owning a majority of the outstanding Series B Preferred Stock, voting together as a separate class, shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, repeal, or waiver of any provision of the Certificate of Incorporation of the Company (including the filing of any Certificate of Designations), as in effect from time to time (the "Certificate of Incorporation"), or the Bylaws of the Company, that affects adversely the voting powers, preferences, priorities or other special rights or privileges, qualifications, limitations, or restrictions of the Series B Preferred Stock; 15 (ii) Any redemption or repurchase of capital stock of the Company (except for acquisitions of Common Stock by the Company under stock option or restricted stock agreements with employees approved by the Board of Directors); (iii) Any material disbursement of funds outside of the ordinary course of the Company's business; (iv) Any consolidation or merger of the Company with or into any other Company or other entity or person, or the entering into any other corporate reorganization; (v) Any termination of the Company's line of business as of the date of the first issuance of Series B Preferred Stock or substitution of an unrelated line of business as its principal focus of the Company's activities; (vi) Any voluntary dissolution, liquidation winding-up or partial liquidation of the Company, or any distribution or transaction in the nature of a partial liquidation or distribution, or any sale or other transfer of all or substantially all of the assets of the Company (including shares, or all or substantially all of the assets, of any subsidiary of the Company); or (vii) Any increase or decrease in the authorized number of Series B Preferred Stock or in the number of shares of any series or class of the Company's capital stock which is authorized or outstanding. (b) FINANCIAL REPORTS. The Company will furnish to the Series B Holders, as soon as practicable, and in any case within 75 days after the end of each fiscal quarter, unaudited quarterly financial statements, and within 90 days after the end of each fiscal year, annual audited financial statements (all prepared in accordance with generally accepted accounting principles consistently applied). Section 9: NO IMPAIRMENT The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Preferred Stock set forth herein, and will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Series B Holders against impairment. Without limiting the generality of the foregoing, the Company will take all such action as may be necessary or appropriate in order that the Company may reserve for issuance, and validly and legally issue fully paid and non-assessable Company Shares on the conversion of all Series B Preferred Stock from time to time outstanding. Section 10: NOTICES. All notices, requests and other communications shall be in writing addressed to the Company at its principal office or to the Series B Holders at their addresses appearing on the stock ownership records of the Company and delivered by a nationally recognized overnight 16 mail carrier, certified mail return receipt requested or facsimile. Any notice sent by nationally-recognized overnight mail carrier shall be deemed to be delivered on the expected date of delivery. Any notice sent by certified mail, return receipt requested, shall be deemed to be delivered 3 days after mailing. Any notice sent by facsimile shall be deemed delivered upon the receipt by sender of written confirmation of transmission. [Remainder of page intentionally left blank.] 17 IN WITNESS WHEREOF, I have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury this ____day of December, 2000. ________________________________ Rudolph G. Morin, President and Chief Executive Officer 18 EX-10.59 6 a2043237zex-10_59.txt EXHIBIT 10.59 EXHIBIT 10.59 NETWORK COMPUTING DEVICES, INC. WARRANT NO. 12 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. Void after 5:00 p.m. December 28, 2005 Warrants To Purchase Common Stock (unless earlier redeemed under Dated: December 28, 2000 the circumstances described herein) WARRANT CERTIFICATE REPRESENTING WARRANTS TO PURCHASE COMMON STOCK OF NETWORK COMPUTING DEVICES, INC. FOR VALUE RECEIVED, NETWORK COMPUTING DEVICES, INC., a corporation organized and existing under the laws of Delaware (the "Company"), hereby certifies that the holder identified on the final page (the "Holder") of this Redeemable Warrant (the "Warrants", and each right to purchase a share of Common Stock, a "Warrant") is entitled, subject to the terms set forth below, at any time or from time to time hereafter, but not later than December 28, 2005, to purchase from the Company fully paid and non-assessable shares of Common Stock in the amount set forth opposite the Holder's name. These Warrants and all rights hereunder, to the extent such rights shall not have been exercised, shall terminate and become null and void at 5:00 p.m., New York time, on December 28, 2005, unless earlier redeemed under the circumstances described herein. DEFINITIONS The terms defined below, whenever used in this Warrant, shall have the respective meanings hereinafter specified. Whenever used in this Warrant, any noun or pronoun shall be deemed to include both the singular and plural and to cover all genders. "Assignment" means the form of Assignment appearing at the end of this Warrant. "Common Stock" means the Company's authorized Common Stock, $.001 par value. "Commission" means the United States Securities and Exchange Commission, or any other Federal agency then administering the Securities Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any similar or successor U.S. federal statute, and the rules and regulations of the Commission (or its successor) thereunder, all as the same shall be in effect at the time. "Exercise Period" means the period commencing on the date hereof and terminating at 5:00 p.m., New York time, on December 28, 2005, unless earlier redeemed. "Exercise Price" means the price per share of Common Stock set forth in Section 1A hereof, as such price may be adjusted from time to time pursuant to Section 1. "Form of Subscription" means the Form of Subscription appearing at the end of this Warrant. "Holder" means the person in whose name this Warrant is registered on the books of the Company maintained for such purpose. "Securities Act" means the Securities Act of 1933, as amended, or any similar U.S. Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. SECTION 1. EXERCISE OF WARRANTS: TERM; EXERCISE PRICE; ADJUSTMENTS OF EXERCISE PRICE 1A. EXERCISE OF WARRANTS. Subject to the conditions of this Section 1, the holder of any Warrant at the holder's option may exercise such holder's rights under all or any part of the Warrants to purchase shares of the Company's Common Stock (the "Warrant Shares") at a price (the "Exercise Price") at any time on or after the date hereof equal to Seventy Five Cents ($.75) per share, subject to adjustment as hereinafter provided. 1B. ADJUSTMENT OF EXERCISE PRICE FOR OTHER TRANSACTIONS. If and whenever after the date hereof the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the Exercise Price in effect immediately prior to the time of such issue or sale then, forthwith upon such issue or sale, the Exercise Price with respect to the exercise of any Warrant subsequent to such event shall be reduced to the lower of the prices (calculated to the nearest cent) determined as follows: (a) by dividing (1) an amount equal to the sum of (A) the aggregate number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price, and (B) the consideration, if any, received by the Company upon such issue or sale, by (ii) the aggregate number of shares of Common Stock of all classes outstanding immediately after such issue or sale; and 2 (b) by multiplying the Exercise Price in effect immediately prior to the time of such issue or sale by a fraction, the numerator of which shall be (1) the sum of (A) the aggregate number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Market Price immediately prior to such issue or sale plus (B) the consideration received by the Company upon such issue or sale; and the denominator of which shall be (2) the product of (A) the aggregate number of shares of Common Stock of all classes outstanding immediately after such issue or sale, multiplied by (B) the Market Price immediately prior to such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than 1% of the Exercise Price, but any such lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment, PROVIDED, HOWEVER, upon the exercise of the Warrants, the Company shall make all necessary adjustments not theretofore made to the Exercise Price up to and including the date upon which the Warrant is exercised. 1C. SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the number of shares issuable on exercise of this Warrant shall be proportionately increased, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the number of shares issuable on exercise of this Warrant shall be proportionately reduced. 1D. CHANGES IN COMMON STOCK. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or sale, transfer or other disposition of all or substantially all of its properties to another corporation, shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Warrants shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the shares of the Common Stock of the Company immediately theretofore issuable upon exercise of the Warrants, such shares of stock, securities or properties, if any, as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore issuable upon exercise of the Warrants had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of each holder of Warrants to the end that the provisions hereof (including without limitation provisions for adjustment of the Exercise Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Warrants at the last address of such holders appearing on the books of the Company, the obligation to deliver to such holders such shares of 3 stock, securities or properties as, in accordance with the foregoing provisions, such holders may be entitled to acquire. The above provisions of this subparagraph shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers, or other dispositions. 1E. NOTICE OF ADJUSTMENT. Upon any adjustment of the Exercise Price, then and in each such case the Company shall give written notice thereof to the registered Holder, which notice shall state the Warrant price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon written request of the Holder, the Company shall promptly obtain the opinion of a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing selected by the Company's Board of Directors, which opinion shall state the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock issuable upon Exercise of the Warrant or Warrants held by each holder of Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The good faith determination of the Board of Directors based upon such accountants opinion shall be final and binding with respect to any adjustment required hereunder. 1F. CERTAIN EVENTS. If any event occurs as to which in the opinion of the Board of Directors of the Company the other provisions of Section 1 hereof are not strictly applicable or if strictly applicable would not fairly protect the conversion rights of the holders of the Warrants in accordance with the essential intent and principles of such provisions, then such Board of Directors shall appoint a firm of independent certified public accountants (which may be the regular auditors of the Company) of recognized national standing, which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holders of the Warrants. Upon receipt of such opinion by the Board of Directors, the Company shall forthwith make the adjustments described therein; PROVIDED, HOWEVER, that no such adjustment pursuant to this Section 1F shall have the effect of increasing the Exercise Price as otherwise determined pursuant to Section 1 hereof except in the event of a combination of shares of the type contemplated in Section ID and then in no event to an amount larger than the exercise price as adjusted pursuant to Section ID. 1G. PROHIBITION OF CERTAIN ACTIONS. The Company will not (i) authorize or issue, or agree to authorize or issue, any shares of its capital stock of any class preferred as to dividends or as to the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding-up of the Company otherwise than for full and fair consideration in hand paid to the Company concurrent with any such issuance; or (ii) take any action which would result in any adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's Certificate of Incorporation. 1H. STOCK TO BE RESERVED. The Company will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon the exercise of Warrants as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise 4 of all outstanding Warrants, and the Company will maintain at all times all other rights and privileges sufficient to enable it to fulfill all its obligations hereunder. 1I. REGISTRATION AND LISTING OF COMMON STOCK. If any shares of Common Stock required to be reserved for purposes of exercise of Warrants hereunder require registration with or approval of any governmental authority under any Federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. Shares of Common Stock issuable upon exercise of the Warrants shall be registered by the Company under the Securities Act or similar statute then in effect. If and so long as the Common Stock is listed on any national securities exchange or quoted on the Nasdaq Stock Market, the Company will, at its expense, obtain promptly and maintain the approval for listing or quotation thereon upon official notice of issuance, of shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing or quotation of such shares after their issuance; and the Company will also cause the listing on such national securities exchange or quotation on Nasdaq, will register under the Exchange Act and will maintain such listing or quotation of, any other securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange or quoted on Nasdaq by the Company or shall require registration under the Exchange Act. The Shares are subject to a separate Registration Rights Agreement. 1J. NO CHARGE FOR ISSUANCE. The issuance of certificates for shares of Common Stock upon exercise of Warrants shall be made without charge to the holders of the Warrants, other then payment of the exercise price. 1K. CLOSING OF BOOKS. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any Warrant in any manner which interferes with the timely exercise of such Warrant. 1L. NO RIGHTS OR LIABILITIES AS SHAREHOLDERS. No Warrant shall entitle any holder thereof to any of the rights of a shareholder of the Company. No provision of this Warrant, in the absence of the actual exercise of such Warrant or any part thereof by the holder thereof into Common Stock issuable upon such exercise, shall give rise to any liability on the part of such holder as a shareholder of the Company, whether such liability shall be asserted by the Company or by creditors of the Company. 1M. FRACTIONAL SHARES. The Company shall not issue fractional shares of Common Stock or scrip representing fractional shares of Common Stock upon any exercise of this Warrant. As to any fractional share of Common Stock which the Holder would otherwise be entitled to purchase from the Company upon such exercise, the Company shall purchase from the Holder such fractional share at a price equal to an amount calculated by multiplying such fractional share (calculated to the nearest 1/100th of a share) by its Market Price on the date the Form of Subscription is received by the Company. Payment of such amount shall be made in cash or by check payable to the order of 5 the Holder at the time of delivery of any certificate or certificates arising upon such exercise. SECTION 2. METHOD OF EXERCISE OF WARRANTS The Warrants may be exercised by the surrender of this Certificate, with the Form of Subscription attached hereto duly executed by the holder, to the Company at its principal office, accompanied by payment of the Exercise Price for the number of shares of Common Stock specified. The Warrants may be exercised for less than the full number of shares of Common Stock called for hereby by surrender of this Certificate in the manner and at the place provided above, accompanied by payment for the number of shares of Common Stock being purchased. If the Warrants should be exercised in part only, the Company shall, upon surrender of this Warrant Certificate for cancellation, execute and deliver a new Warrant Certificate evidencing the right of the holder to purchase the balance of the shares purchasable hereunder. Upon receipt by the Company of this Warrant Certificate at the office of the Company, in proper form for exercise, accompanied by the full Exercise Price in cash or certified or bank cashier's check, the holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to the holder. As soon as practicable after the exercise of these Warrants in whole or in part and, in any event, within ten (10) days thereafter, the Company at its expense will cause to be issued in the name of and delivered to the holder a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (and any new Warrants) to which the holder shall be entitled upon such exercise. Each certificate for shares of Common Stock so delivered shall be in such denominations as may be requested by the holder and shall be registered in the name of the holder or such other name as the holder may designate. SECTION 3. PAYMENT OF TAXES The issuance of certificates for shares of Common Stock upon exercise of the Warrants shall be made without charge to the holders of the Warrants exercised for any issuance tax in respect thereto; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax which may be payable in respect of any transfer of any certificate or Warrant. SECTION 4. MUTILATED OR MISSING WARRANT CERTIFICATES Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification and upon surrender and cancellation of this Warrant Certificate, if mutilated, the Company will execute and deliver a new Warrant Certificate of like tenor and date. SECTION 5. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS 6 5A. IN GENERAL. This Warrant and the Common Stock issued upon the exercise hereof shall not be transferable except upon the conditions hereinafter specified, which conditions are intended to insure compliance with the provisions of the Securities Act and any applicable state securities laws in respect of the transfer of this Warrant or any such Common Stock. 5B. RESTRICTIVE LEGENDS. This Warrant (including each Warrant issued upon the transfer of any Warrant) shall bear on the face thereof a legend substantially in the form of the notice endorsed on the first page of this Warrant. Each certificate for shares of Common Stock initially issued upon the exercise of this Warrant and each certificate for shares of Common Stock issued to a subsequent transferee of such certificate shall, bear on the face thereof a legend reading substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. In the event that a registration statement covering the shares of Common Stock issued upon exercise of this Warrant shall become effective under the Securities Act or in the event that the Company shall receive an opinion of its counsel that, in the opinion of such counsel, such legend is not, or is no longer, necessary or required (including, without limitation, because of the availability of the exemption afforded by Rule 144 of the Regulations of the Securities and Exchange Commission), the Company shall, or shall instruct its transfer agents and registrars to, remove such legend from the certificates evidencing such shares of Common Stock or issue new certificates without such legend in lieu thereof. 5C. NOTICE OF PROPOSED TRANSFER; REGISTRATION NOT REQUIRED. The Holder of this Warrant or the holder of any shares of Common Stock issuable upon the exercise hereof (the "Warrant Shares") by acceptance hereof or thereof, agrees to give written notice to the Company, prior to any transfer of this Warrant, the Warrant Shares or any portion hereof or thereof, of its intention to make such transfer which notice shall include a brief description of such proposed transfer. 7 If in the opinion of counsel to the Company or counsel to the transferor reasonably acceptable to the Company the proposed transfer may be effected without registration or qualification under any Federal or state law whereupon the Holder shall be entitled to transfer this Warrant or Warrant shares in accordance with the terms of the notice delivered to the Company and the opinion of counsel. The Company shall not be required to implement any unregistered transfer of the Warrant or Warrant Shares without such opinion of counsel. 5D. REQUIRED REGISTRATION AND QUALIFICATION. Upon the written request of the Holder, Company shall include the Warrant Shares in any registration under the Securities Act filed by the Company (other than a registration limited to employees or other specified transaction offerees) provided that on notice of such registration, the Holder of the Warrant or Warrant Shares shall request inclusion therein and specify the number of shares to be registered or qualified and the jurisdictions in which such registration or qualification is desired. Promptly upon receipt of any request pursuant to this Section 5D the Company shall promptly (a) take such steps as are reasonably necessary or appropriate to prepare for registration and qualification of shares of Common Stock and (b) give written notice to the holders of the Warrants and shares of Common Stock issuable upon the exercise thereof of a proposed registration or qualification by the Company under the Securities Act and under the securities or blue sky laws of the requested jurisdictions and shall as expeditiously as possible, in good faith, use its best efforts to effect any such registration or qualification of: (i) the number of shares of Common Stock issuable upon the exercise hereof designated in such request, and (ii) the number of shares of Common Stock issuable upon the exercise of any other Warrants the holders of which shall have requested the Company, in writing within 30 days after the date of such notice by the Company, to have such shares of Common Stock registered or qualified; all to the extent requisite to permit the disposition (in accordance with the intended methods thereof) by the prospective sellers of the shares of Common Stock to be registered or qualified, with notification to or approval of, any governmental authority under any Federal or state law, or any listing with any securities exchange or qualification on the Nasdaq Stock Market, which may be required to permit the sale or disposition of any shares of Common Stock issuable upon the exercise of such Warrants which the holders thereof propose to make, and the Company will keep effective and current such registration or qualification for such period as may be reasonably necessary to effect such sale or disposition, not to exceed nine (9) months after the effective date of such registration statement. If the managing underwriter, to be selected by the Company, subject to reasonable approval by the person(s) holding a majority of the shares of Common Stock being registered, advises the prospective sellers in writing that the aggregate number of shares of Common Stock to be sold in the proposed distribution should be less than the number of shares of Common Stock requested to be registered, the number of shares of Common Stock to be sold by each prospective seller shall be reduced, so that each prospective seller may sell that proportion of the shares of Common Stock to 8 be sold in the proposed distribution which the number of shares of Common Stock issuable upon the exercise of its Warrant proposed to be sold by such prospective seller bears to the aggregate number of shares of Common Stock issuable upon the exercise of the Warrants proposed to be sold by all prospective sellers. 5E. ALLOCATION OF EXPENSES. If the Company is required by the provisions hereof to use its best efforts to effect the registration or qualification under the Securities Act or any state securities or blue sky laws of any of the shares of Common Stock issuable upon the exercise of the Warrants, the Company will pay all expenses in connection therewith, including, without limitation, (a) all expenses incident to filing with the National Association of Securities Dealers, Inc., (b) registration fees, (c) printing expenses, (d) accounting and legal fees and expenses, (e) expenses of any special audits incident to or required by any such registration or qualification, (f) premiums for insurance in such amount, if any, deemed appropriate by the managing underwriter and (g) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualification; provided, however, the Company shall not be (i) liable for any discounts or commissions to any underwriter. 5F. CROSS-INDEMNIFICATION. In connection with any registration or qualification of securities hereunder, the Company hereby indemnifies the Holder and the holders of any shares of Common Stock issuable upon the exercise hereof and each underwriter thereof, including each person, if any, who controls the Holder or such stockholder or underwriter within the meaning of Section 15 of the Securities Act, against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of a material fact contained in any registration statement, preliminary prospectus, prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or caused by 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, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Company by the Holder expressly for use therein. The Company and each officer, director and controlling person of the Company or underwriter within the meaning of Section 15 of the Securities Act are hereby indemnified by the Holder and by the holders of any shares of Common Stock issuable upon the exercise hereof against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of a material fact contained in any registration statement, preliminary prospectus or notification or offering circular (as amended or supplemented) or caused by any omission, or alleged omission, to state therein a material fact necessary to make the statements therein not misleading, but only to the extent that such alleged untrue statement or alleged omission was based upon information furnished in writing to the Company by the Holder or any such stockholder expressly for use therein. Promptly upon receipt by a party indemnified under this Section 5F of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 5F, such indemnified 9 party shall notify the indemnifying party in writing of the commencement of such action, but the failure so to notify the indemnifying party shall not relieve it of any liability which it may have to any indemnified party otherwise than under this Section 5F unless such failure shall materially adversely affect the defense of such action. In case notice of commencement of any such action shall be given to the indemnifying party as above provided, the indemnifying party shall be entitled to participate in and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and satisfactory to such indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (a) the indemnifying party agrees to pay the same, (b) the indemnifying party fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party or (c) the named parties to any such action (including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party). No indemnifying party shall be liable for any settlement entered into without its consent. 5G. SUPPLYING INFORMATION. The Company, the Holder and each holder of shares of Common Stock issuable upon the exercise hereof shall cooperate with each other in supplying such information as may be necessary for any of such parties to complete and file any information reporting forms presently or hereafter required by the Commission or any commissioner or other authority administering the blue sky or securities laws of any jurisdiction where shares of Common Stock are proposed to be sold pursuant hereto. 5H. COMPLIANCE WITH RULE 144. At the request of any Holder of this Warrant or holder of shares of Common Stock issuable upon the exercise hereof who proposes to sell shares of Common Stock issuable upon the exercise hereof in compliance with Rule 144 of the Commission, or any similar Rule, assuming that at such time the provisions of such Rule are applicable to such Holder or holder and, in the event the Holder or holder is or could be deemed an "affiliate" of the Company, and the Company is then required to file reports under Section 13 or 15(d) of the Exchange Act, the Company shall (a) forthwith furnish to such Holder or holder a written statement as to its compliance with the filing requirements of the Commission as set forth in such Rule and (b) make such additional filings of reports with the Commission as will enable the Holder or holder to make sales of shares of Common Stock issued upon exercise hereof pursuant to such Rule. SECTION 6 MISCELLANEOUS 6A. NONWAIVER. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, powers or remedies. 10 6B. NOTICE GENERALLY. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the Holder at its last known address appearing on the books of the Company maintained for such purpose or (b) the Company at its principal office referred to in the Purchase Agreement. The Holder and the Company may each designate a different address by notice to the other pursuant to this Section 6B. 6C. SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder. 6D. AMENDMENT. This Warrant may not be modified or amended except by written agreement of the parties. 6E. HEADINGS. The headings of the Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 6F. GOVERNING LAW. Except to the extent the corporation statute of Delaware applies, this Agreement shall be governed by and construed and enforced under the laws of California without reference to the principles of the conflicts of laws thereof. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, as of the day and year first above written. WARRANT NO. 12 WARRANTS TO PURCHASE 600,000 WARRANT SHARES ISSUED TO: Dr. Guenther E. Pfaff NETWORK COMPUTING DEVICES, INC. By:_______________________________ Name: Rudolph G. Morin Title: President and Chief Executive Officer Dated: Mountain View, California December 28, 2000 11 FORM OF SUBSCRIPTION DATE: _______________, 19___ WARRANT # ____________ TO: NETWORK COMPUTING DEVICES, INC. The Undersigned, the holder of the within Warrants, hereby, irrevocably elects to exercise all or part of the purchase right represented by such Warrants for, and to purchase thereunder, shares of Common Stock of NETWORK COMPUTING DEVICES, INC. (the "Company") and herewith makes payment of $__________ to the Company, evidenced by delivery of the Holder's certified or bank check and requests that the certificate representing such shares be issued in the name of, and be delivered to Holder, at the address indicated below. ___________________________ (Name of Holder) ___________________________ (Authorized Signatory) ___________________________ (Address) ___________________________ (Telephone #) ASSIGNMENT FORM (To be executed only upon the assignment of the within Warrant) TO: NETWORK COMPUTING DEVICES, INC. FOR VALUE RECEIVED the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto________________________________________ whose address is________________________________________________________________ all of the rights of the undersigned under the within Warrant, with respect to a certain Warrant to purchase shares of Common Stock of NETWORK COMPUTING DEVICES, INC. and if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, then a new Warrant of like tenor for the number of shares of Common Stock of NETWORK COMPUTING DEVICES, INC., not being transferred hereunder shall be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint_________________________________________________________________________ ___________________________________________________________________ as attorney in fact to register such transfer on the books of The Company maintained for the purpose, with full power of substitution in the premises. Dated ________________, ______ Signature Guaranteed: By: (Signature of Registered Holder) By: [TITLE: ] NOTICE: The signature to this Assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. The signature to this Assignment must be guaranteed by a commercial bank or trust company of the United States or a member firm of the New York Stock Exchange. EX-10.60 7 a2043237zex-10_60.txt EXHIBIT 10.60 EXHIBIT 10.60 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is made and entered into as of the 28th day of December, 2000, by and between NETWORK COMPUTING SERVICES, INC., a Delaware corporation (the "COMPANY"), and DR. GUENTHER E. PFAFF, an individual (the "HOLDER"). ARTICLE I BACKGROUND WHEREAS, the Holder of certain Convertible Preferred shares converted into, and Warrants to purchase, Common Stock, par value $.001 per share ("STOCK") of the Company; and WHEREAS, the parties desire to provide for the registration of the shares of Stock issuable or issued to the Holder upon conversion of the Convertible Preferred Shares on exercise of the Warrants. 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 Dr. Guenther E. Pfaff., 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. -1- (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 respect thereto, if any, axe 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 Convertible Preferred Shares, or exercise of the Warrants, 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 -2- 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 -3- 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 shares 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. -4- 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 for at leastone 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; -5- (v) furnish to the Holder a signed counterpart, addressed to the seller, of (A) an pinion 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 -6- 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 -7- 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. -8- (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 from 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. -9- 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 Guenther Pfaff, addressed in the manner set forth beneath the Holder's 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 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), -10- 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. -11- 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. By: Print Name: Rudolph G. Morin Title: President and CEO Attest: Print Name: Michael A. Garner Title: CFO Address for notices: 301 Ravendale Drive Mountain View, CA 94043 HOLDER: Dr. Guenther Pfaff Address for notices: Underbachstrasse 22 CH-6318 Walchwil Switzerland -12- EX-11.1 8 a2043237zex-11_1.txt EXHIBIT 11.1 INDEX 11.1 NETWORK COMPUTING DEVICES, INC. Statement Regarding Computation of Shares Used in per Share Computations (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 ------------ ------------ ----------- Basic and diluted: Weighted average common shares outstanding during the period 16,686 16,192 16,393 ============ ============ =========== Net loss $ (32,652) $ (16,259) $ (9,103) ============ ============ =========== Basic and diluted loss per share $ (1.96) $ (1.00) $ (0.56) ============ ============ ===========
EX-21.1 9 a2043237zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES
ORGANIZATION JURISDICTION NAME - ------------ ----------------- NCD Graphic Software Corporation California Network Computing Devices Australia Australia Pty. Ltd. Network Computing Devices Canada (Canada), Inc. Network Computing Devices England (UK) Limited Network Computing Devices France (France) S.A.R.L. Network Computing Devices Germany GmbH Network Computing Devices Sweden (Scandinavia) AB Network Computing Devices The Netherlands (Benelux) B.V. Network Computing Devices (FSC), Inc. Guam NCD Acquisition Corp. Indiana
EX-23.1 10 a2043237zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Network Computing Devices, Inc. and Subsidiaries We hereby consent to the incorporation by reference in the registration statement on Form S-8 of Network Computing Devices, Inc. and Subsidiaries of our report dated February 28, 2001 relating to the consolidated balance sheet of Network Computing Devices, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended appearing in the Company's Annual Report (Form 10-K) for the year ended December 31, 2000. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. /s/ BDO Seidman, LLP San Francisco, California March 30, 2001 EX-23.2 11 a2043237zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Network Computing Devices, Inc. We consent to incorporation by reference in the registration statements on Form S-8 of Network Computing Devices, Inc. of our report dated February 10, 2000, relating to the consolidated balance sheet of Network Computing Devices, Inc. and subsidiaries as of December 31, 1999 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1999, which report appears in the December 31, 2000, annual report on Form 10-K of Network Computing Devices, Inc. Our report dated February 10, 2000, contains an explanatory paragraph that states that the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Mountain View, California March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----