<PAGE>
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, 1998
[ ] 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.)
350 NORTH BERNARDO AVENUE, 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. [ X ]
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
26, 1999, as reported on the Nasdaq Stock Market, was approximately $81,448,047.
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, 1999, 16,097,668 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders of
Network Computing Devices, Inc. (the "Proxy Statement") scheduled to be held on
or about May 26, 1999, are incorporated by reference in Part III of this Report
on Form 10-K.
<PAGE>
PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS, WHICH REFLECT
THE COMPANY'S 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. (the "Company") 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. The Company's product
line includes the NCD THINSTAR line of Windows-based terminals, optimized to
access Microsoft's Windows NT Server 4.0, Terminal Server Edition, the NCD
EXPLORA thin clients and the NCD NC200 and NCD NC400 network computers,
acquired in the acquisition of Tektronix Inc. Network Displays business unit
("NWD"). On the software side, the Company's 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 Terminal Server. 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. The Company's thin clients, the THINPATH software and its
installation and support services are a combination that delivers a fully
integrated desktop solution to companies seeking low-cost, easy to manage,
simple to use, high performance user experience. The Company believes that
this integrated desktop offering is a viable alternative to workstations,
character-based terminals and PCs used in mainframe and client/server
computing models. Since introducing its first product in 1989, the Company
has installed over 1,000,000 thin clients worldwide.
Network Computing Devices, Inc. is a Delaware corporation. The Company was
originally incorporated in California in February 1988 and was 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 MIS staffs.
As the 1990s approached, businesses developed networks and highly efficient
networked servers that could provide 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. This new
computing environment evolved: "thin client computing" combines the
cost-effectiveness, manageability and security of the original centralized
model with the performance, GUIs and network accessibility of the later
distributed model.
1
<PAGE>
The key technology behind the original development of the thin client
computing approach was the X Window System, or X, a graphical windowing
system. X software runs over a TCP/IP (Transmission Control Protocol/Internet
Protocol) network that allows full use of thin client computing resources.
Unlike operating systems designed for stand-alone personal computers, X is an
open system, not tied to any particular hardware or operating system,
allowing the development of applications that can run on multi-vendor
products on a common network. This multi-vendor capability is possible
because the X architecture separates windowing into two distinct parts: the
graphical display function on the user's desk; and the computing function,
which executes the applications, at shared "compute servers" (personal
computers, workstations, or larger computers) anywhere on the network. This
model, which the Company refers to as the Network Computing Architecture, or
NCA, addresses both the individual's need for an advanced GUI and the
organization's need for reduced system management overhead and better
utilization of computing resources. Users of thin client computing systems
can simultaneously access multiple applications running on separate compute
servers on the network, and view and manipulate these applications in
separate windows on their screens. Thin client computing systems also allow
the organization to keep up with advances in computing technologies while
protecting existing equipment investments. Rather than replacing every
desktop system when the industry attains new price/performance points, the
organization can simply add new computing resources to the network; the
desktop devices stay in place.
Although X-based network computing systems have been deployed in a wide range
of network environments, particularly in UNIX and other large computer-based
applications, these systems require the availability of X protocol support
from the vendors of host operating systems software and application software
developers. Until the mid-1990's, the absence of support by Microsoft
Corporation ("Microsoft"), combined with the proliferation of off-the-shelf
Windows-based application software, constituted an obstacle to the expansion
of the thin client computing model into Windows-based environments.
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 the Company to work on the realization of the lean client
initiative. Second, Microsoft NT Server software, combined with
Microsoft-authorized multi-user software, became available to support
multi-user Windows applications. By September 1998, Microsoft demonstrated
its support of the thin client computing model with its introduction of
Windows Terminal Server, multi-user Windows NT and its support of the
development of Windows CE-based thin clients to access these servers. Now
thin clients can easily access Windows applications. 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.
INFORMATION ACCESS SOFTWARE
Software is key to information access. 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 software is large and comprised
of a number of segments, many of which are expanding rapidly. Segments of
this market include: PC-based TCP/IP software stacks and applications,
including X access software; electronic mail software; and Internet access
software.
With the continuing proliferation of increasingly powerful and low-cost PCs
in large organizations, the Company 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, the
Company, in 1992, acquired Graphic Software Systems, a pioneer in the
development of X software for PCs. In 1993, the Company introduced PC-XWARE,
its initial PC-UNIX integration software product. PC-XWARE is based on the
Company's 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, WINDOWS 95 and WINDOWS NT users in
addition to its new version, NCD THINPATH X-WARE, a part of its new NCD
THINPATH software family.
In 1995, the Company introduced NCD WINCENTER software that included
Microsoft Windows NT as its basic operating system and WinFrame,
Microsoft-authorized multi-user software that the Company licensed from
Citrix Systems, Inc. ("Citrix"). NCD WINCENTER also included NCD-developed
graphics and network features that make it compatible with the X Windows
protocol supported by NCD thin clients and UNIX workstations. NCD WINCENTER
allowed a single server to provide
2
<PAGE>
Windows applications to many users simultaneously. In September of 1998, the
licensing agreement with Citrix was terminated. See "Proprietary Rights and
Licenses."
Building on this core competency, the Company has 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.
MARKETS AND APPLICATIONS
NCD's 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. The Company's main target industries are
healthcare, retail, finance and education.
Initially, the Company's X-terminal systems were sold as alternatives to
high-priced UNIX workstations required to 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. NCD
introduced NCD WINCENTER to provide Windows NT access from the already
existing X-terminal of the UNIX users. With the recently-introduced Microsoft
Windows NT Server 4.0, Terminal Server Edition ("TSE") UNIX users can still
access Windows applications through the Citrix MetaFrame protocol with NCD
THINPATH CONNECT.
Microsoft's Terminal Server 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 TSE with RDP that
gives it the most important features required by major implementers of
Windows-based terminals in a TSE 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. The Company's NCA provides
these users with a three-tiered X-based network computing environment in
which: (1) existing applications and corporate-wide databases remain on
central computing resources; (2) departmental-level applications are run on
RISC-based UNIX compute servers; and (3) thin clients on each user's desk
provide simultaneous access to applications on mainframes, minicomputers and
compute servers of varying operating environments.
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, X-terminals 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 and VMS 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. As discussed above, X-terminals were
optimized to access UNIX servers, and through the addition of NCD WINCENTER
software they were able to access Windows NT servers. However, as the
requirement to access
3
<PAGE>
Windows applications has grown, Microsoft introduced Windows NT Server 4.0,
Terminal Server Edition, and the Company 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, the Company believes 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 (intranet), plus connectivity to the worldwide
web. 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 Microsoft Windows Terminal Server, while the NCD NC200 and
NCD NC400 network computers are optimized for browser access and Java. The
NCD EXPLORA devices are also well-established thin clients for these
purposes. The NCD THINPATH family of software provides emulators to permit
PCs and NCD THINSTAR to access virtually any server, to permit easy network
management and to provide support for local peripheral devices on NCD
THINSTAR and PC desktops.
PRODUCTS
THIN CLIENT HARDWARE PRODUCTS
The Company offers a broad line of thin client products that provide
businesses and other enterprises with an open systems approach to network
computing based on the Company's Network Computing Architecture. The
Company's thin client devices include NCD THINSTAR Windows-based terminals,
NCD NC200 and NCD NC400 network computers and NCD EXPLORA network terminals.
THIN CLIENTS. The Company's 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 the Company's 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, the Company has introduced the NCD THINSTAR
Windows-based terminals and NCD THINPATH software to optimize access to
networked Windows NT servers.
The Company's 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 the Company's
products help reduce the cost of connection logic and provide hardware
acceleration for certain graphics functions. NCD's thin clients feature
single-board electronics and incorporate current ergonomic standards in
monitor technology. NCD's thin clients come with a full line of peripherals,
including mouse and several keyboard options.
NCD THINSTAR 200 and NCD THINSTAR 300 Windows-based terminals were the first
thin clients introduced with the Windows CE operating system kernel. The NCD
THINSTAR 300 is the first thin client that employs the Intel lean client
architecture that was developed by the Company under a non-exclusive
agreement with Intel. This model provides higher performance than the NCD
THINSTAR 200, and can support a greater number of peripheral devices.
Suggested list prices range from $695 to $1,038.
The Company's NCD NC200 and NCD NC400 network computers, as well as the NCD
EXPLORA 700 and HMXPRO24 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 NCD NC200/400 are industry leading network computers
acquired in the recent acquisition of the Tektronix Network Displays business
unit, and are expected to be important NC products for the Company. Suggested
list prices for the NCD NC200 and NCD NC400 start at $895. Suggested list
prices for the NCD EXPLORA 700 and HMXPRO24 start at $1,495.
The NCD EXPLORA 450 is the Company's low-end thin client product. It targets
the character-based terminal replacement market. It is based on the 32-bit
PowerPC RISC processor. Suggested list prices range from $895 to $1,014.
4
<PAGE>
NCDWARE AND NCD NCBRIDGE. The Company's thin clients run NCDWARE and NCD
NCBRIDGE, the Company's proprietary operating systems. These products
incorporate extensive enhancements to the basic X server software to improve
performance, system manageability and robustness. Suggested list prices start
at $300.
SOFTWARE PRODUCTS
NCD THINPATH SOFTWARE. The Company manufactures a family of software products
that are either client or server-based, and deliver a series of important
capabilities 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. These are pieces that make
centralized management and support of the network easier, and that permit
support of local printers and other peripheral devices on Windows-based
terminals and PCs without adding protocol software to Microsoft's Terminal
Server. As a result of the acquisition of Tektronix' Network Display business
unit, the Company's NCD THINPATH CONNECT is now the only software that allows
X-terminal users to access Citrix MetaFrame and, ultimately, Windows Terminal
Server. Suggested list prices start at $59 per user with a five-user minimum.
NCD PC-XWARE. NCD PC-XWARE is software for Windows PCs that provides
connectivity to X Windows applications running on UNIX host systems. There
are versions of NCD PC-XWARE for WINDOWS 3.1, WINDOWS 95 and WINDOWS NT. NCD
PC-XWARE is based on the Company's NCDWARE network computing software and
offers many of the same local applications and network management features.
Suggested list prices start at $395.
PRODUCT DEVELOPMENT
The Company believes that it must enhance its 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 its position as a major supplier of thin client solutions and expand
the market for this style of computing and information access products.
Accordingly, the Company is committed to investing significant resources in
software and hardware development activities.
The Company's current development programs include:
- Server and client software for making thin client devices and PCs
easy to deploy and manage in multi-user Windows NT environments;
- Server and client software for connecting thin client devices and
PCs to a broad range of applications running on Windows NT and
legacy systems;
- Additional Intel Architecture-based lean client devices and other
advanced terminal platforms that incorporate increased levels of
logic integration; and,
- Cost reductions and feature enhancements of network computer
platforms acquired from Tektronix.
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 1998, 1997 and 1996, the Company's research and development
expenditures were $13,213,000, $14,179,000, and $14,930,000, respectively.
THE FOREGOING DISCUSSION CONCERNING THE COMPANY'S 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
The Company's 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 that meets users'
performance goals and the
5
<PAGE>
corporate desire for centralized management. Equally important is the
Company's aim to maintain its position as the recognized leader in the thin
client industry and differentiate its integrated hardware and software
offerings from competitors' products. Both of these objectives need to be
addressed through the Company's newly adopted focus on indirect channels of
distribution.
The strategies that are in place include channel education on the Company's
value proposition of making access simple through an emphasis on unique
integrated hardware and software as the best and most-easily implemented thin
client solution.
Other significant strategies are the Company's work in cooperation with
industry leaders like IBM, Intel and Microsoft, and its greater focus on
vertical industries and applications like healthcare, retail and call centers.
The Company's marketing team is organized around participation in trade
shows, conferences and seminars, the placement of advertising, 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 (e-commerce).
The Company has embraced an indirect sales model worldwide, including
distributors and value-added resellers (the traditional two-tier distribution
model). The acquisition of the Tektronix Network Displays business unit
broadened the Company's network of resellers and support staff to better
serve the emerging marketplace.
International sales, including sales to foreign OEM customers, represented
approximately 35%, 34% and 33% of the Company's net revenues during 1998,
1997 and 1996, 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, the Company has experienced no material difficulties due
to these factors.
The Company also sells its products to OEMs who combine the Company's
products with computers and peripherals, add application software and sell
complete computer systems to end-users. OEM sales represented approximately
29%, 26%, and 15% of the Company's revenues for the years ended December 31,
1998, 1997 and 1996, respectively.
IBM accounted for 29% and 26% of the Company's net revenues in 1998 and 1997,
respectively. No single customer of the Company accounted for more than 10%
of the Company's net revenues during 1996.
The Company also sells its PC connectivity software products through an
internal telesales team that fulfills orders through the indirect channel.
SERVICE AND SUPPORT
The Company believes that its ability to provide service and support is and
will continue to be an important element in the marketing of its products.
The Company maintains in-house repair facilities and also provides telephone
and electronic mail access to its technical support staff. The Company's
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. The Company provides system level software support through its
factory-based technical maintenance organization and field system engineers,
and also offers software update services that allow customers to purchase
subsequent releases of its software products. Teleplan & K-Litex, a leading
European service organization, provides certain repair services for the
Company's European distributors and OEM customers. Cybersource, a leading
Australian service organization, provides certain repair services for the
Company's Australian distributors and OEM customers. In addition, in
conjunction with the Company's acquisition of NWD, the Company will be
subcontracting with the Tektronix service organization for certain services
for the first six months of 1999.
COMPETITION
The simplified information access marketplace is characterized by rapidly
changing technology and by evolving industry standards. Although the Company
is a major supplier of thin client computing systems and software, the
Company experiences significant competition from other thin client
manufacturers, suppliers of personal computers and workstations and from
software developers.
6
<PAGE>
In the Windows-based terminal area, the Company's major competitor is Wyse
Technology, Inc. ("Wyse"). The Company believes that its principal
competitive advantages are its integrated hardware and software offerings and
its networking core competence. Server manufacturers who offer thin client
products may have advantages over independent thin client vendors, including
the Company, based on their ability to "bundle" their thin clients, personal
computers and servers in certain large sales opportunities. The Company is
addressing this competitive threat by forming marketing partnerships with
suppliers of the various pieces of such solutions not provided by the Company.
At the low end of the commercial segment of the computer market, the Company
competes with suppliers of lower cost ASCII and 3270 terminals. These
products do not offer the graphics and windowing capabilities offered by
NCD's 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.
Generally speaking, competition in the thin client computing market has
intensified over the past several years, resulting in price reductions,
reduced profit margins and increased efforts to maintain market share, which
have adversely affected the Company's operating results. In addition, intense
competition from alternative desktop computing products, particularly
personal computers, has slowed the growth of the thin client computing
market. The Company expects this intense competition to continue. There can
be no assurance that the Company will be able to continue to compete
successfully against current and future competitors as the desktop computer
market evolves and competition increases.
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., FTP Software, Inc. and Walker, Ritchie,
Quinn, a privately-held company.
MANUFACTURING AND SUPPLIES
The Company conducts certain thin client production activities at its
Mountain View, California facility. These operations consist primarily of
final assembly and configuration, testing and quality control of material,
components, sub-assemblies and systems. The Company utilizes a manufacturing
control system that includes purchasing, inventory control and cost
accounting functions. The Company tests each thin client in a network
environment using a Company-developed, computer integrated manufacturing
("CIM") system. In addition, the Company employs a statistical process
control system ("SPC") and conducts regular on-site inspections at its
vendors' facilities to maintain quality control.
The Company currently obtains substantially all of the sub-assemblies used
for its thin client products (consisting of all major components except
monitors and cables) from a single supplier located in Thailand. In addition,
a number of components and parts used in the Company's products, including
certain semiconductor components, also are currently available from single or
limited sources of supply. The Company has no long-term purchase agreements
or other guaranteed supply arrangements with suppliers of these single or
limited source components. The Company has generally been able to obtain
adequate supplies of parts and components in a timely manner from existing
sources under purchase orders and endeavors to maintain inventory levels
adequate to guard against interruptions in supplies.
The Company's 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 the
Company's operating results and the Company has been able to obtain an
adequate supply of such components.
The Company currently outsources the reproduction and packaging of its
software to vendors located in California and Oregon.
BACKLOG
The Company assembles its thin client products based upon its projections of
near-term demand. Orders from large end-users and OEMs are generally placed
by the customer on an as-needed basis, and the Company typically ships
products within 45 days after receipt of a firm purchase order. The Company
does not generally have a significant backlog, and its backlog at
7
<PAGE>
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, the Company is able
to effect the manufacture and shipment of these products quickly in response
to customer orders without maintaining significant inventories, and, as a
result, has historically had little, if any, backlog at any particular time.
The Company does not, therefore, consider backlog for these products to be a
significant measure of actual sales for any succeeding period.
PROPRIETARY RIGHTS AND LICENSES
The Company relies 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 its proprietary
technology. The Company holds eight U.S. patents. Although management intends
to pursue a policy of obtaining patents for appropriate inventions, the
Company believes that its success will depend primarily on the innovative
skills, technical competence and marketing abilities of its 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 the Company's technology. In
addition, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented, or that any rights
granted thereunder will provide adequate protection to the Company.
Certain technology used in the Company's products is licensed from third
parties on a royalty-bearing basis. The costs associated with such royalties
increased substantially during 1996, and 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 the Company non-exclusive, worldwide rights
with respect to the subject technology and terminate only in the event of
material breach.
In March 1996, the Company entered into a license agreement with Citrix
pursuant to which the Company was granted the right to incorporate WINFRAME,
Citrix's Microsoft-authorized multi-user software, into the Company's
WINCENTER PRO Windows application server software and other related products.
The Company was required to pay Citrix a per-copy royalty, subject to certain
specified minimum royalty obligations. The license agreement had a term of
two and one half years. The agreement with Citrix was terminated as of
September 30, 1998.
The Company's software products are generally licensed on a right-to-use
basis. The Company relies 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 the Company's software products are
distributed do not protect the Company's 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 the Company or its suppliers with respect to current or future
products. Although the Company has historically been able to resolve all
asserted claims on terms which have not had a material effect on the
Company's operations, there is no assurance that any future claims may not
require the Company to enter into unfavorable royalty arrangements or result
in costly litigation.
EMPLOYEES
As of December 31, 1998, the Company had 340 full-time employees, of whom 78
were primarily engaged in research and development, 56 in technical support,
116 in marketing and sales, 45 in manufacturing and 45 in administration and
finance. On January 1, 1999, the Company hired 83 employees associated with
the acquisition of Tektronix' Network Displays business unit. Of these
employees, 17 were primarily engaged in research and development, 10 in
technical support, 53 in marketing and sales and 3 in administration and
finance. Also in conjunction with the acquisition of NWD, the Company
undertook various restructuring activities including the reduction in
personnel of approximately 40 employees, primarily in sales and engineering
roles. None of the Company's employees is represented by a collective
bargaining agent. The Company has experienced no work stoppages and believes
that its employee relations are good.
Competition for employees in the computer and software industries is intense.
The Company believes that its future success will depend, in part, on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel.
8
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the executive
officers of the Company, and their ages as of March 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
------ --- --------
<S> <C> <C>
Robert G. Gilbertson 57 President and Chief Executive Officer
Rudolph G. Morin 61 Executive Vice President, Operations &
Finance and Chief Financial Officer
</TABLE>
Mr. Gilbertson has served as President and Chief Executive Officer of the
Company since May 1996. Prior to joining the Company, Mr. Gilbertson served
as Chairman of Avidia Systems, Inc., a manufacturer of ATM switching systems,
and also as President and Chief Executive Officer of CMX Systems, Inc., a
manufacturer of precision measurement and positioning products from 1993 to
1996. In 1994, CMX ranked No. 103 on the INC. MAGAZINE list of the 500
fastest growing privately held companies in the U.S. Prior thereto, he served
as President and Chief Executive Officer of Data Switch Corporation, which
was named turnaround company of the decade by CFO MAGAZINE. Mr. Gilbertson
holds an MBA from the University of Chicago, served as Chairman of the Board
of the American Electronics Association, and was a member of the faculty of
Harvard Business School for five years.
Mr. Morin has served as Executive Vice President, Operations & Finance and
Chief Financial Officer since June 1996. Prior to joining the Company, Mr.
Morin served as Senior Vice President, Finance and Administration for Memorex
Telex Corporation from 1993 to 1996. Prior thereto, he worked with Mr.
Gilbertson 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.
ITEM 2. PROPERTIES.
The Company's principal administrative, marketing, manufacturing and research
and development operations are located in adjacent buildings in Mountain
View, California. These facilities consist of approximately 153,000 square
feet and are occupied under leases, which expire between June 2000 and
February 2003. Approximately 28,000 square feet in these facilities are
currently being sublet to a third party. The annual gross rent for these
facilities in 1998 was approximately $1,612,000. The Company's software
operations are located in a 44,000 square foot facility in Beaverton, Oregon,
under leases expiring in October 2000, with gross rent of approximately
$293,000 for 1998. The Company also leases a 20,000 square foot facility in
Novato, California, under a lease expiring in July 2001, a portion of which
is currently being subleased to third parties. The Company believes that its
existing facilities are adequate for its present requirements and that
suitable additional space will be available as needed. The Company's field
sales and service offices worldwide consist of leased office space totaling
approximately 24,000 square feet, with current aggregate gross rents of
approximately $706,000 for 1998.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1998.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE DATA
The Company's Common Stock has been traded on the Nasdaq Stock Market under the
symbol "NCDI" since the Company's initial public offering in June 1992. The
following table sets forth, for the periods indicated, the high and low closing
sale prices for the Common Stock on such market:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998:
First Quarter $13.50 $9.00
Second Quarter 11.375 6.00
Third Quarter 8.8125 5.75
Fourth Quarter 8.25 5.0625
1997:
First Quarter $15.375 $9.375
Second Quarter 13.50 9.375
Third Quarter 11.875 8.25
Fourth Quarter 10.875 6.25
</TABLE>
The closing sale price for the Common Stock on February 26, 1999 was $5.375.
As of February 28, 1999, the Company had 209 holders of record and
approximately 4,400 beneficial holders of its Common Stock and 16,097,668
shares of Common Stock were outstanding.
The market price of the Company's 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."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
10
<PAGE>
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."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues $ 105,596 $ 133,400 $ 120,608 $ 139,328 $ 160,871
Operating income (loss) (13,446) 1,736 (17,241) (7,657) (15,507)
Income (loss) before income taxes (9,761) 3,831 (8,721) (6,205) (7,285)
Net income (loss) (9,103) 2,681 (5,232) (4,029) (10,843)
Net income (loss) per share - basic (0.56) 0.16 (0.32) (0.25) (0.68)
Net income (loss) per share - diluted (0.56) 0.15 (0.32) (0.25) (0.68)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 21,359 $ 31,480 $ 35,671 $ 36,150 $ 31,220
Working capital 41,097 53,811 60,981 57,470 62,802
Total assets 75,146 86,514 85,693 97,537 101,029
Capital lease obligations, less current portion 69 160 314 991 1,497
Total shareholders' equity 52,523 60,519 67,425 68,014 71,889
</TABLE>
11
<PAGE>
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 THE COMPANY'S 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. The Company's product line
includes the NCD THINSTAR line of Windows-based terminals, optimized to
access Microsoft's Windows NT Server 4.0, Terminal Server Edition, the NCD
EXPLORA thin clients and the NCD NC200 and NCD NC400 network computers,
acquired in the acquisition of Tektronix Inc. Network Displays business unit
("NWD"). On the software side, the Company's 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 Terminal Server. 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.
The Company sells hardware products to International Business Machines
Corporation ("IBM") pursuant to the joint development agreement dated June
27, 1996 (the "IBM Agreement") of a network application terminal for resale
by IBM. The non-exclusive IBM Agreement provides for IBM to purchase a
portion of its requirements for such products from the Company through
December 31, 2000, although no minimum purchase volumes are required by the
contract.
RECENT DEVELOPMENTS
During the first quarter of 1998, the Company signed a non-exclusive
three-year agreement with Intel Corporation under which the Company and Intel
will collaborate to produce desktop devices based on guidelines for Lean
Client systems outlined by Intel in December 1997. Under the terms of the
agreement as amended, the Company has developed a "reference platform design"
consisting of Pentium-based lean client hardware integrated with software
technology from both companies. Subject to the Company's successful
completion of the development project, including the Company's demonstration
of volume production, Intel has agreed to (i) reference the Company's lean
client design(s) as the "preferred design" for the lean client marketplace
and (ii) refrain from developing a board level product(s) substantially
equivalent to the Company's lean client design(s) for a period of six months
after NCD and Intel execute an agreement to develop a particular lean client
design. The agreement provides that the Company will develop new product
designs based on Intel architecture and will have a limited period of
exclusivity for such design(s). Thereafter, Intel shall have the option to
acquire a non-exclusive license to any Company lean client design(s)
developed by the Company under the auspices of the agreement. The agreement
further contemplates that Intel may elect to terminate the agreement for
convenience prior to the Company's completion of its development efforts upon
Intel's payment to the Company of substantial specified lump sum payments.
In June 1998, the Company announced that it had developed a Windows-based
terminal, endorsed by Microsoft, based on Microsoft's CE operating system.
This new Windows-based terminal, which utilizes Microsoft's RDP protocol
and/or Citrix's ICA protocol, can access Microsoft's NT operating system from
multiple desktops. In September 1998, the Company commenced volume shipments
of the NCD THINSTAR Windows-based terminals. In addition, in October 1998,
the Company announced companion software for the NCD THINSTAR product line,
NCD THINSTAR PLUS and NCD THINSTAR LOAD BALANCING, which are designed to give
NCD Windows-based terminal customers a cost effective, flexible choice in
selecting the capabilities they need with either Microsoft RDP or Citrix ICA
protocols.
On December 31, 1998, the Company completed the acquisition of Tektronix'
Network Displays business unit for $3.0 million in cash and warrants
to purchase one million shares of the Company's common stock at $8.00 per
share. 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, $1.4 million to in-process research
and development and $2.8 million to other intangible assets. 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, the Company undertook various
restructuring activities to eliminate redundancies with the acquired
business, including the reduction in
12
<PAGE>
personnel of approximately 40 employees. The Company recorded a charge of
approximately $1.0 million related to these restructuring activities. (See
Note 5 of the "Notes to Consolidated Financial Statements.")
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's 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.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Hardware products and services 77% 75% 79%
Software licenses and services 23% 25% 21%
---- ---- ----
Total net revenues 100% 100% 100%
Cost of revenues:
Hardware products and services 56% 53% 60%
Software licenses and services 7% 7% 6%
---- ---- ----
Total cost of revenues 63% 61% 67%
---- ---- ----
Gross profit 37% 39% 33%
Operating expenses:
Research and development 13% 11% 12%
Marketing and selling 29% 23% 27%
General and administrative 5% 5% 9%
Business restructuring 1% -- (1)%
Acquired in-process research and development 1% -- --
Litigation settlement -- (0)% 1%
---- ---- ----
Total operating expenses 49% 38% 48%
---- ---- ----
Operating income (loss) (13)% 1% (14)%
Non-operating income and gains, net 3% 2% 7%
---- ---- ----
Income (loss) before income taxes (9)% 3% (7)%
Provision for income taxes (income tax benefit) (1)% 1% (3)%
---- ---- ----
Net income (loss) (9)% 2% (4)%
---- ---- ----
---- ---- ----
</TABLE>
TOTAL NET REVENUES
Total net revenues for 1998 were $105.6 million, a decrease of 21% from 1997
net revenues of $133.4 million. Net revenues for 1997 increased by 11%
compared to 1996 net revenues of $120.6 million. International revenues were
35% of total net revenues for 1998, representing a slight increase from 34%
and 33% in 1997 and 1996, respectively. Sales to IBM accounted for 29% and
26% of revenues in 1998 and 1997, respectively. No single customer of the
Company accounted for more than 10% of the Company's net revenues during 1996.
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 service
activities. Hardware revenues were $81.2 million for 1998, a decrease of 19%
compared to revenues of $100.6 million in 1997. Hardware revenues for 1997
increased 6% compared to revenues of $95.0 million in 1996. The decline in
revenues in 1998 reflects decreased shipments of UNIX-based products as the
Company transitions to the sale of
13
<PAGE>
lower priced Windows-based terminals and decreased shipments to IBM. The
increase in revenues in 1997 reflects the increased shipments related to the
IBM Agreement, offset by lower average selling prices ("ASPs").
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 WINCENTER, the
Company's multi-user WINDOWS NT application server software, (ii) NCD
PC-XWARE, the Company's thin client software for PCs, and (iii) NCDWARE, the
Company's proprietary thin client software. Through the first quarter of
1996, Software revenues also included revenues from the development and
licensing of the Company's MARINER Internet connectivity product line (which
was sold in the first quarter of 1996), and the Z-MAIL product line (which
was sold during the second quarter of 1996). Revenues from software and
related services were $24.4 million for 1998, a decrease of 26% compared to
revenues of $32.8 million in 1997. Revenues in 1997 increased by 28% compared
to revenues of $25.6 million in 1996. The decrease in 1998 reflects decreases
in all software revenue product lines; the most significant of which were NCD
WINCENTER and the Company's PC-XWARE product line. The reduction in NCD
WINCENTER reflects the Company's transition from an OEM of Citrix's WinFrame
for NT 3.5 products to a provider of value-add software to that product, and
the market's move from Citrix WinFrame for NT 3.5 to MetaFrame for NT 4.0
concurrently with the availability of multi-user Windows NT 4.0 from
Microsoft. In addition to the decreased product sales, revenues for 1997
included revenues from AT&T of $1.2 million related to an agreement with AT&T
that terminated in September 1997. The Company's OEM relationship with Citrix
ended on September 30, 1998. This will result in significantly reduced sales
of WINCENTER products, and, potentially, a decrease in total software
revenues in future periods if the Company's newly announced software products
do not achieve sufficient marketplace acceptance. The increase in 1997
software revenues compared to 1996 resulted from increased sales of WINCENTER
and related support services.
GROSS MARGIN ON HARDWARE REVENUES
The Company's gross margin percentages on Hardware revenues were 27%, 29% and
23% for the years ended December 31, 1998, 1997 and 1996, respectively. The
decrease in margin in 1998 primarily reflects reduced margins on products
sold to IBM on an OEM basis. The increase in margin for 1997 relates to lower
material costs, reflecting declines in the cost of certain semiconductor and
other components. In addition, in 1996 the Company recorded a $3.0 million
charge associated with the reduction of certain inventories to market value.
Exclusive of this charge, the gross margin percentage on Hardware revenues
would have been 27% for 1996. The Company also benefited from certain reduced
component prices related to volume purchase discounts in association with the
IBM Agreement during 1997 while no such purchasing benefits were realized in
1996.
The Company continues to increase the mix of revenues generated through
indirect channels. This should continue to put downward pressure on gross
margin percentages on hardware revenues in future periods.
GROSS MARGIN ON SOFTWARE REVENUES
The Company's gross margin percentages on Software revenues were 68% for the
year ended December 31, 1998, and 70% for both years ended December 31, 1997
and 1996. The decline in 1998 when compared to 1997 was due primarily to a
higher mix of WINCENTER revenues in 1998, which carry a lower margin because
of higher third-party royalty costs, and reduced revenues of other software
products, including revenues associated with the AT&T agreement and PC-XWARE.
Certain technology used in the Company's products is licensed from third
parties on a royalty-bearing basis. Accordingly, royalties are a significant
component of total software cost of sales in the periods presented.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $13.2 million, $14.2 million
and $14.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Although R&D expenses decreased slightly in absolute dollars in
1998, the investment in R&D as a percentage of net revenues increased as the
Company continued to invest in R&D in a period of lower revenues. R&D
expenses decreased in 1997 compared to 1996 primarily due to the absence of
costs of $2.5 million related to the Z-MAIL and MARINER product lines which
were sold in the first half of 1996. Absent these costs, R&D expenses in 1997
increased 15% reflecting increased investment in the area of thin client
computing products. R&D expenses as a percentage of revenues (excluding
Z-MAIL and MARINER costs in 1996) were 13%, 11% and 10% for 1998, 1997 and
1996, respectively. The Company plans to maintain its investment in research
and development in the area of thin client computing products through 1999.
14
<PAGE>
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $31.1 million, $30.5 million and $32.1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
The slight increase in 1998 compared to 1997 related to the Company's
continued investment in the marketing and selling of the Company's products
during a transition year of lower revenues. The decrease in 1997 compared to
1996 reflects increased efficiencies related to the consolidation of the
Company's remaining business units, which commenced in June of 1996. As a
percentage of net revenues, marketing and selling expenses were 29%, 23% and
27% for 1998, 1997 and 1996, respectively, resulting from the combined impact
of slightly increased spending and lower net revenues in 1998 and decreased
spending in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $5.2 million, $6.1 million
and $10.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The decreases in 1998 and 1997 when compared to 1996 primarily
reflect increased efficiencies and continued cost controls related to
personnel costs and outside service fees. As a percentage of net revenues,
G&A expenses were 5% for both 1998 and 1997, and 9% for 1996 reflecting the
combined impact of decreased spending and lower net revenues in 1998 and
decreased spending in 1997.
BUSINESS RESTRUCTURING
On December 31, 1998, the Company acquired the Network Displays business unit
of Tektronix Inc. As a result of the acquisition, the Company reduced
its workforce and discontinued certain activities that were overlapping with
the acquired business. Accordingly, during the fourth quarter of 1998, the
Company 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.
During 1995, the Company created and began implementing a plan to restructure
the business in order to improve the Company's operating performance
potential. The plan included substantial modifications to the Company's
manufacturing processes, phasing out activities related to less profitable
products, a reduction in facilities, and a reduction in the number of
employees. During 1995, the Company recognized charges totaling $7.5 million
for the implementation of this plan. In 1996, the Company substantially
concluded such restructuring activities and an amount of $1.1 million in
related accruals was determined to be in excess of amounts required. As a
result, the Company recognized a $1.1 million credit for business
restructuring during 1996. See Note 5 of the "Notes to Consolidated Financial
Statements" contained herein.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's 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 the Company's
future operating results.
The in-process research and development projects acquired in the acquisition
of NWD consisted of development of a new Windows-based terminal and a new
browser terminal, as well as technology to upgrade current software products.
The new Windows-based terminal ("WBT") was intended to replace the Thin
Client 200/400 products and be a less expensive, faster and higher
performance machine. Post acquisition, NCD intends to incorporate the
acquired WBT technology with its own to create a more fully featured, higher
performance WBT. The browser terminal is similar to the new WBT, but is
designed solely for the Internet, intranet and extranet applications. These
hardware products are expected to be released in late 1999 and continue
through 2003. The software product upgrades include two primary software
applications: a new enterprise management software which allows for the
terminal to be centrally configured and remotely administered; and a next
generation software product which is expected to differentiate the Company by
rewriting the previous product to be JAVA based and adding key value features
such as more central configuration support and support for token ring
networks. These new software products are expected to be released in the
second quarter of 1999. The aggregate expected costs to complete the
in-process projects is approximately $2.0 million.
15
<PAGE>
The fair value of the in-process technology was based on projected cash flows
which were discounted based on the risks associated with achieving such
projected cash flows upon successful completion of the acquired projects.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. In developing cash flow projections, revenues were forecast based
upon relevant factors, including aggregate revenue growth rates for the
business as a whole, characteristics of the potential market for the
technology and the anticipated life of the underlying technology. Operating
expenses and resulting profit margins were forecast based on the
characteristics and cash flow generating potential of the acquired in-process
technology.
The fair value of the in-process research and development was $1.4 million.
Projected annual revenues for the in-process projects was assumed to increase
from product release through 2001 and decline significantly in 2002 and 2003,
which is estimated to be the end of the in-process technology's economic life.
Gross profit was assumed to be 35% for the hardware projects and 85% for the
software projects. The projected gross profit percentages were based on
estimated costs of revenues which include duplication, manuals, packaging
materials and third party order fulfillment costs. Gross profit projections
were based on the Company's experience with other similar products.
Estimated operating expenses, income taxes and capital charges to provide a
return on other acquired assets were deducted from gross profit to arrive at
net operating income for the in-process development projects. Operating
expenses were estimated as a percentage of revenue and included sales and
marketing expenses and development costs to maintain the technology once it
has achieved technological feasibility.
The Company discounted the net cash flows of the in-process research and
development projects to their present values using a discount rate of 40%.
This discount rate approximates the overall rate of return for the
acquisition as a whole and reflects the inherent uncertainties surrounding
the successful development of the in-process research and development
projects.
LITIGATION SETTLEMENT
The $1.1 million charge for litigation settlement that was recognized in 1996
represented an estimate of the Company's voluntary contribution toward a
total of $12 million in costs to settle all pending securities litigation.
The settlement agreement was executed by all parties in 1997, and the Company
anticipates that no further charges related to such settlement will be
incurred in the future. A credit of $147,000 representing the excess of the
$1.1 million accrual was recognized in 1997 when all expenses related to the
litigation settlement were determined.
INTEREST INCOME, NET
Interest income, net of interest expense, was $1.6 million, $1.9 million and
$1.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The decrease in 1998 when compared to 1997 relates to decreased
average balances in interest-earning accounts and declining average interest
rates. The increase in 1997 compared to 1996 is primarily due to higher
average balances in interest-earning accounts. This was partially offset by
declining interest rates across the periods presented.
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income for 1998 reflects the sale of the Company's interest in Precept
Software, Inc. ("Precept") after Precept was acquired by Cisco Systems in
March 1998, resulting in a net gain of approximately $2.1 million. The
Company acquired shares of Precept in 1995 in return for providing
specialized software. Other income in 1997 reflects the receipt of insurance
proceeds for certain legal expenses incurred in association with the
securities litigation costs. No significant other income was produced during
1996.
GAIN ON SALE OF PRODUCT LINES
The gain on sale of product lines in 1996 represents the net gain on the sale
of the MARINER product line in February 1996, offset by a slight loss on the
sale of the Z-MAIL product line in June 1996.
16
<PAGE>
INCOME TAXES AND INCOME TAX BENEFIT
The Company recognized an income tax benefit of $0.7 million and $3.5 million
in 1998 and 1996, respectively, compared to an income tax provision of $1.2
million in 1997. At December 31, 1998, the Company's net deferred tax assets
are approximately $6.6 million. During 1998, the Company recorded a valuation
allowance against a portion of its deferred tax assets because operating
losses created uncertainty about the Company's ability to generate sufficient
taxable income to utilize all deferred tax assets. Based on the Company's
expected operating results, management believes that it is more likely than
not that the Company will realize the benefit of the recognized deferred tax
assets. See Future Performance and Risk Factors below and Note 7 of the
"Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
Total assets of $75.1 million at December 31, 1998 decreased $11.4 million
from $86.5 million at December 31, 1997. The change in total assets reflects
decreases in cash and equivalents, accounts receivable, deferred income taxes
and inventory of $12.7 million, $3.6 million, $1.6 million and $1.1 million,
respectively, partially offset by increases in other assets and short-term
investments of $5.2 million and $2.6 million, respectively. Total liabilities
as of December 31, 1998 decreased by $3.4 million to $22.6 million from $26.0
million at December 31, 1997.
CAPITAL REQUIREMENTS
Capital spending requirements for 1999 are estimated at approximately $3.5
million, and at December 31, 1998, the Company had commitments for capital
expenditures of approximately $360,000. These commitments are primarily
related to information technology and facilities.
LIQUIDITY
As of December 31, 1998, the Company had combined cash and equivalents and
short-term investments totaling $21.4 million, with no significant debt. Cash
used in operations was $5.8 million in 1998 compared to cash provided by
operations of $7.1 million in 1997 and cash used in operations of $6.5
million in 1996. Cash used in operations in 1998 primarily reflects the
Company's 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, respectively. Cash provided by operations in 1997 primarily
reflects the Company's net income of $2.7 million, depreciation of $3.3
million and increases in accounts payable of $6.8 million, partially offset
by increases in inventories and accounts receivable of $5.6 million and $3.6
million, respectively. Cash used in operations in 1996 primarily reflects the
Company's net loss of $5.2 million, the gain on sale of product lines of $6.9
million and decreases in accounts payable of $9.5 million, partially offset
by depreciation of $4.6 million and decreases in accounts receivable and
inventories of $7.0 million and $4.5 million, respectively. Cash flows used
in investing activities in 1998 of $5.1 million primarily reflects the cash
portion of the acquisition of NWD of $3.0 million. Cash flows used in
financing activities reflects repurchases of $10.7 million of the Company's
common stock, partially offset by Intel's investment in the Company's common
stock. Cash flows used in financing activities in 1997 reflects repurchases
of $12.2 million of the Company's common stock. The Company believes that its
existing sources of liquidity, including cash generated from operations, will
be sufficient to meet operating cash requirements and capital lease repayment
obligations at least through the next twelve months.
YEAR 2000 ISSUES
In the next year, most companies could face a potentially serious information
systems problem because many software applications and operational programs
written in the past were designed to handle date formats with two-digit years
and thus may not properly recognize calendar dates beginning in the Year
2000. This problem could result in computers either outputting incorrect data
or shutting down altogether when attempting to process a date such as
"01/01/00." In response to this, the Company has formed a task force (the
"Task Force") specifically assigned to addressing Year 2000 issues.
The Task Force is composed of members from all essential functional groups
within the Company. The Task Force meets regularly, and the meeting minutes
are reviewed on a regular basis at the Executive Staff's operational meeting.
The Company has reviewed all of its current product offerings and believes
that its current products are Year 2000 compliant. As to the Company's
internal operations, the Task Force's general plan of action includes
inventorying all essential systems, equipment and facilities, contacting
suppliers to ascertain vendor readiness for Year 2000, testing all critical
systems and
17
<PAGE>
resolving all mission-critical problems by the end of the third quarter of
1999. The Company is currently on schedule to complete all mission-critical
Year 2000 problems by the end of the third quarter of 1999.
The Company has completed a comprehensive inventory, and is currently in the
process of completing the evaluation, remediation and testing of its systems,
equipment and facilities. The Company has also identified all essential
suppliers and has contacted them to determine whether these suppliers'
operations, products and services are, or will be, Year 2000 ready. The
Company expects to receive substantially all supplier responses by the end of
the first quarter of 1999. In addition, the Company plans to audit its
largest supplier to ensure Year 2000 readiness. The Company has a number of
projects underway to replace or upgrade systems, equipment and facilities
that are not currently Year 2000 ready. To date, the Company has not
identified any specific contingency plans should the replacement or upgrade
of these systems not be completed on a timely basis. The Company plans to
have all mission-critical systems Year 2000 ready by the end of the first
quarter of 1999.
The Company estimates the total Year 2000 costs to be between $500,000 to
$750,000. As of December 31, 1998, the Company has spent approximately
$78,000 related to Year 2000 issues. The Company has budgeted all Year 2000
costs independently of the Company's information technology budget. All costs
will be paid from the Company's operating funds.
In addition to potential costs or losses directly associated with the Year
2000 issue, the Company could experience reduced revenues resulting from
other companies' information systems budgets being allocated to solving Year
2000 issues, thus reducing amounts available to purchase the Company's
products. The Company could also be exposed to a potential adverse impact
resulting from the failure of key suppliers, financial institutions and other
third parties to adequately address the Year 2000 problem, despite assurances
to the contrary given to the Company. However, the Company cannot currently
estimate the incidental costs and losses which may be incurred from reliance
on these third parties, nor can any assurance be given that the Year 2000
problem will not have a material adverse effect on the Company's business,
operating results or financial condition.
The Company believes that the most reasonable likely worst case scenario
related to Year 2000 compliance that the Company may experience would be a
delay or inability to procure components from suppliers or an interruption of
orders from key customers due to their failure to successfully remediate
Year 2000 related issues. Such scenarios, if they were to develop, could
materially, adversely affect the Company and its operations. The Company has
in place only general contingency plans, such as replacement of suppliers and
stockpiling of critical components, to respond to such scenarios.
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING THIN CLIENT COMPUTING MARKET
The Company derives a majority of its revenues from the sale of thin client
network computing products and related software. Until several years ago, the
Company's thin client product offerings primarily focused on the UNIX
marketplace using the Company's X protocol. The Company's introduction of its
WINCENTER multi-user Windows NT application server software and new,
lower-priced thin client network computing devices allowed the Company to
offer thin client network computing systems that provide users with access to
Windows applications. The Company's expansion of its thin client computing
model into the Windows-based environment has been limited because of the
Company's 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. The Company's future success
will depend substantially upon increased acceptance of the thin client
computing model and the successful marketing of the Company's new thin client
computing hardware and software products. There can be no assurance that the
Company's 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 the Company's thin client computing products
would have a material, adverse effect on the Company's business, operating
results and financial condition.
RELIANCE ON OEM RELATIONSHIPS
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the
execution of the IBM Agreement. The production cycle of related product
requires the Company to rely on IBM to provide accurate product requirement
forecasts, which have in the past, and will in the future, be subject to
changes by IBM. Should the Company commence production of related product
based on provided forecasts that are subsequently reduced, the Company bears
the risk of increased levels of unsold inventories. Should the expected
business volumes associated with the IBM Agreement not occur, or occur in
volumes below management's expectations, there would be a material, adverse
effect on the Company's operating results.
18
<PAGE>
COMPETITION
The desktop computer and information access markets are characterized by
rapidly changing technology and evolving industry standards. The Company
experiences significant competition from other network computer
manufacturers, suppliers of personal computers and workstations and software
developers. Competition within the thin client computing market has
intensified over the past several years, resulting in price reductions and
reduced profit margins. The Company expects this intense competition to
continue, and there can be no assurance that the Company will be able to
continue to compete successfully against current and future competitors as
the desktop computer market evolves and competition increases. The Company's
software products also face substantial competition from software vendors
that offer similar products, including several large software companies,
including Microsoft and Citrix.
FLUCTUATIONS IN OPERATING RESULTS
The Company's 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 the Company and
its 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. The Company's operating
results may fluctuate in the future as a result of these and other factors,
including the Company's success in developing and introducing new products,
its product and customer mix, licensing costs, the level of competition which
it experiences and its ability to develop and maintain strategic business
alliances.
The Company has committed significant resources, including research and
development, manufacturing and sales and marketing resources, to the
execution of the IBM Agreement. The production cycle of related product
requires the Company to rely on IBM to provide accurate product requirement
forecasts, which have in the past, and will in the future, be subject to
changes by IBM. Should the Company commence production of related product
based on provided forecasts that are subsequently reduced, the Company bears
the risk of increased levels of unsold inventories.
The Company currently anticipates that the mix of hardware revenues as a
component of total revenues may rise as a result of potential OEM
relationships for the Company's thin client computing products. This
condition would likely lead to overall reduced gross margins on total
revenues. In addition, the Company operates 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. The Company's
expense levels are based in part on its forecast of future revenues. If
revenues are below expectations, the Company's operating results may be
adversely affected. The Company has experienced a disproportionate amount of
shipments occurring in the last month of its fiscal quarters. This trend
increases the risk of material quarter-to-quarter fluctuations in the
Company's revenues and operating results.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS
The markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The Company's future results will depend to a
considerable extent on its ability to continuously develop, introduce and
deliver in quantity new hardware and software products that offer its
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, the
Company 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 the Company 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 the
Company is continuously engaged in this product development and transition
process, its 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 the Company's operating results.
19
<PAGE>
DEFERRED TAX ASSETS
The Company has significant deferred tax assets and will have to generate
approximately $17 million of future taxable income to realize its net
deferred tax assets. If the Company is unable to realize its net deferred tax
assets, it will have to establish an additional valuation allowance, which
could have a material, adverse effect on future operating results. Although
management believes that the Company will achieve the operating results
necessary to realize these assets, there can be no assurance that future
levels of taxable income will be sufficient to realize the net deferred tax
assets.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
The Company relies increasingly on independent distributors and resellers for
the distribution of its products. In early 1996, the Company experienced
significant returns of its software products from its distributors. Although
controls have since been improved, there can be no assurance that the Company
will not experience some level of returns in the future. In addition, there
can be no assurance that the Company's distributors and resellers will
continue their current relationships with the Company or that they will not
give higher priority to the sale of other products, which could include
products of the Company's competitors. A reduction in sales effort or
discontinuance of sales of the Company's products by its distributors and
resellers could lead to reduced sales and could adversely affect the
Company's operating results. In addition, there can be no assurance as to the
continued viability or the financial stability of the Company's distributors
and resellers, the Company's ability to retain its existing distributors and
resellers or the Company's ability to add distributors and resellers in the
future.
RELIANCE ON INDEPENDENT CONTRACTORS
The Company relies on independent contractors for virtually all of the
sub-assembly of the Company's thin client computing products. The Company's
reliance on these independent contractors limits its control over delivery
schedules, quality assurance and product costs. In addition, a number of the
Company's independent suppliers are located abroad. The Company's reliance on
these foreign suppliers subjects the Company to risks such as the imposition
of unfavorable governmental controls or other trade restrictions, changes in
tariffs and political instability. The Company currently obtains all of the
sub-assemblies used for its thin client computing products (consisting of all
major components except monitors and cables) from a single supplier located
in Thailand. Any significant interruption in the supply of sub-assemblies
from this contractor would have a material, adverse effect on the Company's
business and operating results. However, the Company now has the capability
to obtain sub-assemblies from an alternative location of its single supplier,
which is located in Mexico. Disruptions in the provision of components by the
Company's other suppliers, or other events that would require the Company to
seek alternate sources of supply, could also lead to supply constraints or
delays in delivery of the Company's products and adversely affect its
operating results. The operations of certain of the Company's foreign
suppliers were briefly disrupted during 1992 due to political instability in
Thailand.
A number of components and parts used in the Company's products, including
certain semiconductor components, also are currently available from single or
limited sources of supply. The Company has no long-term purchase agreements
or other guaranteed supply arrangements with suppliers of these single or
limited source components. The Company has generally been able to obtain
adequate supplies of parts and components in a timely manner from existing
sources under purchase orders and endeavors to maintain inventory levels
adequate to guard against interruptions in supplies. However, the Company's
inability to obtain sufficient supplies of these parts and components from
existing suppliers or to develop alternate supply sources would adversely
affect the Company's operating results.
INTERNATIONAL SALES
A majority of the Company's international sales are denominated in U.S.
dollars, and an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in those
markets. In the past, a significant portion of international revenues have
been derived from sales to a customer in the United Kingdom that have been
denominated in pound sterling, and sales denominated in foreign currencies
may increase in the future. These sales are subject to exchange rate
fluctuations which could affect the Company's operating results negatively or
positively, depending on the value of the U.S. dollar against the other
currency. Where the Company believes foreign currency-denominated sales could
pose significant exposure to exchange rate fluctuations, the Company acquires
forward exchange contracts in an effort to reduce such exposure.
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 the Company's products and
intellectual property rights to
20
<PAGE>
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 the Company's future
international sales and, consequently, on the Company's operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its senior management and other key employees, particularly
Robert G. Gilbertson, President and Chief Executive Officer and Rudolph G.
Morin, Executive Vice President of Operations & Finance and Chief Financial
Officer. The Company believes that its future success will depend in large
part on its 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 the Company will be successful in
attracting, integrating and retaining such personnel. Failure to attract and
retain key personnel could have a material, adverse effect on the Company's
business, operating results or financial condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's common stock has fluctuated significantly
over the past several years and is subject to material fluctuations in the
future in response to announcements concerning the Company or its competitors
or customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, general
conditions in the computer industry, developments in the financial markets
and other factors. In particular, shortfalls in the Company's 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. The Company 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 the Company's common stock.
ITEM 7A. MARKET RISK SENSITIVE INSTRUMENTS
The Company's market risk sensitive instruments as of December 31, 1998 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.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 1998 and 1997 24
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements 28
Supplementary Data: Quarterly Financial Data (Unaudited) 37
</TABLE>
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Network Computing Devices, Inc.
We have audited the accompanying consolidated balance sheets of Network
Computing Devices, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Mountain View, California
February 9, 1999
23
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 8,553 $ 21,240
Short-term investments 12,806 10,240
Accounts receivable, net of allowances of $1,821 and
$2,606 as of December 31, 1998 and 1997, respectively 21,590 25,148
Inventories 14,362 15,412
Deferred income taxes 3,126 4,763
Other current assets 3,214 2,843
------------------ ----------------
Total current assets 63,651 79,646
Property and equipment, net 3,850 4,424
Other assets 7,645 2,444
------------------ ----------------
Total assets $ 75,146 $ 86,514
------------------ ----------------
------------------ ----------------
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 10,438 $ 11,211
Accrued expenses 5,647 8,955
Deferred revenue 6,105 4,918
Income taxes payable 274 597
Current portion of capital lease obligations 90 154
------------------ ----------------
Total current liabilities 22,554 25,835
Long-term portion of capital lease obligations 69 160
Commitments and contingencies
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001: 30,000,000 shares authorized;
16,049,130 and 16,283,772 shares issued and outstanding as of
December 31, 1998 and 1997, respectively 16 16
Capital in excess of par value 59,721 58,614
Retained earnings (accumulated deficit) (7,214) 1,889
------------------ ----------------
Total shareholders' equity 52,523 60,519
------------------ ----------------
Total liabilities and shareholders' equity $ 75,146 $ 86,514
------------------ ----------------
------------------ ----------------
</TABLE>
See accompanying notes.
24
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Net revenues:
Hardware products and services $ 81,194 $ 100,555 $ 94,973
Software licenses and services 24,402 32,845 25,635
--------------- --------------- ----------------
Total net revenues 105,596 133,400 120,608
Cost of revenues:
Hardware products and services 59,337 71,118 72,715
Software licenses and services 7,693 9,957 7,769
--------------- --------------- ----------------
Total cost of revenues 67,030 81,075 80,484
--------------- --------------- ----------------
Gross profit 38,566 52,325 40,124
Operating expenses:
Research and development 13,213 14,179 14,930
Marketing and selling 31,124 30,455 32,117
General and administrative 5,231 6,102 10,270
Business restructuring 996 - (1,052)
Acquired in-process research and development 1,448 - -
Litigation settlement (credit) - (147) 1,100
--------------- --------------- ----------------
Total operating expenses 52,012 50,589 57,365
--------------- --------------- ----------------
Operating income (loss) (13,446) 1,736 (17,241)
Interest income 1,609 1,946 1,656
Interest expense (14) (51) (68)
Other income, net 2,090 200 -
Gain on sale of product lines - - 6,932
--------------- --------------- ----------------
Income (loss) before income taxes (9,761) 3,831 (8,721)
Provision for income taxes (income tax benefit) (658) 1,150 (3,489)
--------------- --------------- ----------------
Net income (loss) $ (9,103) $ 2,681 $ (5,232)
--------------- --------------- ----------------
--------------- --------------- ----------------
Basic earnings per share:
Net income (loss) per share $ (0.56) $ 0.16 $ (0.32)
--------------- --------------- ----------------
--------------- --------------- ----------------
Shares used in per share computations 16,393 16,725 16,579
--------------- --------------- ----------------
--------------- --------------- ----------------
Diluted earnings per share:
Net income (loss) per share $ (0.56) $ 0.15 $ (0.32)
--------------- --------------- ----------------
--------------- --------------- ----------------
Shares used in per share computations 16,393 18,313 16,579
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
See accompanying notes.
25
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Retained
Common Stock Other Earnings Total
---------------- Comprehesive Comprehensive (Accumulated Shareholders'
Shares Amount Income (Loss) Income (Loss) Deficit) Equity
------ ------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 16,119 $ 63,543 $ 31 $ 4,440 $ 68,014
Comprehensive loss
Net loss - - - [ (5,232) ] (5,232) (5,232)
Other comprehensive loss
Reclassification of gain on securities
included in net income - - (31) [ (31) ] - (31)
---------
[ (5,263)]
---------
---------
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 928 4,763 - - 4,763
Repurchase of common stock (10) (89) - - (89)
------ ------- ---------- ---------- ----------
Balances as of December 31, 1996 17,037 68,217 - (792) 67,425
Issuance of common stock under Stock
Option Plan and Employee Stock
Purchase Plan, including related tax
benefit 438 2,634 - - 2,634
Repurchase of common stock (1,191) (12,221) - - (12,221)
Net income - - - [ 2,681 ] 2,681 2,681
------ ------- ---------- -------- ---------- ----------
--------
Balances as of December 31, 1997 16,284 58,630 - 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 6,938 - - 6,938
Fair value of warrants issued - 2,690 - - 2,690
Repurchase of common stock (1,369) (10,671) - - (10,671)
Net income - - - [ (9,103)] (9,103) (9,103)
------ ------- ---------- -------- ---------- ----------
--------
Balances as of December 31, 1998 16,049 $ 59,737 $ - $ (7,214) $ 52,523
------ ------- ---------- ---------- ----------
------ ------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
26
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating actitivites:
Net income (loss) $ (9,103) $ 2,681 $ (5,232)
Reconciliation of net income (loss) to net cash provided by (used in)
operating activities:
Gain on sale of product lines - - (6,932)
Non-cash restructuring charges (credit) 96 - (1,052)
Depreciation and amortization 3,022 3,287 4,559
Deferred income taxes (820) 404 (440)
Gain on sale of investment (2,090) - -
Acquired in-process research and development 1,448 - -
Changes in:
Accounts receivable, net 3,558 (3,599) 7,042
Inventories 5,782 (5,636) 4,455
Other current assets and other (278) 809 (378)
Accounts payable (1,729) 6,828 (9,510)
Income taxes payable (323) 897 (1,446)
Accrued expenses (3,195) (22) 1,856
Deferred revenue (2,182) 1,432 578
-------------- --------------- ---------------
Net cash provided by (used in) operating activites (5,814) 7,081 (6,500)
-------------- --------------- ---------------
Cash flows from investing activities:
Purchases of short-term investments (17,721) (12,649) (3,684)
Sales and maturities of short-term investments 15,155 14,248 14,600
Changes in other assets (230) 2,539 (2,784)
Net proceeds from sale of investment 2,402 - -
Net proceeds from sale of product lines - - 8,625
Acquisition of business (3,037) - -
Property and equipment purchases, net (1,704) (2,816) (2,273)
-------------- --------------- ---------------
Net cash provided by (used in) investing activities (5,135) 1,322 14,484
-------------- --------------- ---------------
Cash flows from financing activities:
Principal payments on capital lease obligations (155) (748) (1,175)
Repurchases of common stock (10,671) (12,221) (89)
Proceeds from issuance of stock, net 9,088 1,974 3,748
-------------- --------------- ---------------
Net cash provided by (used in) financing activities (1,738) (10,995) 2,484
-------------- --------------- ---------------
Change in cash and cash equivalents (12,687) (2,592) 10,468
Cash and cash equivalents:
Beginning of year 21,240 23,832 13,364
-------------- --------------- ---------------
End of year $ 8,553 $ 21,240 $ 23,832
-------------- --------------- ---------------
-------------- --------------- ---------------
Noncash investing and financing activities:
Fair value of warrants issued for acquisition of business $ 2,690 $ - $ -
-------------- --------------- ---------------
-------------- --------------- ---------------
Income tax benefit from employee stock transactions $ 263 $ 660 $ 860
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
See accompanying notes.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. (the "Company") was
incorporated on February 17, 1988. The Company provides 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. The Company's product lines include the NCD THINSTAR Windows-based
terminals and NCD EXPLORA and family of thin clients, NCD THINSTAR software
to extend the functionality reach of NCD THINSTAR Windows-based terminals,
NCD THINCLIENT software for implementing thin client computing to a variety
of enterprise desktops, NCD WINCENTER multi-user Windows NT server software,
and NCD PC-XWARE software that delivers PC access to UNIX and multi-user
Windows NT PCs.
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 The Company considers all highly liquid investments
purchased with a maturity date of 90 days or less to be cash equivalents.
Cash equivalents at December 31, 1998 and 1997 consist of bank deposits,
commercial paper and corporate debt securities. The fair value of cash
equivalents approximates the carrying value.
SHORT-TERM INVESTMENTS The Company has classified all of its short-term
investments as "available-for-sale" securities. The carrying value of such
securities is adjusted to fair market value, with unrealized gains and
losses, net of deferred taxes, being excluded from earnings and reported as a
component of other comprehensive income. Cost is determined by specific
identification for purposes of computing realized 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. Equipment
under capital leases is stated at the lower of fair value or the present
value of the minimum lease payments at the inception of the lease.
Depreciation is 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 and equipment
under capital leases 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 generally recognized upon shipment,
provided that no significant obligations remain and collection of the
resulting receivable is deemed probable. Product warranty costs and an
allowance for sales returns are accrued at the time the related revenues are
recognized. Service contract revenues are recognized ratably over the
contract period.
RESEARCH AND DEVELOPMENT COSTS Research and development costs are charged to
engineering 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. Capitalized software is amortized to
cost of goods sold over eighteen months to three years, based on the expected
life of the product.
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.
28
<PAGE>
USE OF ESTIMATES Management of the Company 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. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's
cash and cash equivalents, short-term investments, accounts receivable, and
accounts payable approximate their respective fair values.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The
Company evaluates its 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.
NET INCOME (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 (1,588,000 shares in 1997) outstanding, when
dilutive, using the treasury stock method. At December 31, 1998 and 1996
there were 3,757,098 and 3,236,208 options 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. In addition, on December 31, 1998 the
Company issued warrants to purchase 1,000,000 shares of common stock that
could potentially dilute EPS in the future.
STOCK-BASED COMPENSATION The Company accounts for its 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.
OTHER COMPREHENSIVE INCOME Effective the first quarter of 1998, the Company
adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components of net income and other comprehensive income in the
consolidated financial statements. Other comprehensive income refers to
revenues, expenses, gains and losses that are not included in net income, but
rather are recorded directly in stockholders' equity. The Company has elected
a reporting format that incorporates a statement of other comprehensive
income in the Consolidated Statements of Changes in Shareholders' Equity.
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 years
beginning after June 15, 1999. The Company will adopt the standard no later
than the first quarter of fiscal year 2000 and is in the process of
determining the impact that adoption will have on its consolidated financial
statements.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to
conform with current year presentation.
NOTE 2. ACQUISITION
On December 31, 1998, the Company acquired Tektronix' Network Displays
Business unit ("NWD") for $3.0 million in cash and warrants to purchase one
million shares of the Company's 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: expected 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. In addition to
acquiring certain assets of NWD, approximately 83 former NWD employees,
primarily in sales, marketing and
29
<PAGE>
engineering roles, joined NCD. In conjunction with this acquisition, the
Company undertook various restructuring activities to eliminate redundancies
with the acquired business. The Company recorded a charge of approximately
$1.0 million related to these restructuring activities. See Note 5 contained
herein.
NOTE 3. SHORT-TERM INVESTMENTS
The fair value of short-term investments consisted of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Corporate debt securities $ 9,799 $ 7,491
Commercial paper 3,007 981
Certificates of deposit -- 1,768
------- -------
$12,806 $10,240
------- -------
------- -------
</TABLE>
There were no material unrealized gains or losses at December 31, 1998 and
1997.
The maturities of available-for-sale securities as of December 31, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
Within One to
One Year Two Years
-------- ---------
<S> <C> <C>
Corporate debt securities $8,484 $1,315
Commercial paper 3,007 --
------- ----------
$11,491 $1,315
------- ----------
------- ----------
</TABLE>
NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
<TABLE>
<CAPTION>
1998 1997
------- ----------
<S> <C> <C>
Inventories as of December 31 consisted of (in thousands):
Purchased components and sub-assemblies $10,733 $13,178
Work in process 1,285 545
Finished goods 2,344 1,689
----- -------
$14,362 $15,412
------- -------
------- -------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment as of December 31 consisted of (in thousands):
Office equipment $14,369 $13,077
Machinery and equipment 6,599 6,108
Demonstration equipment 3,847 3,708
Furniture and fixtures 2,117 2,068
Leasehold improvements 2,143 2,003
------- -------
29,075 26,964
Less accumulated depreciation
and amortization 25,225 22,540
------ ------
$ 3,850 $ 4,424
------- -------
------- -------
</TABLE>
Included in property and equipment is approximately $447,000 and $870,000 of
equipment under capital leases as of December 31, 1998 and 1997, respectively.
Accumulated amortization related to this equipment is approximately $363,000 and
$616,000 as of December 31, 1998 and 1997, respectively.
30
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrued expenses as of December 31 consisted of (in thousands):
Payroll-related costs $2,904 $2,882
Royalties 285 2,061
Warranty 906 631
Other accrued expenses 1,552 3,381
------- ---------
$5,647 $8,955
------ ------
------ ------
</TABLE>
Income taxes paid were $283,000, $262,000 and $223,000 for 1998, 1997 and
1996, respectively. Interest paid was $14,400, $51,000 and $119,000 for 1998,
1997 and 1996, respectively.
NOTE 5. BUSINESS RESTRUCTURING
On December 31, 1998, the Company acquired certain assets of Tektronix,
Inc.'s NWD division. As a result of this acquisition, the Company reduced its
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 NCD's 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. It is anticipated that the plan for
restructuring will be complete by the end of the first quarter of 1999.
In 1996, the Company determined that the restructuring plan initiated in 1995
was substantially complete, and an operating credit of $1.1 million was
recorded during that period.
NOTE 6. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM In April 1997, the Company's Board of Directors
adopted a program to repurchase up to 1,000,000 shares of the Company's
common stock during the 12-month period ending April 30, 1998. Repurchases
were made under the program using the Company's cash resources. Shares
repurchased are available for issuance under the Company's 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, the Company's Board of Directors adopted an
additional program to repurchase up to 1,000,000 shares of the Company's
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, the Company announced an
additional program to repurchase up to 750,000 shares of the Company's common
stock. Repurchases of 559,800 shares have been made as of December 31, 1998
under the third program at prices ranging from $4.98 to $8.25 at a total
aggregate price of $3.7 million. Total repurchases of 2,559,800 shares were
made under all three programs at prices ranging from $4.98 to $12.00 per
share for a total purchase price of $22.9 million.
STOCK PURCHASE PLAN In 1992, the Company established the 1992 Employee Stock
Purchase Plan and has reserved 1,450,000 shares of common stock for issuance
thereunder. 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 commencement of the employee's participation, if later) or the end of
such offering period. As of December 31, 1998, 1,284,307 shares have been
issued under this plan, of which 167,871 were issued in 1998.
The per share weighted-average fair value of employee stock purchases during
1998, 1997 and 1996 was $4.95, $2.77 and $2.18, respectively, on the date of
grant using the Black-Scholes model with the following weighted-average
assumptions: 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; 1997 - dividend yield of 0%, expected volatility of 84%, risk-free
interest rate of between 5.22% and 5.85%, and an expected life of 1 year;
1996 - dividend yield of 0%, expected volatility of 77%, risk-free interest
rate of between 5.0% and 5.74%, and an expected life of 1 year.
31
<PAGE>
STOCK OPTION PLANS As of December 31, 1998, the Company had reserved
6,105,850 shares and 250,000 shares of common stock for issuance under its
1989 Stock Option Plan and the 1994 Outside Directors' Stock Option Plan,
respectively ("the Plans"). Under the 1989 Stock Option Plan, options are
granted to employees, officers, directors and consultants to purchase shares
of the Company's 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 the Company's 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% on the first
anniversary of the grant date with the remainder vesting 25% on each of the
following three anniversary dates. As of December 31, 1998, 2,375,851 options
were exercisable under the Plans.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $5.49, $6.37 and $2.39, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 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 5 years; 1997 - dividend yield of 0%, expected volatility of
84%, risk-free interest rate of between 5.71% and 6.75%, and an expected life
of between 3 and 5 years; 1996 - dividend yield of 0%, expected volatility of
77%, risk-free interest rate of between 5.27% and 6.65%, and an expected life
of between 3 and 5.25 years.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 in
accounting for its Stock Option and Stock Purchase Plans and, accordingly, no
compensation cost has been recognized for its stock plans in the accompanying
consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant dates for its stock plans under
SFAS No. 123, the Company's net income (loss) and income (loss) per share
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported $(9,103) $2,681 $(5,232)
Pro forma (12,396) (554) (7,222)
Basic income (loss) per share:
As reported $(0.56) $0.16 $(0.32)
Pro forma (0.76) (0.03) (0.44)
Diluted income (loss) per share:
As reported $(0.56) $0.15 $(0.32)
Pro forma (0.76) (0.03) (0.44)
</TABLE>
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.
In November 1997, upon approval by the Board of Directors, the Company repriced
316,120 options originally issued at prices ranging from $11.13 to $14.75. The
options were repriced at $8.50, the then current market value of the Company's
stock. The 1997 cancellations and grants in the summary below and pro forma
amounts above include the 316,120 options.
32
<PAGE>
A summary of option transactions under the Plans follows:
<TABLE>
<CAPTION>
Weighted-
Options Average
Available Options Exercise
For Grant Outstanding Price
--------- ----------- --------
<S> <C> <C> <C>
Balances as of December 31, 1995 476,862 2,784,154 $4.66
Options authorized 1,265,000 -- --
Options granted (2,339,570) 2,339,570 3.78
Options cancelled 1,170,090 (1,170,090) 4.55
Options exercised -- (717,426) 3.95
--------- --------- -----
Balances as of December 31, 1996 572,382 3,236,208 $4.23
Options authorized 250,000 -- --
Options granted (1,207,175) 1,207,175 9.85
Options cancelled 619,574 (619,574) 9.67
Options exercised -- (226,523) 4.18
--------- --------- -----
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
--------- --------- -----
--------- --------- -----
</TABLE>
The following table summarizes information about options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Life Price Number Price
- ------ ------ ---------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$3.50 1,532,753 7.45 $3.50 1,219,305 $3.50
3.56 to 3.88 511,027 6.36 3.87 498,881 3.87
4.00 to 7.50 689,150 7.69 6.53 407,579 6.50
7.63 to 8.50 782,485 9.02 8.24 180,392 8.47
8.56 to 12.63 241,683 8.54 9.91 69,694 9.97
----------- ---- ----- ---------- -----
$3.50 to 12.63 3,757,098 7.74 $5.50 2,375,851 $4.66
----------- ---- ----- ---------- -----
----------- ---- ----- ---------- -----
</TABLE>
33
<PAGE>
NOTE 7. INCOME TAXES
The components of the Company's provision for income taxes for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ (202) $(226) $ (4,210)
State and other 101 312 301
------ --------- --------
Total current (101) 86 (3,909)
------- --------- -------
Deferred
Federal (710) 355 (440)
State and other (110) 49 --
--------- ---------- -------
Total deferred (820) 404 (440)
--------- ----- -----
Charge in lieu of income taxes associated with
the exercise of stock options 263 660 860
---------- ------ -----
$ (658) $1,150 $(3,489)
---------- ------ -----
---------- ------ -----
</TABLE>
Total income tax expense (benefit) differs from the expected tax expense
(computed by applying the U.S. federal income tax rate of 34% to loss before
income taxes) as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate $ (3,319) $1,303 $(2,967)
State income taxes, net of federal benefit 67 30 24
Tax exempt investment income -- (53) (364)
Research and experimental credit (438) (63) --
Difference between prior provision estimates and actual
tax returns (3,310) -- --
Change in valuation allowance 6,305 -- --
Other 37 (67) (182)
--------- ---------- --------
$ (658) $1,150 $(3,489)
--------- ---------- --------
--------- ---------- --------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accruals, allowances and reserves $6,152 $4,914
Net operating loss and tax credit carryforwards 5,566 --
Property and equipment, principally due to differences
in depreciation and capitalized leases 626 1,035
Intangible assets 579 --
------ ----------
Total gross deferred tax assets 12,923 5,949
Less valuation allowance 6,305 --
------ ---------
Deferred tax assets 6,618 5,949
------ -----
Deferred tax liabilities -- (151)
------ ------
Net deferred tax assets $6,618 $5,798
-------- ------
-------- ------
</TABLE>
34
<PAGE>
Based on the Company's expected operating results, management believes that
it is more likely than not that the Company will realize the benefit of the
net deferred tax assets recorded. At December 31, 1998, the Company has
federal and state net operating loss carryforwards of $8.8 million and $2.2
million that expire in 2018 and 2003, respectively. During 1998, the deferred
tax valuation allowance increased by $6.3 million. Excluding the effect of
the increase in the valuation allowance, the deferred tax benefit generated
during the year was $7.0 million.
NOTE 8. CREDIT CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. The Company places its 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 are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographies.
NOTE 9. SALE OF PRODUCT LINES
In February 1996, the Company sold its MARINER product line to FTP Software
("FTP") for $9.8 million. The Company paid FTP a one-time license fee of $2.5
million for the right to incorporate MARINER technology into future versions of
the Company's hardware and software products. The net gain recognized on this
transaction was $7.0 million.
In June 1996, the Company sold its Z-MAIL product line to NetManage, Inc. for a
total sales price of $1.3 million. The net loss recognized on this transaction
was $27,000.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company leases its principal facilities under noncancellable operating lease
agreements that expire through 2003. The Company also leases office facilities
in several locations in the United States, and one location each in Australia,
Canada, France, Germany, Japan, Sweden and the United Kingdom, which are used as
sales offices. Rent expense was approximately $2,377,000, $2,552,000 and
$2,832,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company also leases certain equipment under capital leases. As of December
31, 1998, minimum lease payments under all noncancellable lease agreements were
as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ------
<S> <C> <C>
Year Ending December 31,
1999 $93 $2,896
2000 69 2,187
2001 -- 1,041
2002 -- 651
Thereafter -- 109
------ ------
Total minimum lease payments 162 $6,884
======
Less amounts representing interest 3
----
Present value of minimum lease payments 159
Less current portion 90
----
Long-term capital lease obligations $69
----
----
</TABLE>
The above future operating lease payments are anticipated to be offset by the
following sublease contract income:
<TABLE>
<S> <C>
1999 $494
2000 329
2001 87
-------
Total sublease income $910
-------
-------
</TABLE>
35
<PAGE>
NOTE 11. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The Company has 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. The Company's chief operating decision maker is considered to be
its executive staff, consisting of the Chief Executive Officer and the Chief
Financial Officer. Primarily because the Company operates 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 IBM accounted for 29% and 26% of net revenues for the years ended
December 31, 1998 and 1997, respectively. No sales to any one customer accounted
for greater than 10% of net revenues for the year ended December 31, 1996.
Export sales to the Company's international customers outside North America,
primarily Europe, comprised approximately 35%, 34% and 33% of net revenues for
the years ended December 31, 1998, 1997 and 1996, respectively.
36
<PAGE>
QUARTERLY FINANCIAL DATA
(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Hardware products and services $22,573 $14,677 $20,877 $23,067
Software licenses and services 8,091 7,988 5,238 3,085
--------- --------- --------- --------
Total net revenues 30,664 22,665 26,115 26,152
Gross profit 10,854 9,324 9,191 9,197
Operating income (loss) (1,163) (3,456) (2,877) (5,950)
Income before income taxes (752) (1,128) (2,236) (5,645)
Net income (489) (733) (2,236) (5,645)
Net income per share:
Basic (0.03) (0.04) (0.14) (0.35)
Diluted (0.03) (0.04) (0.14) (0.35)
Shares used in per share computations:
Basic 16,612 16,731 16,228 16,008
Diluted 16,612 16,731 16,228 16,008
1997
Hardware products and services $22,927 $26,889 $26,532 $24,208
Software licenses and services 8,137 7,473 8,114 9,120
--------- --------- --------- --------
Total net revenues 31,064 34,362 34,646 33,328
Gross profit 13,003 14,045 12,303 12,974
Operating income (loss) 753 612 (354) 725
Income before income taxes 1,421 1,161 81 1,168
Net income 852 697 51 1,081
Net income per share:
Basic 0.05 0.04 0.00 0.07
Diluted 0.05 0.04 0.00 0.06
Shares used in per share computations:
Basic 17,089 17,121 16,355 16,345
Diluted 18,889 18,820 17,848 17,625
</TABLE>
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
38
<PAGE>
PART III
Certain information required by Part III is omitted from this report because the
Registrant will file a definitive proxy statement within 120 days after the end
of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its
annual meeting of shareholders to be held on or about May 26, 1999, and the
information included therein is incorporated herein by reference to the extent
detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors of the Registrant is incorporated by
reference to the information under the caption "Election of Directors -
Nominees" in the Registrant's Proxy Statement.
Information with respect to executive officers of the Registrant is set forth
in "Item 1. Business -- Executive Officers of the Company" 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 the Registrant's 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 of Directors" and "Executive Compensation -
Employment, Severance and Change of Control Arrangements" contained in the
Registrant's 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 the Registrant's 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", "Executive Compensation - Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions"
contained in the Registrant's Proxy Statement.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the full extent permitted by Delaware law. The Company has
entered into indemnification agreements with its officers and directors
containing provisions that may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as officers and directors (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified and to obtain directors' and officers'
insurance if available on reasonable terms. The Company maintains insurance
policies covering officers and directors under which the insurer has agreed
to pay the amount of any claim made against the officers or directors of the
Company for wrongful acts that such officers or directors may otherwise be
required to pay or for which the Company is required to indemnify such
officers and directors, subject to certain exclusions.
39
<PAGE>
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 22 of
this Report.
(2) Financial Statement Schedule:
<TABLE>
<CAPTION>
Page Schedule Title
---- -------- -----
<S> <C> <C>
S-1 II Valuation and Qualifying Accounts and
Reserves
S-2 Independent Auditors' Report on Schedule
</TABLE>
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, 1998:
None.
40
<PAGE>
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: /s/ Robert G. Gilbertson
--------------------------------------
Robert G. Gilbertson, President and
Chief Executive Officer
Dated: March 31, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert G. Gilbertson his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities to sign any and
all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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
/s/ Robert G. Gilbertson President, Chief Executive March 31, 1999
- --------------------------- Officer and Director (Principal
Robert G. Gilbertson Executive Officer)
/s/ Rudolph G. Morin Executive Vice President, March 25, 1999
- --------------------------- Operations & Finance, Chief
Rudolph G. Morin Financial Officer and Director
(Principal Financial and Accounting
Officer)
/s/ Peter Preuss Chairman of the Board of Directors March 30, 1999
- ---------------------------
Peter Preuss
/s/ Philip Greer Director March 29, 1999
- ---------------------------
Philip Greer
/s/ Douglas Klein Director March 28, 1999
- ---------------------------
Douglas Klein
/s/ Paul R. Low Director March 26, 1999
- ---------------------------
Paul R. Low
/s/ Stephen A. MacDonald Director March 29, 1999
- ---------------------------
Stephen A. MacDonald
41
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ------------
<S> <C>
3.1 (1) Certificate of Incorporation of Registrant.
3.2 (1) Bylaws of Registrant.
4.2 (2) Specimen Common Stock Certificate of Registrant.
4.3 Reference is made to Exhibits 3.1 and 3.2.
10.8 (2) 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 (2) 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 (2)* Form of Stock Option Agreements for use with the 1989 Stock Option
Plan.
10.13 (2)* Employee Stock Purchase Plan (revised).
10.14 (2)* Form of Indemnification Agreement between the Registrant and its
officers and directors.
10.15 (2)* Registrant's 401(k) Retirement Plan.
10.20 (2) Lease Agreement dated April 29, 1985, as amended, between Graphic
Software Systems, Inc. and Beaverton-Redmond Tech Properties, a
Joint Venture.
10.22 (2) Distributorship and OEM Agreement and related Trademark License
Agreement, each dated July 23, 1990, between Registrant and Nihon
NCD K.K.
10.23 (2) 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 IBM 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.
10.41 (6)+ Asset Purchase Agreement dated February 20, 1996 by and between
the Registrant and FTP Software, Inc.
10.42 (6)+ Alliance Agreement dated June 27, 1996 by and between the
Registrant and International Business Machines Corporation.
10.43 (6)+ Asset Purchase Agreement dated June 3, 1996 by and between the
Registrant and NetManage, Inc.
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 Corporation
("IBM").
10.46 (7) Attachment 3 to Article 2 - Manufacturing of the Alliance
Agreement dated November 4, 1997 between Registrant and IBM
Corporation ("IBM").
10.47 (8)+ Development and License Agreement dated March 6, 1998 between
Registrant and Intel Corporation.
10.48 Asset Purchase Agreement dated December 31, 1998 between
Registrant and Tektronix, Inc.
21.1 List of subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney. Reference is made to page 41 of this Report.
27.1 Financial Data Schedule.
* 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.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
(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.
</TABLE>
<PAGE>
SCHEDULE II
NETWORK COMPUTING DEVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1998, 1997 and 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
--------------------------
Charged to
Balance at Charged to Other Balance
Beginning Costs and Accounts - Deductions - at End
of Period Expenses Describe Describe of Period
----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $ 2,606 $ 22 $ - $ 807 (1) $ 1,821
Warranty reserve 631 389 - 114 (2) 906
1997
Allowance for doubtful accounts 2,603 645 - 642 (3) 2,606
Warranty reserve 495 615 - 479 (2) 631
1996
Allowance for doubtful accounts 1,976 645 - 18 (3) 2,603
Warranty reserve 510 791 - 806 (2) 495
</TABLE>
(1) Includes amounts credited to income of $667 and accounts written off of $140
(2) Warranty costs incurred
(3) Accounts written off
S-1
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors and Shareholders
Network Computing Devices, Inc.
Under date of February 9, 1999, we reported on the consolidated balance
sheets of Network Computing Devices, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which are included in the 1998 annual report
on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Mountain View, California
February 9, 1999
S-2
<PAGE>
EXHIBIT 10.48
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as of December 31,
1998, between NETWORK COMPUTING DEVICES, INC., a Delaware corporation ("Buyer")
and TEKTRONIX, INC., an Oregon corporation ("Seller"). Seller desires to sell
and Buyer desires to buy the assets of Seller's Network Displays Business
division ("NWD" or the "Business").
NOW, THEREFORE, Buyer and Seller hereby agree as follows:
ARTICLE 1
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
1.1. AGREEMENT TO SELL. Upon the terms and subject to all of the
conditions contained herein, Seller hereby agrees to sell, assign, transfer and
deliver to Buyer on the Closing Date (as defined in Article 3), and Buyer hereby
agrees to purchase from Seller on the Closing Date, the "Assets" (as defined in
Section 1.2).
1.2. DESCRIPTION OF ASSETS. For purposes of this Agreement, the
term "Assets" shall mean all equipment, inventories, pre-paid licenses, fixed
assets, contractual rights, intellectual property rights (as described below),
and other assets of every kind and description, wherever located, real, personal
or mixed, tangible or intangible, owned or held by Seller and used in or
necessary to the conduct or operation of the Business, as identified below:
1.2.1 all personal property, office computers, machinery,
office equipment and other equipment, furniture, fixtures, fixed assets and
other tangible property used in connection with the Business set forth on
SCHEDULE 1.2.1, less items disposed of in the ordinary course of business
between November 30, 1998 and the Closing Date and plus any replacements or
additions acquired in the ordinary course between November 30, 1998 and the
Closing Date;
1.2.2 all inventories (including spare parts) acquired,
manufactured or produced in the ordinary course of the Business as listed on
SCHEDULE 1.2.2 (the "Inventory"), less items disposed of in the ordinary
course of business between November 30, 1998 and the Closing Date and plus
any replacements or additions acquired in the ordinary course between
November 30, 1998 and the Closing Date;
1.2.3 those licenses, contracts and agreements listed on
SCHEDULE 1.2.3 hereto (collectively, the "Contracts"), plus any purchase
orders related exclusively to the Business and entered into between December
17, 1998 and the Closing Date in the ordinary course of business;
1.2.4 the prepaid royalties associated with certain contracts
set forth on SCHEDULE 1.2.4;
1.2.5 all product designs, patents, patent applications,
software, trademarks, trademark applications, service marks, service mark
applications, trade and other marks and names (either registered, common law
or registration applied for), copyrights, copyright applications, mask works,
inventions, trade secrets, proprietary information, know-how,
<PAGE>
processes, manufacturing or marketing procedures, recipes, formulae,
drawings, schematics and patterns, and all documentation and other media
relating to the foregoing (collectively, "Intellectual Property") owned by
Seller or with respect to which Seller has a license, interest or other right
to use (all such Intellectual Property, collectively, the "Seller
Intellectual Property") and which is used by Seller solely in connection with
the Business. The Seller Intellectual Property includes, without limitation,
the Intellectual Property listed on SCHEDULE 1.2.5, but excludes the
Intellectual Property listed as "Excluded Intellectual Property" on such
Schedule. Without limitation of the foregoing, the Assets shall be deemed to
further include any drawings, documentation, schematics, manuals or other
materials, whether in written or magnetic form that describe, disclose or
otherwise set forth any of the Seller Intellectual Property; and
1.2.6 all goodwill associated with the Business and the name
"Network Displays."
1.3. EXCLUDED ASSETS. All accounts receivable of the Business
outstanding prior to the Closing Date and Seller's current Spotlight product and
all Intellectual Property associated with the Spotlight product and not with
any other products designed, developed, manufactured or marketed by NWD and any
other rights or assets of Seller not included in the definition of Assets are
excluded from the definition of Assets for purposes of Section 1.2 and will not
be purchased by Buyer (the "Excluded Assets").
1.4. ASSUMPTION OF LIABILITIES AND OBLIGATIONS. In connection with
the purchase and sale of the Assets pursuant to this Agreement, Buyer shall
assume only the following liabilities and obligations of Seller (the "Assumed
Liabilities"):
1.4.1 all liabilities and obligations of Seller incurred in
connection with the Business which relate to the purchase and other
commitments listed on SCHEDULE 1.4.1;
1.4.2 obligations of Seller under the service and support
agreements (the "Support Agreements") listed on SCHEDULE 1.4.2;
1.4.3 obligations of Seller arising under warranties with
respect to products sold prior to the Closing Date listed in SCHEDULE 1.4.3;
and
1.4.4 all liabilities and obligations of Seller under the
Contracts.
Except for the Assumed Liabilities, no other liabilities or obligations of
any nature, whether known or unknown, foreseen or unforeseen, fixed or
contingent, liquidated or unliquidated, accrued or unaccrued, shall be assigned
to or assumed by Buyer in connection with the purchase and sale of the Assets
hereunder, and such liabilities and obligations shall remain the responsibility
of Seller. All such liabilities and obligations of Seller are hereinafter
referred to as the "Excluded Liabilities." The Excluded Liabilities shall
include, without limitation, all accounts payable arising or outstanding prior
to the Closing Date, all indebtedness secured by any of the Assets, any and all
liabilities based upon or arising from product liability or warranty claims
(other than those listed in Schedule 1.4.3) relating to products sold prior to
the Closing Date and any liabilities based upon or arising from a breach of any
of the commitments listed on Schedule 1.4.1, the Support Agreements, or the
Contracts prior to the Closing.
-2-
<PAGE>
ARTICLE 2
PURCHASE PRICE
2.1. PURCHASE PRICE. As full consideration for the sale,
assignment, transfer and delivery of the Assets by Seller to Buyer and upon the
terms and subject to all of the conditions contained herein (and the performance
by each of the parties hereto of their respective obligations hereunder), the
purchase price shall consist of the following (the "Purchase Price"):
2.1.1 Cash in the amount of $3.5 million, subject to
adjustment as provided in Section 2.4 (the "Closing Purchase Price") in
connection with (1) employees who are not offered employment and (2) changes
in the net book value of the Assets described in Section 1.2.1 and 1.2.2
between November 30 (the date of Schedules 1.2.1 and 1.2.2) and the Closing
Date in the ordinary course of business; and
2.1.2 A warrant (the "Warrant") evidencing Seller's right to
acquire, within five (5) years after the Closing Date, one million
(1,000,000) shares of common stock of the Buyer at an exercise price equal to
$8.00 per share pursuant to the terms and conditions set forth in the
Warrant, a copy of which is attached hereto as Exhibit A.
2.2. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid as
set forth below:
2.2.1 PAYMENT AT CLOSING. On the Closing Date, Buyer shall
pay Seller the Closing Purchase Price in cash by check or wire transfer in
immediately available funds to the account designated by Seller and provided
to Buyer.
2.2.2 DELIVERY OF WARRANT. On the Closing Date, Buyer shall
execute and deliver the Warrant to Seller.
2.3. PURCHASE PRICE ALLOCATION. Prior to, or promptly following the
Closing, the parties shall mutually agree on a purchase price allocation. The
parties agree that any government filings made by them will be in a manner
consistent with such agreed upon allocation.
2.4. PURCHASE PRICE ADJUSTMENTS. The Closing Purchase Price shall
be subject to adjustment as follows:
2.4.1 In the event more than fifteen (15) employees of the
Business as of the Closing Date (as identified by Seller in a written
instrument delivered to Buyer at least ten (10) business days prior to the
Closing Date) are not offered employment by Buyer in accordance with Section
7.3, the Closing Purchase Price shall be increased by an amount calculated by
multiplying (a) the difference between (x) the aggregate number of such
employees not offered employment by Buyer and (y) fifteen (15), by (b) the
average amount payable to all such employees not offered employment by Buyer
pursuant to Seller's severance pay plan upon their termination of employment
with Seller (such severance amounts for all employees of the Business shall
be set forth in a written instrument delivered to Buyer at least ten (10)
business days prior to the Closing Date). In the event that Seller does not,
within ninety (90) days after the Closing Date, terminate the employment of
any of the employees of the Business not offered
-3-
<PAGE>
employment by Buyer, then (i) the amount calculated pursuant to the preceding
sentence shall be recalculated as if all such employees not terminated by
Seller within the foregoing period had been offered employment by Buyer, and
(ii) Seller will promptly pay to Buyer an amount equal to the difference
between the initial calculation pursuant to this Section 2.4.1 and such
recalculation. Promptly following the end of the ninety (90) day period
following the Closing Date, Seller will notify Buyer in writing if it has not
terminated, within such period, the employment of any of the employees of the
Business not offered employment by Buyer, setting forth the identity of each
such employee.
2.4.2 The Closing Purchase Price shall be reduced or
increased, as applicable, on a dollar for dollar basis to reflect (i) the net
book value of any property listed on Schedule 1.2.1 which is acquired or
disposed of by Seller prior to the Closing Date, and (ii) the net book value
of any Inventory which is disposed of or acquired by seller prior to the
Closing Date (the "Adjustment Amount"). As soon as practicable following the
Closing Date, Seller will prepare a revised Schedule 1.2.1 and 1.2.2
reflecting the assets described in Sections 1.2.1 and 1.2.2 as of the Closing
Date and Seller's net book value for such assets. Buyer and Seller shall use
their best efforts to determine the Adjustment Amount, if any, as soon as
practicable following the Closing Date, and in any event no later than
January 31, 1999. If Buyer and Seller are unable to agree on the amount, if
any, of the foregoing reduction or increase, the matters in dispute shall be
resolved by arbitration as provided in Section 12.7 hereof. Resolution of
such disputes by agreement of Buyer and Seller or by arbitration shall be
final, conclusive and binding on the parties. Promptly following the final
determination of the Adjustment Amount, if any, Seller shall pay Buyer, or
Buyer shall pay to Seller, such amount, as applicable.
2.5. NONCOMPETE. In connection with the purchase of the Assets,
Seller and Buyer shall enter into a Non-Competition Agreement in the form of
EXHIBIT C attached hereto.
2.6. TAXES AND CLOSING COSTS. All sales and transfer taxes imposed
by any governmental entity or agency on the transfer of the Assets and the
Assumed Liabilities hereunder shall be shared equally by Buyer and Seller.
Seller shall be responsible for any of Seller's business, occupation,
withholding, income or other taxes whatsoever, or any taxes of any kind
concerning the Assets or the Assumed Liabilities that are related to any period
prior to the Closing Date. Except as provided above, each party shall bear
their own costs in connection with the transactions contemplated hereby.
2.7. PRORATIONS. Rents, taxes, and other operating expenses
associated with the Assets shall be prorated between Buyer and Seller as of the
Closing Date. Seller shall be responsible for any of Seller's rents, taxes,
and other operating expenses of any kind concerning the Business or the Assets
that are related to any period before the Closing Date.
ARTICLE 3
CLOSING
3.1. CLOSING. The transactions contemplated by this Agreement shall
be consummated (the "Closing") at such time and place as may be mutually agreed
to by the parties hereto (the "Closing Date") upon the satisfaction of all
conditions to the closing of the transactions contemplated hereby as set forth
in Article 8, excluding such conditions whose
-4-
<PAGE>
satisfaction is waived in whole or in part by the party entitled to the
benefit of such condition. In no event shall the Closing occur later than
December 31, 1998.
3.2. DOCUMENTS DELIVERED BY SELLER AT CLOSING. Seller shall cause
good and marketable title to all of the Assets to be transferred to Buyer at the
Closing, free and clear of all liens, encumbrances, charges, security interests,
claims, restrictions or rights in others (collectively, "Liens"). Without
limiting the foregoing and except as otherwise set forth herein, Seller shall
take or cause to be taken any and all actions necessary or otherwise reasonably
required by Buyer to ensure that at the Closing Buyer acquires possession of and
good and marketable title to all of the Assets, free and clear of all Liens. At
the Closing, Seller shall deliver to Buyer the following documents
(collectively, the "Seller Closing Documents"), executed by Seller, where
applicable, and in form satisfactory to Buyer:
(a) a Bill of Sale in substantially the form of EXHIBIT D
attached hereto;
(b) certified resolutions of the Board of Directors of Seller
approving the sale of the Assets to Buyer in accordance with the terms of this
Agreement;
(c) UCC-2 Termination Statements terminating Financing
Statements executed by each creditor who has filed UCC-1's covering any of the
Assets to be filed with the applicable governmental agency and releases of liens
or other evidence acceptable to Buyer terminating all liens or encumbrances on
the Assets;
(d) Space Sharing Agreement in substantially the form of
Exhibit I attached hereto with regard to the sales and support offices listed on
Schedule 6.11;
(e) the Assignment and Assumption Agreement in substantially
the form of EXHIBIT E attached hereto;
(f) the Non-Competition Agreement described in Section 2.5
hereof;
(g) the Registration Rights Agreements in substantially the
form of EXHIBIT F attached hereto;
(h) the Supply Agreement in substantially the form of
EXHIBIT G attached hereto;
(i) the License Agreement in substantially the form of
EXHIBIT H attached hereto (the "License Agreement");
(j) evidence that all federal, state and local tax liens and
creditor claims related to the Assets and the Business, if any, have been paid
in full;
(k) the Services Agreement in substantially the form of
EXHIBIT B attached hereto;
(l) a certificate executed by an authorized officer of
Seller to the effect that the conditions set forth in Section 8.1(b) have been
satisfied;
(m) all third-party consents (including, without limitation,
from parties to the Contracts and governmental authorities necessary for the
consummation of the transactions contemplated hereby);
(n) any updates to the Seller Disclosure Schedule (as defined
in Article 4), as contemplated by Section 6.9 below; and
-5-
<PAGE>
(o) any other documents reasonably required by Buyer to
transfer the Assets and the Assumed Liabilities in accordance with the terms
of this Agreement.
3.3. DOCUMENTS DELIVERED BY BUYER AT CLOSING. At the Closing, Buyer
shall deliver to Seller the following executed documents or consideration
("Buyer Closing Documents"):
(a) the Closing Purchase Price;
(b) the Warrant;
(c) the Services Agreement in substantially the form of
EXHIBIT B attached hereto;
(d) the Assignment and Assumption Agreement in substantially
the form of EXHIBIT E attached hereto;
(e) the Registration Rights Agreement in substantially the
form of EXHIBIT F attached hereto;
(f) the Supply Agreement in substantially the form of
EXHIBIT G attached hereto;
(g) the License Agreement in substantially the form of
EXHIBIT H attached hereto;
(h) resolutions of the Board of Directors of Buyer
authorizing the consummation of the transactions contemplated hereby, certified
by the Secretary of Buyer;
(i) the Space Sharing Agreement in substantially the form of
Exhibit I;
(j) a certificate executed by an officer of Buyer to the
effect that the conditions set forth in Section 8.2(b) have been satisfied; and
(k) any other documents reasonably required to transfer the
Assets and the Assumed Liabilities in accordance with the terms of this
Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that the following facts and
circumstances are true and correct as of the date of this Agreement, except as
set forth on the schedule of exceptions attached hereto as Schedule 4 (the
"Seller Disclosure Schedule"):
4.1. AUTHORITY AND CONSENTS. Seller has full power and authority
(corporate and otherwise) to enter into this Agreement and the other documents
to be executed by Seller pursuant to the terms hereof and to carry out the
transactions contemplated by this Agreement and such other documents. The
execution and performance of this Agreement and the other documents to be
executed by Seller pursuant to the terms hereof will not result in a violation
of Seller's Certificate of Incorporation or Bylaws. This Agreement and the
other documents to be executed by Seller pursuant to the terms hereof and their
execution and delivery to Buyer have been duly authorized by the Board of
Directors of Seller and no further corporate action shall be necessary on the
part of Seller or its shareholders to make this Agreement and the other
-6-
<PAGE>
documents to be executed by Seller pursuant to the terms hereof and the
transactions contemplated by the Agreement and such other documents valid and
binding upon Seller. This Agreement and the other documents to be executed by
Seller pursuant to the terms hereof do and will constitute legal, valid and
binding obligations of Seller, enforceable against Seller in accordance with
their respective terms, subject as to enforcement only: (a) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights generally; (b)
to general principles of equity; and (c) to the extent indemnification
provisions in the Registration Rights Agreement may be limited by federal or
state securities laws.
4.2. DUE ORGANIZATION. Seller (a) is a corporation duly organized
and validly existing as a corporation under the laws of the State of Oregon; and
(b) has all requisite corporate power and authority to own or lease and to
operate its properties and carry on the Business, as now being conducted.
4.3. TITLE TO ASSETS. Seller (or a subsidiary of Seller) has good
and marketable title to all of the Assets and all the Assets are free and clear
of all Liens.
4.4. PROPERTIES AND ASSETS. The Business has, at all times, been
owned and operated by Seller. The tangible Assets are in good working order and
in a state of reasonable maintenance and repair, ordinary wear and tear
excepted. Except for general economic conditions or trends affecting the
industry in which the Business operates, to Seller's knowledge, there are no
pending developments affecting or threatening Seller or the Business which
materially interfere with a continuation of the operation of the Business.
4.5. INVENTORY. All of the Inventory is in good and merchantable
condition and salable or useable in the ordinary course of business.
SCHEDULE 1.2.2 sets forth a true, correct and complete list of the Inventory,
including all locations where the Inventory is stored or maintained and the
agreed dollar value of Inventory at each such location.
4.6. CONTRACTS. SCHEDULE 1.2.3 constitutes a true, correct and
complete list of all Contracts. Each Contract is valid and enforceable in
accordance with its respective terms, Seller is not in default in the
performance of any of its obligations thereunder, no event of default has
occurred which (whether with or without notice, lapse of time, or both, or the
happening or the occurrence of any other event) would constitute such a default
thereunder and, to Seller's knowledge, all other parties thereto are not in
default thereunder and have no counterclaims, offsets and defenses with respect
thereto. There are no claims against Seller to return products of the Business
by reason of alleged overshipments, defective products or otherwise, or of
products in the hands of customers or distributors under an understanding that
such products would be returnable. SCHEDULE 1.2.4 constitutes a true, correct
and complete list of all prepaid royalties associated with certain contracts.
4.7. EXISTING EMPLOYMENT CONTRACTS. Except for those obligations
which Seller has agreed to undertake and be fully responsible for pursuant to
Article 6 herein, there are no employment contracts, collective bargaining
agreements, or pension, bonus, profit-sharing, stock option, or other agreements
or arrangements providing for employee remuneration or benefits to which Seller
is a party by which it is bound to the Employees.
-7-
<PAGE>
4.8. COMPLIANCE WITH LAWS. Seller has complied with, and is not in
violation of, applicable federal, state, or local statutes, laws, and
regulations affecting the properties related to, or the operations of, the
Business.
4.9. LITIGATION. There is no suit, action, arbitration, mediation
or legal, administrative, or other proceeding, or governmental investigation
pending or, to the best knowledge of Seller, threatened, against or affecting
the Business or any of the Assets. Seller is not subject to any order, writ,
injunction, judgment, law, regulation or decree of any federal, state, local, or
foreign court, department, agency, instrumentality or other governmental body
relating to the Business or any of the Assets which could reasonably be expected
to have a material adverse effect on the condition, financial or otherwise, of
any of the Assets or the Business or which could reasonably be expected to
prevent the transactions contemplated by this Agreement. Except as set forth on
Schedule 4 and in relation to the Business or Assets, to Seller's knowledge
there are no assertions against Seller or the Business of any claim or
liability, material to the Business or Assets, of any nature other than those
incurred in the ordinary course of business of the Business or contemplated by
this Agreement or the other documents contemplated hereby.
4.10. AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the
execution nor delivery of this Agreement or the other documents contemplated
hereby by the Seller nor compliance by Seller with the terms and provisions
of this Agreement or the other documents contemplated hereby will (a)
conflict with or result in a breach of any of the terms, conditions or
provisions of any judgment, order, injunction, decree, regulation or ruling
of any court or governmental authority to which Seller is subject or of any
Contract or any agreement, contract, or commitment to which Seller is a party
or by which it is bound and no approvals or consents of any persons are
necessary in connection herewith, or (b) give any Person the right to
terminate or modify any Contract, or accelerate any obligation or
indebtedness of Seller with regard to the Business thereunder.
4.11. BROKERS AND FINDERS. Except for certain arrangements with
Lehman Brothers for which Seller is solely responsible, Seller represents and
warrants that it has not retained a finder, investment banker or broker in
connection with the transactions contemplated by this Agreement.
4.12. NO UNDISCLOSED LIABILITIES. Seller represents that, except
with respect to intellectual property matters, which are addressed in Section
4.15, the Business has no liabilities or obligations of any nature except (i)
liabilities that are expressly being assumed by Buyer hereunder, and (ii)
liabilities and obligations that are being retained by Seller and that Seller
will pay and/or satisfy, as applicable, as they become due.
4.13. CONSENTS AND APPROVALS OF GOVERNMENT AUTHORITIES. No
consent, approval or authorization of, or declaration, filing, notice or
registration with, any governmental agency, regulatory authority or other
governmental person or governmental entity is required in connection with the
execution, delivery and performance of this Agreement or any of the other
documents contemplated hereby by Seller or the consummation of the
transactions contemplated herein and therein.
-8-
<PAGE>
4.14. SUBSEQUENT EVENTS. Since November 30, 1998, there have been
no material changes in the condition, financial or otherwise, of any of the
Assets or any of the liabilities, prospects or operations of the Business,
other than changes in the ordinary course of business which in the aggregate
have not been materially adverse to the business, finances or operations of
Seller. Except as set forth on Schedule 4, neither Seller nor the Business
has, in connection with the Business or the Assets, since November 30, 1998:
4.14.1 Incurred any material uninsured obligation or liability
(absolute, accrued, contingent or otherwise), other than in the ordinary
course of business.
4.14.2 Discharged or satisfied any material lien or
encumbrance, or paid or satisfied any material obligation, claim or liability
other than liabilities incurred in the ordinary course of business and
consistent with past practice, or trade payables incurred in the ordinary
course of business and consistent with past practice.
4.14.3 Mortgaged, pledged or subjected any of the Assets to
any Lien.
4.14.4 Sold or transferred any of the Assets other than in the
ordinary course of business.
4.14.5 Except for this Agreement and the other documents
contemplated hereby, entered into any material transaction other than in the
ordinary course of business.
4.14.6 Experienced damage, destruction or loss materially and
adversely affecting the Assets or Business or experienced any other material
adverse change in its financial condition, assets, liabilities or business
affecting the Assets or Business.
4.14.7 Altered the nature of the Business as carried on or
made any material change in the products and services it supplies.
4.14.8 Licensed or disposed of or permitted to lapse any
rights to the use of any Seller Intellectual Property other than the grant of
licenses in the ordinary course of business.
4.14.9 Made any change in the accounting policies or practices
of Seller relating to the Business.
4.14.10 Entered into any other transaction, other than in the
ordinary course of business.
4.14.11 Agreed, whether in writing or otherwise, to do any of the
foregoing.
4.15. INTELLECTUAL PROPERTY.
4.15.1 The intellectual property transferred or licensed to
Buyer pursuant to this Agreement or the License Agreement is owned by Seller
or is used by Seller pursuant to a valid license that will at the Closing be
validly assigned to Buyer, is not subject to any dispute and Seller has the
right to transfer or license such intellectual property to Buyer as
contemplated by this Agreement or the License Agreement.
-9-
<PAGE>
4.15.2 To Seller's knowledge, after reasonable due diligence
and inquiry, the conduct of the Business does not infringe any patent, patent
right, copyright, trademark or trade name, registered or unregistered, or any
other intellectual property right of any third party and no claim is pending
or has been made or threatened to such effect.
4.15.3 To Seller's knowledge, after reasonable due diligence
and inquiry, there is no prior art that is more relevant than that considered
in the prosecution of those patents being transferred or licensed to Buyer
pursuant to this Agreement or the License Agreement.
4.15.4 To Seller's knowledge, after reasonable due diligence
and inquiry, the intellectual property being transferred or licensed to Buyer
pursuant to this Agreement or the License Agreement does not infringe any
patent, patent right, copyright, trademark or trade name, registered or
unregistered, or any other intellectual property right of any third party and
no claim is pending or has been made or threatened to such effect.
4.15.5 To Seller's knowledge, after reasonable due diligence
and inquiry, the patents being transferred or licensed by Seller to Buyer
hereunder or under the License Agreement are valid, subsisting and
enforceable, have not been declared invalid or unenforceable, in whole or in
part (and no proceedings in this regard are currently pending or threatened),
and all maintenance and similar fees in respect thereof have been timely paid
in full.
4.15.6 To the best knowledge of Seller, after reasonable due
diligence and inquiry, no employee of Seller has disclosed without
authorization or otherwise misused or is infringing or misappropriating any
of the Intellectual Property used in connection with the Business.
4.15.7 Seller owns and has good and marketable title to, or a
license to use, each item of Seller Intellectual Property listed on SCHEDULE
1.2.5 OR THE INTELLECTUAL PROPERTY LICENSED UNDER THE LICENSE AGREEMENT, free
and clear of any Liens. Seller owns, or has the binding and enforceable
right to use or operate under, all Seller Intellectual Property not listed on
SCHEDULE 1.2.5 or the intellectual property licensed under the License
Agreement free and clear of any Liens (other than solely as provided in any
licenses relating to such Seller Intellectual Property). No Seller
Intellectual Property or product and/or technology of Seller or any
intellectual property licensed under the License Agreement is subject to any
outstanding decree, order, judgment, stipulation, license or agreement
restricting in any material manner the use or licensing thereof by Seller.
4.15.8 Seller has not received notice from any person or entity
that the operation of the Business, including its design, development,
manufacture and sale of its products and/or technology (including with respect
to products and/or technology currently under development) and provision of
services, infringes the Intellectual Property of any Person or entity.
4.15.9 Except as provided in Schedule 4.15.9, the Seller
Intellectual Property (together with the intellectual property rights licensed
by Seller to Buyer pursuant to the License Agreement) includes all Intellectual
Property that is material to the continued operation
-10-
<PAGE>
of the Business, taken as a whole, and which is necessary to operate the
Business to substantially the same extent and in substantially the same
manner as currently conducted.
4.16. PERSONNEL. Schedule 4 lists the names, current salary
rates, bonuses paid during the last fiscal year, and accrued vacation and
sick leave for all the Employees (as defined in Section 7.3). Seller is not
in default with respect to any of the obligations so listed. Seller has
delivered to Buyer true, complete and correct copies of all such written
obligations and complete summaries of all such oral obligations. There is
no pending or, to Seller's knowledge, threatened labor dispute, strike or
work stoppage affecting the Business. Schedule 4 also lists the amount
payable to employees of Seller under other fringe benefit plans.
4.17. FULL DISCLOSURE. No representation, warranty, covenant or
agreement by the Seller in this Agreement or in any exhibit, schedule,
written statement, certificate or other document delivered or to be delivered
to Buyer pursuant hereto or in connection with the consummation of the
transactions contemplated hereby contains any untrue statement of a material
fact.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that the following facts and
circumstances are true and correct:
5.1. AUTHORITY AND CONSENT. Buyer has full power and authority
(corporate and otherwise) to enter into this Agreement and the other documents
to be executed by Buyer pursuant to the terms hereof and to carry out the
transactions contemplated by this Agreement and such other documents. This
Agreement and the other documents to be executed by Buyer pursuant to the terms
hereof and their execution and delivery to Seller have been duly authorized by
the Board of Directors of Buyer, and no further corporate action shall be
necessary on the part of Buyer or its shareholders to make this Agreement and
the other documents to be executed by Buyer pursuant to the terms hereof and the
transactions contemplated by the Agreement and such other documents valid and
binding upon Buyer. This Agreement and the other documents to be executed by
Buyer pursuant to the terms hereof do and will constitute legal, valid and
binding obligations of Buyer enforceable against Buyer in accordance with their
respective terms, subject as to enforcement only: (a) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights generally; (b)
to general principles of equity; and (c) to the extent indemnification
provisions in the Registration Rights Agreement may be limited by federal or
state securities laws.
5.2. LITIGATION. There is no suit, action, arbitration, or legal,
administrative, or other proceeding, or governmental investigation pending or,
to the knowledge of Buyer, threatened against Buyer, which challenges this
Agreement or the other documents contemplated hereby or affects the transactions
contemplated hereunder or thereunder.
5.3. AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the
execution nor delivery of this Agreement by the Buyer, nor compliance by the
Buyer with the terms and
-11-
<PAGE>
provisions of this Agreement will (a) conflict with or result in a breach of
any of the terms, conditions or provisions of Buyer's Certificate of
Incorporation or Bylaws, or (b) violate, or be in conflict with, or
constitute a default under or cause the acceleration of the maturity of any
debt or obligation pursuant to, any agreement or commitment to which Buyer is
a party or by which Buyer is bound, or violate any statute or law or any
judgment, decree, order, regulation, or rule of any court or governmental
authority.
5.4. BROKERS AND FINDERS. Buyer represents and warrants it has not
retained a finder, investment banker or broker in connection with the
transactions contemplated by this Agreement.
5.5. VALID ISSUANCE. The Warrant is a valid and binding obligation
of Buyer enforceable against it in accordance with its terms subject, as to
enforcement only, to: (a) bankruptcy, insolvency, reorganization, arrangement,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights generally; and (b) general principles of equity.
The common stock to be issued by Buyer pursuant to the terms and conditions of
the Warrant have been reserved for issuance and will be duly authorized, validly
issued, fully-paid and nonassessable.
5.6. BUYER SEC DOCUMENTS. Buyer's Annual Report on Form 10-K for
the year ended December 31, 1997, and its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, complied as to form in all material respects
with the requirements therefor under the Securities Exchange Act of 1934, as
amended, and do not contain any untrue statements 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.
ARTICLE 6
SELLER'S COVENANTS
6.1. ACCESS TO PROPERTIES AND RECORDS. Throughout the period
between the date of this Agreement and the Closing Date, Seller shall give to
Buyer and Buyer's authorized representatives reasonable access, during business
hours, to (a) all facilities and offices which support the operations of the
Business, (b) any and all of the Assets, (c) all of the properties, books,
records, contracts, and related financial and operating data concerning the
Business or the Assets maintained and accumulated by its counsel, accountants
and other representatives and to furnish such persons with all information,
including copies of books, contracts, records and related financial and
operating data which such persons may reasonably request. Without limiting the
foregoing, Buyer shall be permitted to interview during regular business hours
all employees of Seller involved in the Business.
6.2. CONDUCT OF THE BUSINESS PRIOR TO CLOSING DATE. Between the
date of this Agreement and the Closing, and except as otherwise required by this
Agreement:
6.2.1 The Business shall be operated in the ordinary course
consistent with past practices and in a normal businesslike fashion (including,
without limitation, its normal accounts
-12-
<PAGE>
receivable practice), and Seller shall take such actions as are in its
business judgment reasonably necessary to facilitate a smooth transition of
the operation of the Business from Seller to Buyer at the Closing. Seller
shall use its best efforts to preserve and maintain the Business and Seller's
goodwill, including relationships with employees, suppliers and customers.
Seller shall maintain quantities of inventories in a manner consistent with
prior practice and in a normal businesslike fashion. In addition, Seller
shall maintain records and books of account for the Business consistent with
past practices and in a normal businesslike fashion, and shall continue to
carry all of the insurance for the Business consistent with past practice.
6.2.2 Seller shall not take (or permit to be taken) any action with
regard to the Business or the Assets which would cause any material change in
any of the items and matters covered by the representations and warranties set
forth in Article 4, including, without limitation:
(a) incurring or becoming subject to, or agreeing to incur or
become subject to, any obligation or liability (absolute or contingent), except
current liabilities incurred, and obligations under contracts entered into, in
the ordinary course of business consistent with past practices;
(b) mortgaging, pledging or assuming any Lien, or agreeing to
do so, in respect to any of the Assets;
(c) waiving or compromising any material rights or any
material debt owed to Seller with respect to the Business;
(d) entering into any transactions, other than in the
ordinary course of business consistent with past practices;
(e) increasing the rate of compensation payable or to become
payable to any employees of the Business, except in the ordinary course of
business;
(f) terminating or amending any Contract, unless terminated
or amended in the ordinary course of business consistent with past practices;
(g) introducing any new method of accounting with respect to
the Business or any of the Assets or liabilities of Seller in regard to the
Business (assumed or not assumed) (including, without limitation, any change in
depreciation or amortization policies or rates);
(h) making any capital expenditures or entering into
commitments for capital expenditures exceeding, in the aggregate, One Hundred
Thousand Dollars ($100,000); or
(i) alter its practice for creating or accounting for
Inventory.
6.3. ADVICE OF DEVELOPMENTS. Seller shall have continuing
obligations after the date of this Agreement through the Closing Date to advise
Buyer of all significant matters concerning the Business and the Assets.
-13-
<PAGE>
6.4. ACQUISITION, MERGER OR SIMILAR NEGOTIATIONS WITH OTHER PARTIES.
From the date hereof until the earlier of the termination of this Agreement or
consummation of transactions contemplated hereby, none of Seller or any of its
officers, directors, employees, representatives, agents or affiliates shall
directly or indirectly encourage, solicit, initiate or conduct discussions or
negotiations with, provide any information to, or enter into any agreement with,
any corporation, partnership, limited liability company, person or other entity
or group concerning any merger, combination, consolidation, sale of assets
(other than the sale of products in the ordinary course of business) or other
similar transaction involving all or any portion of the Business or the Assets.
Seller shall immediately notify Buyer of any contact by any third-party with
respect to any of the matters described in this Section 6.4.
6.5. SATISFACTION OF CONDITIONS. Seller shall take or cause to be
taken all commercially reasonable actions within its power necessary to satisfy
all conditions to Buyer's obligations to close and consummate the transactions
contemplated by this Agreement.
6.6. CONSENTS. On or prior to the Closing Date, Seller shall (a)
notify all persons required to be notified pursuant to applicable law or any of
the Contracts of the transactions contemplated hereunder, in the form and manner
required thereunder, and (b) use commercially reasonable efforts to obtain the
consent of all persons whose consent is required pursuant to applicable law or
any of the Contracts in connection with the consummation of the transactions
contemplated hereby, in the form and manner required thereunder.
6.7. ERISA. Except as otherwise provided in Sections 2.4.1 or 7.3,
Seller agrees to be responsible for and to undertake the termination of the
participation of the employees in all of Seller's employee benefit plans or
arrangements that are subject to the ERISA, and to assume all liabilities
associated with such plans and their termination, if any.
6.8. BUSINESS NAME. Upon the Closing, Seller shall cease using and
doing business under the name "Network Displays," and any other names used
exclusively in connection with the Business.
6.9. NOTIFICATION OF CERTAIN MATTERS. Without limiting Section 6.3,
Seller shall give prompt notice to Buyer of the occurrence or non-occurrence of
any event which causes or is likely to cause any representation or warranty made
by Seller herein to be untrue or inaccurate or any covenant, condition or
agreement contained herein not to be complied with or satisfied (provided,
however, that any such disclosure shall not in any way be deemed to (a) amend,
modify or in any way affect the representations, warranties and covenants made
by such party in or pursuant to this Agreement, or (b) alter or waive any rights
of Buyer with respect to the breach thereof). Prior to the Closing Date, Seller
shall update the Seller Disclosure Schedule as necessary to make the Seller
Disclosure Schedule accurate and complete as of the Closing Date and promptly
notify Buyer of any such modifications.
6.10. CONTINUING OPERATION OF BUSINESS. Seller agrees to manufacture
network display products solely for the benefit of Buyer in accordance with the
Supply Agreement in the form attached hereto as Exhibit G.
-14-
<PAGE>
6.11. SPACE SHARING AGREEMENT. Seller agrees to enter into the
Space Sharing Agreement with Buyer in substantially the form of EXHIBIT I
attached hereto for any or all of the locations listed on Schedule 6.11 .
6.12. LICENSE AGREEMENT. Seller agrees to grant to Buyer a
non-exclusive, perpetual, irrevocable, royalty-free license to the
Intellectual Property listed on Schedule 6.12 pursuant to a License Agreement
substantially in the form of EXHIBIT H attached hereto (the "License
Agreement").
6.13 NON-COMPETITION AGREEMENT. Buyer and Seller shall enter
into a non-competition agreement substantially in the form of EXHIBIT C
attached hereto.
6.14 RESPONSIBILITY FOR CERTAIN EMPLOYEES. The parties
acknowledge that the employees of Seller listed on Schedule 6.14 will not
become employees of Buyer following the Closing, and that Seller is
responsible for either continuing the employment of such individuals or
assuming the cost of severance under Seller's severance pay policies. Seller
will indemnify Buyer for all costs and expenses (including reasonable
attorneys' fees) incurred by Buyer as a result of any legal claim by any of
the individuals listed on Schedule 6.14 that any such individual is entitled
to employment by, or compensation or severance (or the equivalent) from)
Buyer as a result of the transfer of the Assets to Buyer; provided that Buyer
shall notify Seller as soon as Buyer becomes aware of any such claims or
potential claims and gives Seller exclusive control of the conduct of such
claims and provides Seller with all assistance reasonably necessary to defend
or settle such claims, and provided that Buyer shall not take any action
reasonably likely to interfere with such defense or settlement or increase
the cost thereof. Seller shall not indemnify Buyer for costs associated with
any such individual at the point that Buyer either agrees to employ such
individual or is required to do so by a governmental entity of competent
jurisdiction and Buyer does not immediately terminate such individual. The
indemnity in this Section 6.14 is not subject to the limitations set forth in
Section 9.6.
ARTICLE 7
BUYER'S COVENANTS
7.1. LICENSE OF SELLER INTELLECTUAL PROPERTY. Buyer agrees to
grant a license to Seller to use the Seller Intellectual Property pursuant to
the terms and conditions set forth in a License Agreement in substantially
the form of Exhibit H; provided, however, that Seller shall not use any of
such Seller Intellectual Property for any business or operations prohibited
by the Non-Competition Agreement.
7.2. EXISTING CUSTOMERS. Buyer will use commercially reasonable
efforts to continue to meet the needs of existing customers of the Business
as of the Closing Date with regard to product development, quality and
support in accordance with good industry practices; provided, however, that
in no event shall Buyer be liable to Seller or any other person or entity for
any breach of this covenant.
7.3. EMPLOYEES. Subject to Section 2.4, Buyer shall offer
employment to employees of Seller associated with the Business (excluding
those employees involved in the manufacturing of products for the Business)
on terms reasonably comparable to those currently provided by Seller (the
"Employees"). At least ten (10) business days prior to the Closing Date,
Seller will provide to Buyer in writing a list of all of Seller's employees
associated with the Business, which list shall include a description in
reasonable detail of the current terms of their employment with Seller,
including, without limitation, their severance pay entitlements under
Seller's severance pay plan. If Buyer employs Employees, and terminates any
such Employee without cause within twelve months of the Closing, then Buyer
will provide severance benefits to each such terminated Employee at least
equal to the amount that would have been provided under the terms of Seller's
Severance Pay Plan.
-15-
<PAGE>
7.4. STOCK OPTIONS. It is Buyer's intent to allocate a pool of
approximately five hundred thousand (500,000) shares of Buyer's common stock
for stock options to be granted to key employees of the Business to retain and
motivate them in accordance with Buyer's normal practices. To the extent
Buyer's current stock option pool is insufficient for such purposes, Buyer
shall, at its sole option, either (a) propose in its next annual proxy to
increase the amount of shares available under its then existing stock option
plan; or (b) implement a non-statutory stock option plan.
7.5. SATISFACTION OF CONDITIONS. Buyer shall take or cause to be
taken all commercially reasonable actions within its power necessary to
satisfy all conditions to Seller's obligations to close and consummate the
transactions contemplated by this Agreement.
7.6. CONSENTS. Prior to the Closing, Buyer shall cooperate with
Seller in Seller's efforts to obtain the consents of all persons whose
consent is required pursuant to applicable law or any of the Contracts in
connection with the consummation of the transactions contemplated hereby,
provided that Buyer shall not be required to incur any costs or undertake any
obligations in connection therewith, except as expressly contemplated hereby.
7.7 RETURNED PRODUCTS. Buyer acknowledges that certain of
Seller's customers have the right, pursuant to certain of the Contracts, to
return products of the Business. To the extent saleable products are
returned to Seller by such customers of the Business, Buyer agrees to use
commercially reasonable efforts to market and sell such returned products.
Buyer will pay to Seller an amount equal to 70 percent of the purchase price
paid by a new customer for the product returned to Seller when it is sold to
a new customer.
7.8 COOPERATION IN COLLECTION OF RECEIVABLES. Buyer
acknowledges that following the Closing Seller will continue to collect
accounts receivable related to the Business and outstanding on or before the
Closing Date. Buyer will use commercially reasonable efforts to cooperate
with Seller in Seller's effort to collect overdue accounts receivable
following the Closing.
7.9 AUTOMOBILES. Following the Closing the parties intend for
certain employees of the Business who become employees of Buyer to use the
automobiles leased by Seller from a third party and listed on Schedule 7.9
(the "Leased Automobiles"). The parties acknowledge that the leases for the
Leased Automobiles cannot be transferred to Buyer. Buyer, with the
cooperation of Seller, will use commercially reasonable efforts to establish,
as of the Closing Date, new leases pursuant to which it will assume all
rights and responsibilities associated with the Leased Automobiles. If Buyer
is unable to establish such new leases as of the Closing, Seller, to the
extent permissible under its contractual obligations, will permit Buyer to
use the Leased Automobiles until, at the latest, February 28, 1999; provided
that Buyer reimburses Seller for all costs of any kind incurred by Seller in
connection with the Leased Automobiles following the Closing.
7.10 SELLER AS CUSTOMER. Following the Closing, the parties
intend that Seller will remain a customer of the Business. For a period of
one year, Buyer will provide products and product support to Seller at
Buyer's cost for the selected option. Following the first anniversary of the
Closing Date, Buyer will provide products and product support to Seller on
terms that are no less favorable than terms provided by Buyer to any other
customer purchasing similar products or support.
ARTICLE 8
CONDITIONS TO CLOSING
-16-
<PAGE>
8.1. CONDITIONS TO BUYER'S OBLIGATIONS AT THE CLOSING. Buyer's
obligations to consummate the transactions contemplated by this Agreement
shall be subject to the full satisfaction of the following conditions, each
of which conditions may be waived in writing by Buyer:
(a) INSTRUMENTS. Seller shall have delivered all of the
Seller Closing Documents at the Closing.
(b) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
COVENANTS. The representations and warranties of Seller contained in this
Agreement shall be true in all material respects at the Closing as though made
at such time. Seller shall have performed all obligations and complied with all
covenants and conditions required by this Agreement to be performed or complied
with by it on or prior to the Closing Date.
(c) EMPLOYMENT AND NON-COMPETITION AGREEMENTS.
(i) As more fully set forth in a side letter to this
Agreement, Buyer and the requisite number of employees of the Business set forth
therein to whom Buyer has made an offer of employment shall have entered into an
employment agreement substantially in the form of EXHIBIT J attached hereto (the
"Offer Letters").
(ii) Buyer and Seller shall have entered into the
Non-Competition Agreement, in substantially the form of EXHIBIT C attached
hereto.
(d) Buyer and Seller shall have entered into the Space
Sharing Agreement, in substantially the form of EXHIBIT I attached hereto.
(e) NO MATERIAL CHANGES. There shall not have been any
material adverse change in the Assets or the Business from the date hereof to
the Closing Date, nor shall there exist any condition which could reasonably be
expected to result in such a material adverse change.
(f) CONSENTS. All consents or approvals required for the
consummation of the transactions contemplated hereby, including any required
consents of the parties to any Contract, shall have been obtained.
(g) BOARD APPROVAL. This Agreement and the transactions
contemplated hereby shall have been duly approved and adopted by the Board of
Directors of Seller.
(h) SELLER SCHEDULE. The updates to the Seller Disclosure
Schedule, as delivered to Buyer at the Closing pursuant to Section 3.2 herein,
shall be satisfactory to Buyer.
8.2. CONDITIONS TO SELLER'S OBLIGATIONS AT THE CLOSING. Seller's
obligations to consummate the transactions contemplated by this Agreement shall
be subject to the full satisfaction of the following conditions, each of which
conditions may be waived in writing of Seller:
(a) INSTRUMENTS. Buyers shall have delivered all of the
Buyer Closing Documents at the Closing.
(b) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
COVENANTS. The representations and warranties of Buyer contained in this
Agreement shall be true in all material respects at the Closing as though made
at such time. Buyer shall have performed all obligations and complied with all
covenants and conditions required by this Agreement to be performed or complied
with by it at or prior to the Closing Date.
-17-
<PAGE>
(c) CONSENTS. All material consents or approvals required
for the consummation of the transactions contemplated hereby shall have been
obtained.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
9.1. SURVIVAL. The representations and warranties of Seller
contained in this Agreement or in any document, certificate or schedule or
instrument contemplated hereby or delivered pursuant hereto, shall survive the
Closing Date for a period of one (1) year after the Closing Date. The
representations and warranties of Buyer contained in this Agreement or in any
document, certificate or instrument contemplated hereby or delivered pursuant
hereto, shall survive the Closing Date for a period of one (1) year after the
Closing Date.
9.2. SELLER'S INDEMNITY. Seller shall indemnify, defend, protect
and hold harmless Buyer (and Buyer's officers, directors, shareholders,
employees and agents) from and against any and all losses, costs, expenses,
liabilities, obligations, claims, demands, causes of action, suits, settlements
and judgments of every nature, including the costs and expenses associated
therewith and reasonable attorneys', consultants' and witness fees incurred in
connection therewith ("Buyer's Damages"), which arise out of: (a) the breach of
any representation or warranty made by Seller under this Agreement or any of the
Seller Closing Documents; (b) the non-performance, partial or total, of any
covenant made by Seller pursuant to this Agreement or any of the Seller Closing
Documents; (c) any Excluded Liability; or (d) the conduct of the Business prior
to the Closing Date (other than the Assumed Liabilities).
9.3. BUYER'S INDEMNITY. Buyer shall indemnify, defend, protect and
hold harmless Seller (and Seller's officers, directors, shareholders, employees
and agents) from and against any and all losses, costs, expenses, liabilities,
obligations, claims, demands, causes of action, suits, settlements and judgments
of every nature, including the costs and expenses associated therewith and
reasonable attorneys', consultants' and witness fees incurred in connection
therewith ("Seller's Damages"; and when used together with or in the alternative
to Buyer's Damages, "Damages"), which arise out of: (a) the breach by Buyer of
any representation or warranty made by Buyer pursuant to this Agreement or any
of the Buyer Closing Documents; or (b) the non-performance, partial or total, of
any covenant made by Buyer pursuant to this Agreement or any of the Buyer
Closing Documents; or (c) the conduct of the Business after the Closing Date
(other than the Excluded Liabilities and other than as to matters that
constitute a breach of any of Seller's representations, warranties and covenants
hereunder).
9.4. INDEMNITY PROCEDURES.
9.4.1 In the event that at any time or from time to time
after the Closing Date a person or entity entitled to indemnification
pursuant to Section 9.2 or 9.3 (any such person or entity, an "Indemnitee")
shall sustain a loss of any nature whatsoever against which such Indemnitee
is to be indemnified under this Agreement, such Indemnitee shall notify the
party required to provide such indemnification (such party, the "Indemnitor")
in writing of any such loss so sustained, and Indemnitor shall within thirty
(30) days after transmittal of such notice pay
-18-
<PAGE>
to such Indemnitee the amount of such loss so sustained, subject to their
right to contest any third-party claim which has not yet resulted in a loss,
as hereinafter provided in Section 9.4.2.
9.4.2 Promptly after receipt by an Indemnitee of written
notice of a claim or the commencement of any proceeding against it, such
Indemnitee shall, if a claim in respect thereof is to be made against an
Indemnitor under Section 9.2 or 9.3, give written notice to the Indemnitor of
the commencement thereof, but the failure so to notify the Indemnitor shall
not relieve it of any liability that it may have to any Indemnitee, except to
the extent the Indemnitor demonstrates that the defense of such action is or
has been prejudiced thereby, and then only to the extent of such prejudice.
In case any such proceeding shall be brought against an Indemnitee and it
shall give notice to the Indemnitor of the commencement thereof, the
Indemnitor shall be entitled to participate therein and, to the extent that
it shall wish (unless the Indemnitor is also a party to such proceeding and
the Indemnitee determines in good faith that joint representation would be
inappropriate) to assume the defense thereof with counsel which is reasonably
satisfactory to such Indemnitee and, after notice from the Indemnitor to such
Indemnitee of its election so to assume the defense thereof, the Indemnitor
shall not be liable to such Indemnitee under such Section for any fees of
such counsel or any other expenses with respect to the defense of such
proceeding, in each case, subsequently incurred by such Indemnitee in
connection with the defense thereof. If an Indemnitor assumes the defense of
such proceeding, (a) no compromise or settlement thereof may be effected by
the Indemnitor without the Indemnitee's reasonable prior written consent
unless (i) there is no finding or admission of any violation of law or any
violation of the rights of any person or entity and no effect on any other
claims that may be made against the Indemnitee, and (ii) the sole relief
provided is monetary damages that are paid in full by the Indemnitor; and (b)
the Indemnitor shall have no liability with respect to any compromise or
settlement thereof effected without its prior written consent (which shall
not be unreasonably withheld). If notice is given to an Indemnitor of the
commencement of any proceeding and it does not, within fifteen (15) business
days after the Indemnitee's notice is given, give notice to the Indemnitee of
its election to assume the defense thereof, the Indemnitor shall be bound by
any determination made in such action or any compromise or settlement thereof
effected by the Indemnitee. Notwithstanding the foregoing, if an Indemnitee
determines in good faith that there is a reasonable probability that a
proceeding may adversely affect it or its affiliates, other than as a result
of monetary damages, such Indemnitee may, by notice to the Indemnitor, assume
the exclusive right to defend, compromise or settle such proceeding, but the
Indemnitor shall not be bound by any determination of a proceeding so
defended or any compromise or settlement thereof effected without its prior
written consent (which shall not be unreasonably withheld).
9.4.3 If any Indemnitor contests or challenges any claim or
action asserted against an Indemnitee referred to in this Article, it shall
do so at its own cost and expense, holding Indemnitee harmless from all
costs, fees, expenses, debts, liabilities and charges in connection with such
contest; shall diligently defend against any such claim; and shall hold
Indemnitee's business and assets free and harmless from any attachment,
execution, judgment, lien or other legal process.
9.5. OTHER REMEDIES. Except with respect to claims described in
Section 6.14, the rights of indemnification set forth in this Article 9 shall
be the exclusive remedy for monetary Damages under this Agreement.
-19-
<PAGE>
9.6 LIMITATION OF INDEMNIFICATION.
9.6.1 No indemnification shall be owed by Buyer pursuant to
this Agreement until Seller's reasonable estimate of Seller's Damages,
calculated without any set-off of Buyer's Damages, exceeds $50,000 in the
aggregate, at which point such indemnification shall be owed as follows: (1)
no indemnification shall be owed with respect to the first $50,000 in
Seller's Damages, (2) to the extent Seller's Damages are between $50,000 and
$300,000, Buyer and Seller shall evenly divide the cost of such Damages, such
that Buyer pays $0.50 for each dollar of Seller's Damages between $50,000 and
$300,000 and (3) to the extent Seller's Damages exceed $300,000, Buyer shall
pay all amounts up to the limits set forth in Section 9.6.3.
9.6.2 No indemnification shall be owed by Seller pursuant to
this Agreement until Buyer's reasonable estimate of Buyer's Damages,
calculated without any set-off of Seller's Damages, exceeds $50,000 in the
aggregate, at which point such indemnification shall be owed as follows: (1)
no indemnification shall be owed with respect to the first $50,000 in Buyer's
Damages, (2) to the extent Buyer's Damages are between $50,000 and $300,000,
Buyer and Seller shall evenly divide the cost of such Damages, such that
Seller pays $0.50 for each dollar of Buyer's Damages between $50,000 and
$300,000 and (3) to the extent Buyer's Damages exceed $300,000, Seller shall
pay all amounts up to the limits set forth in Section 9.6.3.
9.6.3 Absent fraud, the maximum indemnification liability
that may be incurred by Buyer or Seller under this Agreement for breach of
their representations and warranties hereunder shall be $800,000. The
foregoing limitation shall not apply in respect of (a) the breach of any
covenant in Article 6 and 7, (b) Buyer's failure to perform the Assumed
Liabilities, and (c) Seller's failure to perform or satisfy the Excluded
Liabilities.
9.6.4 At Seller's sole option, which shall be exercised no
later than five days before Seller is required to satisfy its indemnification
obligation, Seller may satisfy its indemnification obligations with cash or
by agreeing to surrender a portion of the shares underlying the Warrant, or
by a combination of cash and the surrender of a portion of the shares
underlying the Warrant. If Seller chooses to satisfy its indemnification
obligations through the surrender of shares of Buyer's common stock
underlying the Warrant, for the purposes of satisfying obligations under this
Article 9 each surrendered share shall be valued by subtracting the "Exercise
Price" (as defined in the Warrant) from the "Fair Market Value" of each such
share (as defined in the Warrant).
ARTICLE 10
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
10.1. NONDISCLOSURE. Prior to the Closing, no information
concerning Seller, the Assets or the Business that has been furnished to or
obtained by Buyer under this Agreement or in connection with the transactions
contemplated hereby shall be disclosed to any person other than in confidence
to those employees, legal counsel, financial advisers and independent public
accountants of Buyer whom Buyer reasonably determines have a need to know
that information in connection with the transactions contemplated by this
Agreement. If the transactions contemplated hereby are not consummated,
Buyer shall continue to hold all such information in confidence, and all such
information that is in writing or embodied on a diskette, tape or other
tangible medium shall be returned promptly to Seller. The Seller recognizes
and acknowledges that it has had in the past, currently has, and in the
future may possibly have, access to certain Confidential Information (as
defined below) related to the Business that is valuable, special and unique
and which is part of the Assets sold pursuant to this Agreement. The Seller
agrees that, unless this Agreement is terminated, it will not disclose such
Confidential Information to any person, firm, corporation, association or
other entity for any purpose or reason whatsoever, except to authorized
representatives of the Buyer, unless (i) such information becomes available
-20-
<PAGE>
to or known by the public generally through no fault of Seller or its
employees or agents, (ii) disclosure is required by law or the order of any
governmental authority under color of law, provided, that prior to disclosing
any information pursuant to this clause (ii), Seller shall, if possible, give
prior written notice thereof to Buyer and provide Buyer with the opportunity
to contest such disclosure. Nothing herein shall be construed as prohibiting
Buyer from pursuing any other available remedy for such breach or threatened
breach, including the recovery of damages.
10.2. CONFIDENTIAL INFORMATION. "Confidential information" shall
mean all trade secrets and other confidential and/or proprietary information
of the Seller relating exclusively to the Business or the Assets, including
information derived from reports, investigations, research, work in progress,
codes, marketing and sales programs, financial projections, cost summaries,
pricing formulae, contract analyses, financial information, projections,
confidential filings with any state or federal agency, and all other
confidential concepts, methods of doing business, ideas, materials or
information prepared or performed for, by or on behalf of such person by its
employees, officers, directors, agents, representatives, or consultants.
10.3. NONDISCLOSURE COVENANTS: REMEDY FOR BREACH. The parties
agree that, in the event of breach or threatened breach of the covenants in
this Article 10, the damage or imminent damage to the value and the goodwill
of Buyer or Seller, as the case may be, will be irreparable and extremely
difficult to estimate, making any remedy at law or in damages inadequate.
Accordingly, the parties agree that a non-breaching party shall be entitled
to injunctive relief in the event of any breach or threatened breach of any
of such covenants by the other party, in addition to any other relief
(including damages) available to the non-breaching party under this
Agreement or under law.
ARTICLE 11
TERMINATION
11.1. TERMINATION BY BUYER AND/OR SELLER. This Agreement may be
terminated without further liability by either party at any time before the
Closing Date:
(a) by mutual consent of Buyer and Seller; or
(b) by either Buyer or Seller if the Closing has not
occurred by January 31, 1999, provided that the terminating party has not
prevented the Closing from occurring through breach of any of its
representations, warranties or covenants.
11.2. TERMINATION BY BUYER. Buyer, if not then in default
hereunder, may terminate this Agreement at any time before the Closing Date
upon notice to Seller of the occurrence of (a) a material breach of any of
Seller's representations or warranties hereunder, or (b) a default in the
observance or performance of any of Seller's covenants or agreements herein
and such breach is not remedied within ten (10) days after the giving of
written notice by Buyer to Seller.
11.3. TERMINATION BY SELLER. Seller, if not then in default
hereunder, may terminate this Agreement at any time before the Closing Date
upon notice to Buyer of the occurrence of (a) a material breach of any of
Buyer's representations or warranties hereunder, or (b) a default in
-21-
<PAGE>
the observance or performance of any of Buyer's covenants or agreements
herein and such breach is not remedied within ten (10) days after the giving
of written notice by Seller to Buyer.
11.4. PROCEDURE: EFFECT OF TERMINATION. If either Buyer or
Seller elects to terminate this Agreement pursuant to this Article 11, the
terminating party shall promptly give written notice thereof to the other
party. In the event of termination pursuant to this Article 11, the parties
shall be released from all liabilities and obligations under this Agreement,
other than for damages to the extent arising from a breach of this Agreement
and the confidentiality obligations imposed by Article 10.
ARTICLE 12
MISCELLANEOUS
12.1. CONTRACTS NOT ASSIGNED AT CLOSING. If the parties choose to
consummate the transactions contemplated by this Agreement prior to receiving
the necessary third party consents to assign certain of the Contracts or
Intellectual Property licenses to Buyer, then (1) with respect to Contracts with
customers of the Business, following the Closing and until such time as consents
to assign such Contracts are received or such Contracts are terminated, Buyer
will make available to Seller the products or services necessary to fulfill
Seller's obligations under such Contracts in exchange for Seller providing to
Buyer the financial benefits under such Contracts, and (2) with respect to third
party licenses included within Seller's Intellectual Property, Seller will use
commercially reasonable efforts, with the cooperation of Buyer, to obtain
consents to assign such licenses by January 30, 1998 and will cooperate with
Buyer in any reasonable arrangement designed to provide Buyer with the
opportunity to use the intellectual property provided under such licenses;
provided, however, that with respect to clause (2) of this sentence, Seller
shall not be required to incur licensing costs or pay any fees to any vendor in
connection with the assignment of any such license or the establishment of any
new license or other arrangement necessary to provide such Intellectual Property
to Buyer. The parties acknowledge that Seller's efforts to continue to meet
contractual obligations under the customer Contracts described in this Section
shall not be a violation of the Non-Competition Agreement.
12.2 ENTIRE AGREEMENT. This Agreement and the documents and
agreements contemplated herein constitute the entire agreement between and
among the parties with regard to the subject matter of this Agreement. This
Agreement supersedes all previous agreements between or among the parties
relating to the transactions contemplated by this Agreement, including that
certain letter of intent dated November 12, 1998. There are now no
agreements, representations, or warranties between or among the parties other
than those set forth in the Agreement or the documents and agreements
contemplated herein.
12.3. AMENDMENT, WAIVERS AND CONSENTS. This Agreement shall not
be changed or modified, in whole or in part, except by supplemental agreement
signed by the parties. Any party may waive compliance by any other party
with any of the covenants or conditions of this Agreement, but no waiver
shall be binding unless executed in writing by the party granting the waiver.
No waiver of any provision of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not similar, nor
shall any waiver constitute a continuing waiver. Any consent under this
Agreement shall be in writing and shall be effective only to the extent
specifically set forth in such writing.
-22-
<PAGE>
12.4. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the parties hereto and their respective successors and
assigns, provided that Seller shall not assign its obligations hereunder.
12.5. GOVERNING LAW. The rights and obligations of the parties
shall be governed by, and this Agreement shall be construed and enforced in
accordance with, the laws of the State of California, excluding its conflict
of laws rules to the extent such rules would apply the law of another
jurisdiction.
12.6. ATTORNEYS' FEES. If any party brings any suit, action,
counterclaim, or arbitration proceeding to enforce the provisions of this
Agreement (including without limitation enforcement of any award or judgment
obtained with respect to this Agreement), the prevailing party shall be
entitled to recover a reasonable allowance for attorneys' fees and
litigation expenses in addition to court costs.
12.7. DISPUTE RESOLUTION. Any dispute, controversy or claim
between the parties relating to, or arising out of or in connection with,
this Agreement (or any subsequent agreements or amendments thereto),
including as to its existence, enforceability, validity, interpretation,
performance, breach or damages, including claims in tort, whether arising
before or after the termination of this Agreement, shall be settled only by
binding arbitration pursuant to the Commercial Arbitration Rules, as then
amended and in effect, of the American Arbitration Association (the "Rules"),
subject to the following:
12.7.1 There shall be one arbitrator, who shall be selected
under the normal procedures prescribed in the Rules.
12.7.2 Subject to legal privileges, each party shall be
entitled to discovery in accordance with the Federal Rules of Civil Procedure.
12.7.3 At the arbitration hearing, each party may make written
and oral presentations to the arbitrator, present testimony and written
evidence and examine witnesses.
12.7.4 The arbitrator's decision shall be in writing, shall be
binding and final and may be entered and enforced in any court of competent
jurisdiction.
12.7.5 No party shall be eligible to receive, and the
arbitrator shall not have the authority to award, exemplary or punitive
damages.
12.7.6 Each party to the arbitration shall pay one-half of the
fees and expenses of the arbitrator and the American Arbitration Association.
12.7.7 The arbitrator shall not have the power to amend this
Agreement.
12.8. PAYMENT OF FEES AND EXPENSES. Except as otherwise set forth
in this Agreement, each of Seller and Buyer shall each bear their own costs
and expenses, including without limitation, attorneys' fees, incurred in
connection with the negotiation and execution of this Agreement.
-23-
<PAGE>
12.9. RULES OF CONSTRUCTION. The parties acknowledge that each
party has read and negotiated the language used in this Agreement. The
parties agree that, because all parties participated in negotiating and
drafting this Agreement, no rule of construction shall apply to this
Agreement which construes ambiguous language in favor of or against any party
by reason of that party's role in drafting this Agreement.
12.10. ADDITIONAL DOCUMENTS. Each of the parties agree, without
further consideration, to execute and deliver such other documents and take
such further action as may be reasonably required to effectuate the
provisions of this Agreement.
12.11. SEVERABILITY. If any provision of this Agreement, as
applied to either party or to any circumstance, is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision.
12.12. EXHIBITS. All Exhibits and Schedules attached hereto shall
be deemed to be a part of this Agreement and are fully incorporated in this
Agreement by this reference.
12.13. NOTICES. All notices or other communications required or
permitted hereunder shall be made in writing and shall be deemed to have been
duly given and effective immediately if delivered by hand or, effective three
(3) business days after mailed, postage prepaid, by first class or certified
or registered mail, return receipt requested, and addressed as follows:
To Buyer at: Network Computing Devices, Inc.
350 North Bernardo Avenue
Mountain View, CA 94043
Attn: Chief Financial Officer
With a copy to: Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Attn: David C. Wilson, Esq.
To Seller at: Tektronix, Inc.
PO Box 1000
63-862 Wilsonville Industrial Park
Wilsonville, OR 97070
Attn: Secretary
With a copy to: Stoel Rives LLP
900 SW Fifth Avenue, Suite 2600
Portland, OR 97204
Attn: Henry H. Hewitt
A notice of change of address shall be effective only when done in accordance
with this Section 12.13.
12.14. RIGHTS OF PARTIES. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it and
their respective successors and assigns, nor is anything in this Agreement
intended to relieve or discharge the obligation or liability of any third
person to any party to this Agreement, nor shall any provision give any third
person any right of subrogation or action over or against any party to this
Agreement.
-24-
<PAGE>
12.15. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
12.16. KNOWLEDGE. As used in this Agreement, references to the
best knowledge or knowledge of Seller shall include the best knowledge or
knowledge, respectively, of Seller's officers and directors and employees of
the Business after reasonable due diligence and inquiry.
IN WITNESS WHEREOF, the parties hereto have duly executed this Asset
Purchase Agreement as of the date first written above.
SELLER BUYER
TEKTRONIX, INC. NETWORK COMPUTING DEVICES, INC.
By /s/ James F. Dalton By /s/ Rudolph G. Morin
------------------------- --------------------------
Title Title Executive Vice President,
---------------------- Operations & Finance,
Chief Financial Officer
-------------------------
-25-
<PAGE>
<TABLE>
<CAPTION>
LIST OF SCHEDULES AND EXHIBITS
<S> <C>
Exhibit A Form of Warrant
Exhibit B Form of Services Agreement
Exhibit C Form of Non-Competition Agreement
Exhibit D Form of Bill of Sale
Exhibit E Form of Assignment and Assumption Agreement
Exhibit F Registration Rights Agreement
Exhibit G Form of Supply Agreement
Exhibit H Form of License Agreement
Exhibit I Form of Space Sharing Agreement
Exhibit J Form of Offer Letter
Schedule 1.2.1 Equipment
Schedule 1.2.2 Inventory
Schedule 1.2.3 Contracts
Schedule 1.2.4 Pre-Paid Royalties
Schedule 1.2.5 Seller Intellectual Property
Schedule 1.4.1 Purchase and other Commitments
Schedule 1.4.2 Support Agreements
Schedule 1.4.3 Warranty Obligations
Schedule 4 Seller Disclosure Schedule
Schedule 6.11 Location of Sales and Support Offices
Schedule 6.12 Licensed Intellectual Property
Schedule 7.9 Leased Automobiles
</TABLE>
-26-
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
ORGANIZATION JURISDICTION NAME
------------ ------------------
<S> <C>
NCD Graphic Software Corporation Oregon
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
(Germany) GmbH
Network Computing Devices Sweden
(Scandinavia) AB
NCD International Inc. California
</TABLE>
<PAGE>
EXHIBIT 23.1
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 (Nos. 33-51594 and 33-65638) of Network Computing Devices, Inc. of our
reports dated February 9, 1999, relating to the consolidated balance sheets of
Network Computing Devices, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related schedule, which reports appear in the
December 31, 1998, annual report on Form 10-K of Network Computing Devices, Inc.
KPMG LLP
Mountain View, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,553
<SECURITIES> 12,806
<RECEIVABLES> 23,411
<ALLOWANCES> 1,821
<INVENTORY> 14,362
<CURRENT-ASSETS> 66,041
<PP&E> 29,074
<DEPRECIATION> 25,224
<TOTAL-ASSETS> 75,146
<CURRENT-LIABILITIES> 22,554
<BONDS> 0
0
0
<COMMON> 59,737
<OTHER-SE> (7,214)
<TOTAL-LIABILITY-AND-EQUITY> 75,146
<SALES> 105,596<F1>
<TOTAL-REVENUES> 105,596
<CGS> 67,030<F2>
<TOTAL-COSTS> 67,030
<OTHER-EXPENSES> 52,012
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (9,761)
<INCOME-TAX> (658)
<INCOME-CONTINUING> (9,103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,103)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
<FN>
<F1>Includes revenues from licensing of software and support revenues.
<F2>Includes costs from licensing of software and support revenues.
</FN>
</TABLE>
