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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER 0-20124
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NETWORK COMPUTING DEVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0177255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 NORTH BERNARDO AVENUE, MOUNTAIN VIEW, 94043
CALIFORNIA (Zip Code)
(Address of principal executive offices)
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(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)
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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. Yes / /
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 29, 2000, as reported on the Nasdaq Stock Market, was approximately
$104,695,266. 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 29, 2000, 16,491,011 shares of the registrant's Common Stock
were outstanding.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS, WHICH REFLECT
OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK
FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED. IN THIS
REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF.
ITEM 1. BUSINESS.
GENERAL
Network Computing Devices, Inc. provides thin client hardware and software
that delivers simultaneous, high-performance, easy-to-manage and cost effective
access to all of the information on enterprise intranets and the Internet from
thin client, UNIX and PC desktops. Our product line includes the NCD THINSTAR
line of Windows-based terminals, the NCD EXPLORA network terminals and the NCD
NC200 and NCD NC400 network computers. On the software side we offer the NCD
THINPATH family of client and server software, developed to enhance the
connectivity, management and features of the NCD thin clients as well as PCs in
accessing information and applications on Windows servers. Some of the software
products were part of the NCD THINSTAR software family in 1998; they have been
re-named and were announced in March 1999 as part of the NCD THINPATH software
family. Our thin clients, THINPATH software, and installation and support
services are a combination that delivers a fully integrated desktop solution to
companies seeking a low-cost, easy to manage, simple to use, high performance
user experience. Since introducing our first product in 1989, we have installed
over 1,000,000 thin clients worldwide.
Network Computing Devices, Inc. is a Delaware corporation. We were
originally incorporated in California in February 1988 and were reincorporated
in Delaware in October 1998. Unless the context otherwise requires, the terms
"the Company" and "NCD" refer to Network Computing Devices, Inc. and its
consolidated subsidiaries.
INDUSTRY BACKGROUND
THIN CLIENT COMPUTING
Computing environments made a pendulum-like swing from the highly
centralized mainframe and minicomputer systems of the 1970s to the fully
distributed personal computer- and workstation-based systems of the 1980s. While
the earlier approach benefited from centralized system administration and
security, users had to compete for under-powered, centralized processors on a
timesharing basis, using low-performance, character-based "dumb" terminals.
During the 1980s, microprocessor-based systems improved in price and
performance, and graphical user interfaces ("GUIs") with easy-to-use windows,
menus, and icons, became widely available. User groups within large
organizations began implementing their own solutions, using personal computers
and workstations on the desktop to give each individual user a dedicated
computing resource. The need to interconnect these computing resources led to
the development of local area networks ("LANs"), which resulted in processing,
data and applications being spread across many desktops. This approach brought
with it new problems: the high cost of installing, maintaining and upgrading a
computer on every desktop; under-utilization of individual computing resources;
and complex system management requiring large IT staffs.
As the 1990s approached, businesses developed networks and highly efficient
networked servers that could provide the information required to remain
competitive. Since this data was being accessed and used
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by unsophisticated non-technical individuals, it became important to provide
simple, high-performance graphics devices to access the data, and the tools that
made it easy to manage the information and the devices that accessed it. A new
computing environment evolved and came to be referred to as "thin client
computing" which combines the cost-effectiveness, manageability and security of
the original centralized model with the performance, GUIs and network
accessibility of the later distributed model.
The original development of thin client computing came in the UNIX
environment using the X Windows System (often simply called X). It was followed
in the Microsoft Windows environment by Citrix's Independent Computing
Architecture ("ICA") and then by Microsoft's Remote Desktop Protocol ("RDP").
All three technologies allow applications to run on centrally-administered
servers, taking advantage of enterprise-level resources. The applications'
graphical user interface ("GUI") is then sent over the network to the user's
desktop or viewing appliance. This separation of the display of applications
from the computing they require enables organizations to deploy, manage and
upgrade one or a small number of servers instead of hundreds or thousands of
individual personal computers. The result is faster access to new technology,
higher productivity, longer use of both client and server capital investments,
and greatly improved use of information technology staff resources.
Over the last several years, a number of important developments occurred
which expanded the potential markets for network computing systems. First, the
availability of the powerful Pentium microprocessor enabled the development of
complex Windows-based systems. The thin client model was solidified by the
introduction of the "lean client" initiative, Intel's thin client architecture,
demonstrating its support for thin clients and its investment in us to work on
the realization of the lean client initiative. Second, Microsoft NT Server
software, combined with Microsoft-authorized multi-user software such as Citrix
MetaFrame and NCD THINPATH, became available to support multi-user Windows
applications. In September 1998, Microsoft demonstrated its support of the thin
client computing model with its introduction of Windows NT 4.0 server, Terminal
Server Edition and its support of the development of Windows CE-based thin
clients to access these servers. This has been followed and significantly
enhanced by their subsequent integration of Terminal Services into Windows 2000,
enabling thin clients to more easily access Windows applications from any
Windows server. Third, the rapid growth of the Internet and Internet-based
computing has popularized the concept of remote computing and created new
interest in the thin client computing model.
With the centralization of applications in this client computing model, much
greater emphasis is placed on the management of servers that support increasing
numbers of users for their mission critical applications. This has created new
market opportunities for server monitoring and management software products.
With the rapid evolution of the internet, more companies are looking at
deploying thin client applications through web-based interfaces which is driving
the deployment of distributed web servers based on various technologies such as
Intel microprocessors, operating systems from Microsoft and Sun, as well as the
Linux operating system.
With the move of applications to the server in thin client computing, there
has been a rapid rise in the interest in Application Service Providers ("ASPs"),
companies that rent application time to end users to save them the
administrative costs of running their own IT department.
INFORMATION ACCESS AND INFRASTRUCTURE MANAGEMENT SOFTWARE
Software is key to information access and infrastructure management. The
physical connection to the intranet or Internet is relatively simple; but the
simple, well managed, cost-effective operation of network-wide computing
resources requires sophisticated software.
The market for enterprise information access and infrastructure management
software is large and comprised of a number of segments, many of which are
expanding rapidly. Segments of the information
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access market include: PC software for accessing remote UNIX and Windows
applications and Internet integration software. The server management software
market is also large, with the Windows server management segment experiencing
the highest rate of growth.
With the continuing proliferation of increasingly powerful and low-cost PCs
in large organizations, we identified a demand for software products to enable
DOS-based and Windows-based PCs to emulate X terminals for use in predominantly
UNIX environments. In order to address this market, in 1992 we acquired Graphic
Software Systems, a pioneer in the development of X software for PCs. In 1993,
we introduced PC-XWARE, its initial PC-UNIX integration software product.
PC-XWARE is based on our NCDWARE X terminal operating environment and provides
network connectivity using an NCD-developed TCP/IP software stack. NCD now
offers versions of PC-XWARE for WINDOWS 3.1, 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, we introduced NCD WINCENTER software that included Microsoft
Windows NT as its basic operating system and WinFrame, Microsoft-authorized
multi-user software that we licensed from Citrix Systems, Inc. ("Citrix"). NCD
WINCENTER also included NCD-developed graphics and network features that make it
compatible with the X Windows protocol supported by our thin clients and UNIX
workstations. NCD WINCENTER allowed a single server to provide Windows
applications to many users simultaneously. In September of 1998, the licensing
agreement with Citrix was terminated.
Building on this core competency, in 1999 we introduced the NCD THINPATH
family of software that includes three types of functionality--connectivity,
management and desktop support. The software includes emulators that allow any
desktop to access virtually any host environment, management tools to remotely
administer desktops and to optimize server performance and support of local
printers, peripheral devices and audio input/output. These products deliver
features that enhance the performance of Microsoft's Windows Terminal Server
without adding a layer of protocol software.
In January 2000, we acquired Multiplicity LLC, a provider of strategic
performance, capacity and service level management software for Windows NT
server environments. The Multiplicity product continuously collects data from
participating servers to catalog what people and applications are using which
servers. The data can be used for real-time monitoring or can be collected in a
database for later analysis, reporting, and billing.
MARKETS AND APPLICATIONS
Our thin clients are used in a broad range of industries for a wide variety
of applications. Thin clients are widely used in task-based applications like
order-entry and point-of-sale. Our main target industries are healthcare,
retail, finance and education.
Initially, our X-terminal systems were sold as alternatives to high-priced
UNIX workstations required to access applications on UNIX servers. Later,
emulators were added to give them the additional functionality of an ASCII
terminal or IBM 3270 terminal replacement. By mid-1996, server software existed
that made them an enhancement of, or alternative to, personal computer networks.
X-terminals were developed to allow multiple users to access UNIX
applications on servers without the burden of expensive UNIX workstations on
their desktop. When Windows applications became a requirement, these users were
required to add a bulky and expensive PC to their desk space. We introduced NCD
WINCENTER to provide Windows NT access from the already existing X-terminal of
the UNIX users. With Microsoft Windows NT Server 4.0, Terminal Server Edition
("TSE") UNIX users can still access Windows applications through Citrix
Metaframe protocol with NCD WINCENTER for Metaframe.
Microsoft's Terminal Services in Windows 2000 includes the Remote Desktop
Protocol ("RDP") that allows Windows CE-based desktop devices to access Windows
NT applications without the addition of Citrix MetaFrame. While the integrated
RDP protocol does not include many of the features supported by
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Citrix MetaFrame (the ICA protocol), NCD THINPATH software includes enhancements
to Terminal Services with RDP that gives it the most important features required
by major implementers of Windows-based terminals in a Windows 2000 environment.
This delivers a low cost solution without the expense and complexity of adding a
non-Microsoft protocol layer of software.
TERMINAL REPLACEMENT. A principal market for X-based thin clients is
replacement of character-based terminals, such as ASCII and 3270 terminals. Many
commercial users in transaction processing applications are upgrading their
centralized systems to achieve the productivity advantages of GUIs and windowing
as well as the flexibility of "open" systems based on industry-standard
operating systems such as UNIX. Our thin client products offer such customers
the ability to have a single desktop device that gives them access to both
existing legacy applications as well as new GUI-based versions while maintaining
the central administration they have come to depend upon.
WORKSTATION ENVIRONMENTS. Many of the early buyers of X-terminals were also
early users of workstation technology and viewed X-based thin clients primarily
as a low-cost alternative for expanding their workstation networks. In these
environments, thin clients can access the excess processing power of existing
workstations, supplying users with a GUI at a considerably lower cost than a
workstation with equivalent display characteristics. Thus, organizations can
provide windowing and graphics for uses that previously could not justify the
cost of a full workstation. Many users of X-terminals in UNIX workstation or
minicomputer environments have developed an optimized configuration of
workstations and X-terminals. In these environments, rather than providing some
users with workstations and others with X-terminals, every user is given an
X-terminal, and compute servers based on high-performance workstations (without
monitors) that are shared among all users. The organization thereby realizes
cost advantages by centralizing processing, memory and disk requirements into
fewer, high-performance servers.
PERSONAL COMPUTER ENVIRONMENTS. With Microsoft's introduction of Windows NT
Server 4.0, Terminal Server Edition, we introduced the NCD THINSTAR family of
thin clients that are optimized to access Windows NT and NCD THINPATH software
that enhances the capabilities of TSE. For task-based users, like data entry
clerks and call center specialists, we believe that this integration of thin
client hardware and software is a viable alternative to PCs. With the addition
of NCD THINPATH emulators, these Windows-oriented desktops can also access
legacy systems environments like AS/400s and mainframes.
INTRANET ENVIRONMENTS. Many companies employ multiple operating
environments on their corporate network (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. The NCD EXPLORA class
of network terminals provide cost-effective access to X-based applications. The
NCD THINPATH family of software provides emulators to permit PCs and NCD
THINSTAR terminals to access virtually any server, to permit easy network
management and to provide support for local peripheral devices on NCD THINSTAR
and PC desktops.
SERVER MONITORING AND MANAGEMENT. With increased reliance on NT servers for
application provision, the real time monitoring and pre-emptive fixing of
problems before they occur will become increasingly important. The requirements
will be to ensure reliability, availability, and serviceability of thin client
networks in the way that mainframes have traditionally done, as well as to make
it possible for ASPs to provide a contractually binding service level to their
customers. NCD Multiplicity is targeted at these requirements.
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PRODUCTS
THIN CLIENT HARDWARE PRODUCTS
We offer a broad line of thin client products that provide businesses and
other enterprises with an open systems approach to network computing based on
our Network Computing Architecture. Our thin client devices include NCD THINSTAR
Windows-based terminals, NCD NC200 and NCD NC400 network computers and NCD
EXPLORA network terminals.
THIN CLIENTS. Our thin client products are desktop devices that are used to
access information and applications residing on compute servers in a local area
network or wide area network. With our thin clients, applications can be
executed on the powerful networked servers, and the results displayed on simple,
cost-effective desktop devices. As discussed above, the thin clients were
initially introduced to access UNIX applications; later the software was added
to allow these same devices to access mainframes and other non-UNIX servers.
With the growing popularity of Windows environments, we have introduced the NCD
THINSTAR Windows-based terminals and NCD THINPATH software to optimize access to
networked Windows NT servers.
Our thin client product line includes models with various performance
characteristics, various screen sizes and a range of software extensions and
network interfaces. Hardware platforms are based on different microprocessors,
addressing a wide range of price and performance requirements. Custom ASICs used
in the design of most of our products help reduce the cost of connection logic
and provide hardware acceleration for certain graphics functions. Our thin
clients feature single-board electronics and incorporate current ergonomic
standards in monitor technology. Our thin clients come with a full line of
peripherals, including mouse and several keyboard options.
NCD THINSTAR 200, NCD THINSTAR 300 AND NCD THINSTAR 400 Windows-based
terminals were the first family of 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 we developed 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.
NCD THINSTAR 400 is the first Windows-based terminal to provide an internal PCI
slot for expandability and offers increased performance over the NCD THINSTAR
300. The NCD THINSTAR 450 PRO will support Microsoft WBT Professional with
Windows NT Embedded.
Our 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 1998 acquisition of the Tektronix Network Displays business unit. All of
these models are based on powerful MIPS-based processors.
The NCD EXPLORA 400/450 family are our entry level network terminal product.
They target the low end UNIX workstation replacement market. They are based on
the 32-bit PowerPC RISC processor.
SOFTWARE PRODUCTS
NCDWARE AND NCD NCBRIDGE. Our UNIX based thin clients run NCDWARE and NCD
NCBRIDGE, our proprietary operating systems. These products incorporate
extensive enhancements to the basic X server software to improve performance,
system manageability and robustness.
NCD THINPATH SOFTWARE. We manufacture 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,
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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.
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 our NCDWARE network computing software and offers many of
the same local applications and network management features.
NCD MULTIPLICITY. We will shortly be shipping the Multiplicity server
monitoring and management product. Multiplicity allows the real time monitoring
of a number of key NT metrics and presents these in an easy-to-understand
graphical form to enable network administrators to monitor the health of a
distributed NT server network. The idea is to be able to have a real-time
picture of the network and an understanding of areas where problems may occur so
that they can be rectified before downtime occurs. This improves service levels
and reliability, availability and serviceability of thin client networks based
on the Microsoft NT and Windows 2000 operating systems.
PRODUCT DEVELOPMENT
We believe that we must enhance our existing line of thin client and
software products and continue developing new hardware and software products
that incorporate the latest improvements in technology in order to maintain our
position as a major supplier of thin client solutions and expand the market for
this style of computing and information access products. Accordingly, we are
committed to investing significant resources in software and hardware
development activities.
Our 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;
- Cost reductions and feature enhancements of network computer platforms
acquired from Tektronix; and,
- Delivery and enhancement of the Multiplicity Server Management product.
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 1999, 1998 and 1997, the Company's research and development
expenditures were $12,935,000, $13,213,000, and $14,179,000, respectively.
THE FOREGOING DISCUSSION CONCERNING OUR PRODUCT DEVELOPMENT PROGRAM INCLUDES
FORWARD-LOOKING STATEMENTS. ACTUAL PRODUCT DEVELOPMENT RESULTS MAY DIFFER
SUBSTANTIALLY DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED
UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--FUTURE PERFORMANCE AND RISK FACTORS."
MARKETING AND SALES
Our marketing and sales objectives are two-fold. The first is to position
thin client computing within enterprise IT architectures as an approach that is
easy-to-implement and support and meets users' performance goals and the
corporate desire for centralized management. Equally important is our aim to
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maintain our position as a recognized leader in the thin client industry and
differentiate our integrated hardware and software offerings from competitors'
products. Both of these objectives need to be addressed through our focus on
indirect channels of distribution.
A key strategy is the education of our channel partners regarding our value
proposition of making access simple and making our integrated hardware and
software solution easy to sell.
Other significant strategies are our work in cooperation with industry
leaders like Intel and Microsoft, and greater focus on vertical industries and
applications like healthcare, retail and call centers.
Our marketing team is organized around 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.
We have 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 our
network of resellers and support staff to better serve the emerging marketplace.
International sales, including sales to foreign OEM customers, represented
approximately 40%, 35% and 34% of our net revenues during 1999, 1998 and 1997,
respectively. International sales may be subject to government controls and
other risks, including export licenses, federal restrictions on the export of
critical technology, changes in demand resulting from currency exchange
fluctuations, political instability, trade restrictions and changes in tariffs.
To date, we have experienced no material difficulties due to these factors.
We also sell our products to OEMs who combine our products with computers
and peripherals, add application software and sell complete computer systems to
end-users. OEM sales represented approximately 9%, 29%, and 26% of our revenues
for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1999 Adtcom, Tech Data and IBM accounted for 18%, 15% and 9%,
respectively of our net revenue. IBM accounted for 29% and 26% of our net
revenues in 1998 and 1997, respectively.
We also sell our PC connectivity software products through an internal
telesales team that fulfills orders through our normal two tier distribution
channel.
SERVICE AND SUPPORT
We believe that our ability to provide service and support is and will
continue to be an important element in the marketing of our products. We
maintain in-house repair facilities and also provide telephone and electronic
mail access to our technical support staff. Our technical support engineers not
only provide assistance in diagnosing problems but work closely with customers
to address system integration issues and to assist customers in increasing the
efficiency and productivity of their systems. We provide system level software
support through our factory-based technical maintenance organization and field
system engineers, and also offer software update services that allow customers
to purchase subsequent releases of our software products. Teleplan & K-Litex and
MSAS Hitech Logistics, both leading European service organizations, provide
certain repair services for our European distributors and OEM customers.
Cybersource, a leading Australian service organization, provides certain repair
services for our Australian distributors and OEM customers.
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COMPETITION
The market for thin client products and similar products that facilitate
access to data over networks is characterized by rapidly changing technology and
by evolving industry standards. Although we are a major supplier of thin client
computing systems and software, we experience significant competition from other
thin client manufacturers, suppliers of personal computers and workstations and
from software developers. In recent months, a number of other companies have
announced intentions to offer Windows-based terminals, including a few of the
major personal computer companies.
In the Windows-based terminal area, our major competitor is Wyse
Technology, Inc. ("Wyse"). We believe that our principal competitive advantages
are our integrated hardware and software offerings and our networking core
competence. Server manufacturers who offer thin client products may have
advantages over independent thin client vendors, including us, based on their
ability to "bundle" their thin clients, personal computers and servers in
certain large sales opportunities. We are addressing this competitive threat by
forming marketing partnerships with suppliers of the various pieces of such
solutions not provided by us.
At the low end of the commercial segment of the computer market, we compete
with suppliers of lower cost ASCII and 3270 terminals. These products do not
offer the graphics and windowing capabilities offered by our thin client
systems, but are still appealing to certain price sensitive customers. Moreover,
PC networks offer an alternate means of upgrading from ASCII and 3270 terminal
systems in many commercial applications.
Generally speaking, competition in the thin client computing market has
intensified over the past several quarters, resulting in price reductions,
reduced profit margins and increased efforts to maintain market share, which
have adversely affected our operating results. In addition, intense competition
from alternative desktop computing products, particularly personal computers,
has slowed the growth of the thin client computing market. We expect this
intense competition to continue. There can be no assurance that we will be able
to continue to compete successfully against current and future competitors as
the desktop computer market evolves and competition increases.
NCD PC-XWARE software products face direct competition from several software
companies that offer similar products, including Hummingbird
Communications, Ltd., a Canadian company, Visionware, a subsidiary of The Santa
Cruz Operation, Inc., NetManage, Inc., and Walker, Ritchie, Quinn, a
privately-held company.
NCD THINPATH. Many functions of the NCD THINPATH technology such as
Mirroring, Load Balancing and Plus compete with functions provided in Citrix
MetaFrame software. Some functions of the NCD THINPATH MANAGER technology
compete with functions provided in Wyse Technology, Inc.'s WyseWorks software.
We have experienced, and expect to continue to experience strong competitive
pressure from Citrix and Wyse in response to the competitive threat of our
software. Other companies may chose to enter this space and compete with us for
end user and third party customers.
NCD MULTIPLICITY. Server management products are provided by a number of
companies, including Citrix and NetIQ in the NT server market. In addition,
established companies providing server monitoring and management software may
choose to enter the NT server management market as Windows NT and Windows 2000
account for an increasing number of mission-critical servers in the enterprise.
MANUFACTURING AND SUPPLIES
We conduct certain thin client production activities at our Mountain View,
California facility. These operations consist primarily of final assembly and
configuration, testing and quality control of material, components,
sub-assemblies and systems. We utilize a manufacturing control system that
includes purchasing, inventory control and cost accounting functions. We test
our thin clients in a network environment using a internally-developed, computer
integrated manufacturing ("CIM") system. In addition, we employ
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a statistical process control system ("SPC") and conduct regular on-site
inspections at our vendors' facilities to maintain quality control.
We currently obtain substantially all of our thin client products from a
single supplier located in Thailand. In addition, a number of components and
parts used in our products, including certain semiconductor components, also are
currently available from single or limited sources of supply. We have no
long-term purchase agreements or other guaranteed supply arrangements with
suppliers of those single or limited source components. We have generally been
able to obtain adequate supplies of parts and components in a timely manner from
existing sources under purchase orders and we endeavor to maintain inventory
levels adequate to guard against interruptions in supplies.
Our products incorporate memory components, such as video random access
memory chips ("VRAMs") that are available from multiple sources but have been
subject to substantial fluctuations in availability and price. Certain other
components, including microprocessors and ASICs, though generally available from
multiple sources, are subject to industry-wide demand that could result in
limited availability or significant fluctuations in pricing. To date, these
fluctuations have not had a material effect on our operating results and we have
been able to obtain an adequate supply of such components.
We currently outsource the reproduction and packaging of our software to
vendors located in California.
BACKLOG
We assemble our thin client products based upon our projections of near-term
demand. Orders from large end-users and OEMs are generally placed by the
customer on an as-needed basis, and we typically ship products within 45 days
after receipt of a firm purchase order. We do not generally have a significant
backlog, and our backlog at any particular time, or fluctuations in backlog from
time to time, may not be representative of actual sales for any succeeding
period.
Because of the ease of manufacturing software products, we are able to
effect the manufacture and shipment of these products quickly in response to
customer orders without maintaining significant inventories, and, as a result,
have historically had little, if any, backlog at any particular time. We do not,
therefore, consider backlog for these products to be a significant measure of
actual sales for any succeeding period.
INVENTORY
As we have moved to a channel-based model we have placed inventory of our
products into distribution. Although efforts are made to have the inventory in
distribution reflect the expected pattern of near-term demand from reseller
partners, changes in market conditions may cause the need for stock rotation and
price protection, which could affect operating results. In addition, it is
possible that the inventory mix will not be correct, causing a delay in the
shipment of products to end user customers and possible loss of orders.
PROPRIETARY RIGHTS AND LICENSES
We rely primarily on a combination of copyright, trademark and trade secret
laws, employee and third-party non-disclosure agreements and other intellectual
property protection methods to protect our proprietary technology. We hold ten
U.S. patents. Although we intend to pursue a policy of obtaining patents for
appropriate inventions, we believe that our success will depend primarily on the
innovative skills, technical competence and marketing abilities of our personnel
rather than upon the ownership of patents. There can be no assurance that
patents will issue from any pending or future patent applications or that any
claims allowed will be sufficiently broad to protect our technology. In
addition, there can be no
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<PAGE>
assurance that any patents issued to us will not be challenged, invalidated or
circumvented, or that any rights granted thereunder will provide adequate
protection to us.
Certain technology used in our product is licensed from third parties on a
royalty-bearing basis. The costs associated with such royalties were a
significant component of total software cost of sales through 1998. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." Generally, such licenses grant to us non-exclusive, worldwide
rights with respect to the subject technology and terminate only in the event of
material breach.
Our software products are generally licensed on a right-to-use basis. We
rely primarily on "shrink wrap" or "break the seal" licenses. Certain provisions
of such licenses, including provisions protecting against unauthorized copying
and reverse engineering, may not be enforceable under the laws of some
jurisdictions. In addition, the laws of some foreign countries in which our
software products are distributed do not protect our intellectual property
rights to the same extent as U.S. law.
There can be no assurance that third parties will not assert infringement
claims against us or our suppliers with respect to current or future products.
Although we have historically been able to resolve all asserted claims on terms
which have not had a material effect on our operations, there is no assurance
that any future claims may not require us to enter into unfavorable royalty
arrangements or result in costly litigation.
EMPLOYEES
As of December 31, 1999, we had 339 full-time employees, of whom 76 were
primarily engaged in research and development, 46 in service and technical
support, 113 in marketing and sales, 47 in manufacturing and 57 in
administration and finance. None of our employees are represented by a
collective bargaining agent. We have experienced no work stoppages and believe
that our employee relations are good.
Competition for employees in the computer and software industries is
intense. We believe that our future success will depend, in part, on our ability
to continue to attract and retain highly skilled technical, marketing and
management personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to our executive
officers, and their ages as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------
<S> <C> <C>
Robert G. Gilbertson.............. 58 Chairman of the Board
Rudolph G. Morin.................. 62 President and Chief Executive
Officer
Gregory S. Wood................... 41 Vice President and Chief Financial
Officer
John P. DeSantis.................. 44 Senior Vice President, Sales and
Marketing
James L. Fulton................... 36 Chief Technical Officer
</TABLE>
In August 1999 Mr. Gilbertson became Chairman of the Board. Prior to that
Mr. Gilbertson had served as President and Chief Executive Officer since joining
us in May 1996. Prior to joining us, 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. Prior thereto, he served
as President and Chief Executive Officer of Data Switch Corporation.
Mr. Gilbertson holds an MBA fron the University of
11
<PAGE>
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.
In August 1999 Mr. Morin was promoted to President and Chief Executive
Officer. Prior to that Mr. Morin had served as Executive Vice President,
Operations & Finance and Chief Financial Officer since joining us in May 1996.
Prior to joining us, Mr. Morin served as Senior Vice President, Finance and
Administration for Memorex Telex Corporation from 1993 to 1996. Prior thereto,
he worked at Data Switch, where he was Executive Vice President. Mr. Morin's
background also includes more than ten years with Thyssen Bornemisza Inc. as
head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Wood joined us in August 1999 after two years as CFO at Sutmyn Storage
Corp. a Santa Clara, CA data storage company. Mr. Wood had joined Sutmyn
following seven years at Memorex Telex, most recently as senior vice president
of finance. His prior experience includes serving as a principal in the
San Francisco office of Ernst & Young. A 1980 graduate of the University of
San Diego, Mr. Wood is a CPA and also holds a J.D. degree from the University of
San Francisco School of Law.
In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President International
Operations since joining us in July 1997. Mr. DeSantis came to us from
Cincinnati Bell where he held positions as Vice President of European Operations
and International Sales. Mr. DeSantis holds a degree in Philosophy and
Mathematics from Fairfield University, and has completed post graduate work at
Stanford University.
In February 2000, Mr. Fulton was promoted to Chief Technical Officer. Prior
to that, he had served as Vice President of Product Management and over the past
10 years has held a number of positions spanning engineering, marketing, and
management. Before joining us, Mr. Fulton was one of the original staff at the
MIT X Consortium which drove the X Window System to become the industry's first
thin client computing standard. Mr. Fulton holds a bachelor's degree in Computer
Science and Engineering from MIT.
ITEM 2. PROPERTIES.
Our 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
subleased to a third party. The annual gross rent for these facilities in 1999
was approximately $1,500,000. Our 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 $430,000 for 1999. We also lease
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,
with annual gross rents of approximately $530,000 in 1999. We believe that our
existing facilities are adequate for our present requirements and that suitable
additional space will be available as needed. Our field sales and service
offices worldwide consist of leased office space totaling approximately 24,000
square feet, with current aggregate gross rents of approximately $690,000 for
1999.
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 our fiscal year ended December 31, 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE DATA
Our Common Stock has been traded on the Nasdaq Stock Market under the symbol
"NCDI" since our initial public offering in June 1992. The following table sets
forth, for the periods indicated, the high and low sale prices for the Common
Stock on such market:
<TABLE>
<CAPTION>
HIGH LOW
---- --------
<S> <C> <C>
1999:
First Quarter......................................... $ 8.00 $4.50
Second Quarter........................................ 7.00 4.25
Third Quarter......................................... 5.4375 4.25
Fourth Quarter........................................ 9.00 3.875
1998:
First Quarter......................................... $13.75 $9.00
Second Quarter........................................ 11.50 6.00
Third Quarter......................................... 8.9375 5.00
Fourth Quarter........................................ 8.50 4.375
</TABLE>
The closing sale price for the Common Stock on February 29, 2000 was $7.875.
As of February 29, 2000, we had 193 holders of record and approximately
4,500 beneficial holders of our Common Stock and 16,491,011 shares of Common
Stock were outstanding.
The market price of our Common Stock has fluctuated significantly and is
subject to significant fluctuations in the future. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Future
Performance and Risk Factors."
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently expect
that we will retain our future earnings for use in the operation and expansion
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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<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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $109,030 $105,596 $133,400 $120,608 $139,328
Operating income (loss)................... (9,707) (13,446) 1,736 (17,241) (7,657)
Income (loss) before income taxes......... (9,143) (9,761) 3,831 (8,721) (6,205)
Net income (loss)......................... (16,259) (9,103) 2,681 (5,232) (4,029)
Net income (loss) per share--basic........ (1.00) (0.56) 0.16 (0.32) (0.25)
Net income (loss) per share--diluted...... (1.00) (0.56) 0.15 (0.32) (0.25)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 8,339 $ 21,359 $ 31,480 $ 35,671 $ 36,150
Working capital........................... 31,052 41,097 53,811 60,981 57,470
Total assets.............................. 56,764 75,146 86,514 85,693 97,537
Capital lease obligations, less current
portion................................. -- 69 160 314 991
Total shareholders' equity................ 37,876 52,523 60,519 67,425 68,014
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THIS DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A VARIETY OF FACTORS, INCLUDING
THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "FUTURE PERFORMANCE AND RISK
FACTORS."
Network Computing Devices, Inc. provides thin client hardware and software
that delivers simultaneous, high-performance, easy-to-manage and cost effective
access to all of the information on enterprise intranets and the Internet from
thin client, UNIX and PC desktops. Our product line includes the NCD THINSTAR
line of Windows-based terminals, the NCD EXPLORA network terminals and NCD NC
200 and NCD NC400 network computers. On the software side, our products are the
NCD THINPATH family of client and server software, developed to enhance the
connectivity, management and features of the NCD thin clients as well as PCs in
accessing information and applications on Windows servers. Some of the software
products were part of the NCD THINSTAR software family in 1998; they have been
re-named and were announced in March 1999 as part of the NCD THINPATH software
family. These products are sold through OEMs, system integrators and
distributor/VAR channels worldwide.
RECENT DEVELOPMENTS
On December 31, 1998, we completed the acquisition of Tektronix' Network
Displays business unit for $3.0 million in cash and warrants to purchase one
million shares of our 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 of in-process research and development and $2.8 million
to other intangible assets. In addition to acquiring certain assets,
approximately 83 former Tektronix employees joined us, primarily in sales,
marketing and
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<PAGE>
engineering roles. In conjunction with this acquisition, we undertook various
restructuring activities to eliminate redundancies with the acquired business,
including the reduction in personnel of approximately 13 employees. We recorded
a charge of approximately $1.0 million related to these restructuring
activities. (See Note 5 of the "Notes to Consolidated Financial Statements.")
During March 1999, we announced the THINPATH family of software which adds a
feature-rich set of options to Microsoft Windows NT Server 4.0 Terminal Server
and Windows 2000 Terminal Services without adding an additional protocol layer.
Various features of THINPATH were introduced throughout 1999.
During 2000 we expect to see continued declines in the revenue generated
under the IBM Agreement as that relationship winds down.
In January 2000, we acquired the assets of Multiplicity LLC, a privately
held developer of advanced server management software for Microsoft's Windows NT
and Windows 2000 operating systems. The acquisition will be accounted for using
the purchase method. The purchase price was approximately $2.2 million plus a
stream of future payments based on revenue for the four year period following
the acquisition. We expect to record a charge for purchased in-process research
and development in the first quarter of 2000. Multiplicity LLC provides
strategic performance analysis and capacity planning solutions for networked
Windows NT and Windows 2000 servers. These solutions give customers
sophisticated system measurement and management that enable troubleshooting,
analysis, administration and planning to help IT organizations improve end-user
service levels.
In February 2000, we entered into an OEM agreement with Hitachi Ltd. of
Japan to develop and manufacture customized NCD thin client terminals under the
Hitachi name. Hitachi's OEM thin client brand will be called FLORANET 130 and is
based on our THINSTAR 400 Windows-based terminal (WBT).
In March 2000 we announced that revenues to date for the quarter ending
March 31, 2000 had been lower than we expected and that operating expenses had
increased due to the acquisition of Multiplicity and substantial marketing
expenses in connection with the launch of Microsoft's Windows 2000. As a result,
we expect revenues for the quarter ending March 31, 2000 will be lower than
revenues for the final quarter of last year, and we expect to record a net loss
in excess of the loss for the prior quarter.
In the same announcement, we disclosed that we had become more actively
engaged in exploring strategic alternatives intended to enhance shareholder
value, but said we had not entered into any agreement or commitment with respect
to any such strategic transaction, and no assurance can be given that any
transaction will result from these activities.
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. Our line of credit is secured by substantially all of our
assets. Under the terms of the agreement borrowings bear interest at a rate of
prime plus 0.75%. The amount that can be borrowed at any given time is
determined by the balance of our accounts receivable.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in our consolidated statements
of operations as a percentage of net revenues for the periods indicated. Figures
are rounded to the nearest whole percentage, and line items presenting subtotal
and total percentages may therefore differ, due to rounding, from the sum of the
percentages for each line item.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Hardware products and services............................ 90% 77% 75%
Software licenses and services............................ 10% 23% 25%
---- ---- ----
Total net revenues...................................... 100% 100% 100%
Cost of revenues:
Hardware products and services............................ 58% 56% 53%
Software licenses and services............................ 3% 7% 7%
---- ---- ----
Total cost of revenues.................................. 61% 63% 61%
---- ---- ----
Gross profit................................................ 39% 37% 39%
Operating expenses:
Research and development.................................. 12% 13% 11%
Marketing and selling..................................... 30% 29% 23%
General and administrative................................ 6% 5% 5%
Business restructuring.................................... -- 1% --
Acquired in-process research and development.............. -- 1% --
Litigation settlement..................................... -- -- (0)%
---- ---- ----
Total operating expenses................................ 48% 49% 38%
---- ---- ----
Operating income (loss)..................................... (9)% (13)% 1%
Non-operating income and gains, net......................... 1% 3% 2%
---- ---- ----
Income (loss) before income taxes........................... (8)% (9)% 3%
Provision for income taxes (income tax benefit)............. 7% (1)% 1%
---- ---- ----
Net income (loss)........................................... (15)% (9)% 2%
==== ==== ====
</TABLE>
TOTAL NET REVENUES
Total net revenues for 1999 were $109.0 million, an increase of 3% from 1998
net revenues of $105.6 million. Net revenues for 1998 decreased by 21% compared
to 1997 net revenues of $133.4 million. International revenues were 40% of total
net revenues for 1999, representing an increase from 35% and 34% in 1998 and
1997, respectively. Sales to Adtcom and Tech Data accounted for 18% and 15%,
respectively of 1999 revenue. Sales to IBM accounted for 29% and 26% of revenues
in 1998 and 1997, respectively.
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 $98.5 million for 1999, an increase of 21%
compared to revenues of $81.2 million in 1998. Hardware revenues for 1998
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<PAGE>
decreased 19% compared to revenues of $100.6 million in 1997. The increase in
revenues in 1999 reflects increased shipments of Windows-based terminals and
NC's partially offset by a decrease in shipments under the IBM Agreement. The
increase in shipments of NC's is a result of the acquisition of product lines
acquired from Tektronix. The decrease in revenues in 1998 reflects decreased
shipments of UNIX-based products as we began to transition to the sale of lower
priced Windows-based terminals and decreased shipments under the IBM Agreement.
We expect shipments under the IBM Agreement to continue to decline in 2000.
SOFTWARE REVENUES
Software revenues consist primarily of revenues from the licensing of
software products and related support services. Software products that are
included in revenue for the periods presented are (i) NCD THINPATH, (ii) NCD
WINCENTER, our multi-user WINDOWS NT application server software, (iii) NCD
PC-XWARE, our thin client software for PCs, and (iv) NCDWARE, our proprietary
thin client software. Revenues from software and related services were
$10.5 million for 1999, a decrease of 57% compared to revenues of $24.4 million
in 1998. Revenues in 1998 decreased by 26% compared to revenues of
$32.8 million in 1997. The most significant decrease in 1999 was in the NCD
WINCENTER product line. 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. Our OEM relationship with Citrix ended
on September 30, 1998. This has and will continue to result in significantly
reduced sales of WINCENTER products, and, potentially, a decrease in total
software revenues in future periods if our newly announced software products do
not achieve sufficient marketplace acceptance.
GROSS MARGIN ON HARDWARE REVENUES
Our gross margin percentages on hardware revenues were 36%, 27% and 29% for
the years ended December 31, 1999, 1998 and 1997, respectively. The increase in
margin in 1999 primarily reflects the decrease in sales of products to IBM on an
OEM basis, and an increase in sales of higher margin NCD branded products. The
decrease in margin for 1998 relates to a higher mix of lower margin product sold
to IBM.
We continue 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. The transition from network
computers to windows based terminals will also cause margins to decline, though
the expected decrease in shipments under the IBM Agreement could partially
offset these expected declines.
GROSS MARGIN ON SOFTWARE REVENUES
Our gross margin percentages on software revenues were 75%, 68% and 70% for
the years ended December 31, 1999, 1998 and 1997, respectively. The increase in
1999 when compared to 1998 is the result of a move to our branded products that
do not rely on licensed technology and therefore have lower costs. 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 our products is licensed from third parties on a royalty-bearing basis.
Accordingly, royalties are a significant component of total software cost of
sales through 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $12.9 million, $13.2 million
and $14.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. R&D expenses as a percentage of
17
<PAGE>
revenues were 12%, 13% and 11% for 1999, 1998 and 1997, respectively. We plan to
maintain our investment in research and development in the area of thin client
computing products through 2000.
MARKETING AND SELLING EXPENSES
Marketing and selling expenses were $33.0 million, $31.1 million and
$30.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase of $1.9 million in 1999 compared to 1998 was the
result of increased employee based expenses that resulted from the Tektronix
acquisition. The slight increase in 1998 compared to 1997 related to our
continued investment in the marketing and selling of our products during a
transition year of lower revenues. As a percentage of net revenues, marketing
and selling expenses were 30%, 29% and 23% for 1999, 1998 and 1997,
respectively. The higher percentage in 1998 is the result of slightly increased
spending and lower net revenues in 1998 and lower spending in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $6.9 million, $5.2 million
and $6.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively. As a percentage of net revenues, G&A expenses were 6% for 1999 and
5% for both 1998 and 1997. Amortization of goodwill related to the acquisition
of the Network Displays division of Tektronix, Inc. was $0.4 million in 1999.
BUSINESS RESTRUCTURING
On December 31, 1998, we acquired the Network Displays business unit of
Tektronix Inc ("NWD"). As a result of the acquisition, we reduced its workforce
and discontinued certain activities that were overlapping with the acquired
business. Accordingly, during the fourth quarter of 1998, we recorded a charge
of $1.0 million for costs of employee severance benefits and to discontinue
overlapping activities. See Note 5 of the "Notes to Consolidated Financial
Statements" contained herein.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with our acquisition of NWD on December 31, 1998,
approximately $1.4 million of the total purchase consideration was allocated to
the value of in-process research and development. The amounts allocated were
determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition because technological feasibility
had not been established and no alternative uses exist. Research and development
costs to bring the products to technological feasibility are not expected to
have a material impact on our future operating results.
The in-process research and development projects acquired in the acquisition
of NWD consisted of development of a Windows-based terminal and related
software, browser terminal software and token ring support for the NC line of
network computers. Further development on the Windows-based terminal was
discontinued during 1999 since the project overlapped with existing products.
There was no significant impact on operating results as a result of this action.
The Windows-based terminal software was integrated into our existing line of
THINPATH software and is currently being shipped. A new version of browser
terminal software was released and is being shipped as part of the NCBRIDGE
software product family. Token ring support was added to our NC line of network
computers and began shipping in 1999.
INTEREST INCOME, NET
Interest income, net of interest expense, was $0.6 million, $1.6 million and
$1.9 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The continuing decrease in interest income relates primarily to decreased
average balances in interest-earning accounts.
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<PAGE>
OTHER INCOME, NET
Other income includes non-operating income, net of non-operating expense.
Other income for 1998 reflects the sale of our interest in Precept
Software, Inc. after Precept was acquired by Cisco Systems in March 1998,
resulting in a net gain of approximately $2.1 million. Other income in 1997
reflects the receipt of insurance proceeds for certain legal expenses incurred
in association with the securities litigation costs.
INCOME TAXES AND INCOME TAX BENEFIT
We recognized an income tax provision of $7.1 million and $1.2 million in
1999 and 1997, respectively, compared to an income tax benefit of $0.7 million
in 1998. During 1999, we increased the valuation allowance to provide a full
reserve against all of our gross deferred tax assets because operating losses
created uncertainty about our ability to generate sufficient taxable income to
utilize our deferred tax assets. This charge, which was recorded in the third
quarter, and foreign income taxes comprise the 1999 tax provision. See Note 7 of
the "Notes to Consolidated Financial Statements."
FINANCIAL CONDITION
Total assets of $56.8 million at December 31, 1999 decreased $18.3 million
from $75.1 million at December 31, 1998. The change in total assets reflects
decreases in cash and equivalents, short-term investments, property and
equipment, and deferred income taxes of $5.3 million, $7.8 million,
$0.2 million and $6.6 million, respectively, partially offset by increases in
accounts receivable, inventory and prepaid assets of $0.4 million, $0.7 million
and $1.3 million respectively. Total liabilities as of December 31, 1999
decreased by $3.7 million to $18.9 million from $22.6 million at December 31,
1998.
CAPITAL REQUIREMENTS
Capital spending requirements for 2000 are estimated at approximately
$2.6 million, and at December 31, 1999, we had commitments for capital
expenditures of approximately $30,000.
LIQUIDITY
As of December 31, 1999, we had combined cash and equivalents and short-term
investments totaling $8.3 million, with no significant debt. Cash used in
operations was $10.9 million and $5.8 million in 1999 and 1998, respectively
compared to cash provided by operations of $6.4 million in 1997. Cash used in
operations in 1999 primarily reflects our net loss of $16.3 million and
decreases in accrued expenses and deferred revenue of $2.1 million and
$1.8 million, respectively, partially offset by deferred income taxes of
$6.6 million and depreciation and amortization of $3.6 million. Cash used in
operations in 1998 primarily reflects our net loss of $9.1 million and decreases
in accrued expenses and deferred revenues of $3.2 million and $2.2 million,
respectively, partially offset by decreases in inventories and accounts
receivable of $5.8 million and $3.6 million, respectively. Cash provided by
operations in 1997 primarily reflects our net income of $2.7 million,
depreciation and amortization 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 flows provided
by investing activities in 1999 of $4.1 million came from the sales of
short-term investments offset by purchases of property and equipment. Cash flows
used in investing activities in 1998 of $3.6 million primarily reflects the cash
portion of the acquisition of NWD of $3.0 million. Cash flows provided by
investing activities in 1997 of $1.3 million came from the sales of short-term
investments and decreases in other assets offset by purchases of property and
equipment. Cash flows provided by financing activities of $1.5 million in 1999
are provided mainly from the proceeds from the issuance of common stock. Cash
flows used in financing activities in 1998 reflects repurchases of
$10.7 million of our common stock, partially offset by Intel's investment in our
common stock. Cash flows used in financing activities in 1997 reflect
repurchases of $12.2 million of our common stock.
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<PAGE>
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. Our line of credit is secured by substantially all of our
assets. Under the terms of the agreement borrowings bear interest at a rate of
prime plus 0.75%. The amount that can be borrowed at any given time is
determined by the balance of our accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth.
Our capital requirements will depend on many factors, including but not
limited to the market acceptance of our product, the response of our competitors
to our product and our ability to continue to grow software revenue. In addition
to the financing we received approval for in March 2000, we may be required to
seek additional financing before we achieve positive cash flow or in order to
comply with covenants under the line of credit. In that event, no assurance can
be given that additional financing will be available, or that if available, it
will be available on terms acceptable to us, or our shareholders. If adequate
funds are not available to satisfy our short-term or long-term capital
requirements we may be required to limit our operations significantly.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," established
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. The
statement is effective for fiscal years beginning after June 15, 2000. We will
adopt the standard no later than the first quarter of fiscal year 2001 and are
in the process of determining the impact that adoption will have on our
consolidated financial statements.
FUTURE PERFORMANCE AND RISK FACTORS
OUR FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE SUBJECT
TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
EVOLVING THIN CLIENT COMPUTING MARKET
We derive a majority of our revenues from the sale of thin client network
computing products and related software. Until several years ago, our thin
client product offerings primarily focused on the UNIX marketplace using our X
protocol. Our introduction of WINCENTER multi-user Windows NT application server
software and new, lower-priced thin client network computing devices allowed us
to offer thin client network computing systems that provide users with access to
Windows applications. Our expansion of our thin client computing model into the
Windows-based environment was limited because of our inability to offer an
endorsed Microsoft solution within the Windows market prior to the introduction
of the Windows-based terminal in June 1998 and intense competition from
alternative desktop systems, particularly personal computers, whose selling
prices are at historic lows for relatively high performance configurations. Our
future success will depend substantially upon increased acceptance of the thin
client computing model and the successful marketing of our new thin client
computing hardware and software products. There can be no assurance that our new
thin client computing products will compete successfully with alternative
desktop solutions or that the thin client computing model will be widely adopted
in the rapidly evolving desktop computer market. The failure of new markets to
develop for our thin client computing products would have a material, adverse
effect on our business, operating results and financial condition.
RELIANCE ON OEM RELATIONSHIPS
We have committed significant resources, including research and development,
manufacturing and sales and marketing resources, to the execution of our OEM
Agreements. The production cycle of related product requires us to rely on OEM
customers to provide accurate product requirement forecasts, which are subject
to change by OEM customers which have changed their forecasts from time to time
in the past. Should we commence production of related product based on provided
forecasts that are subsequently reduced, we bear the risk of increased levels of
unsold inventories. Should the expected business volumes associated with these
OEM agreements not occur, or occur in volumes below management's expectations,
there would be a material, adverse effect on our operating results.
20
<PAGE>
COMPETITION
The market for thin client products and similar products that facilitate
access to data over networks are characterized by rapidly changing technology
and evolving industry standards. We experience significant competition from
other network computer manufacturers, suppliers of personal computers and
workstations and software developers. Competition within the thin client
computing market has intensified over the past several quarters, resulting in
price reductions and reduced profit margins. We expect this intense competition
and pricing pressure to continue, and there can be no assurance that we will be
able to continue to compete successfully against current and future competitors
as the desktop computer market evolves and competition increases. There is the
possibility that competition in the future could come from companies not
currently in the market or with greater resources than ours which would
adversely affect our operating results.
Our software products also face substantial competition from software
vendors that offer similar products. We are trying to penetrate a software
market currently dominated by Microsoft, Citrix and others. There is no
assurance that we will be able to succeed. Failure to gain market share could
have an adverse effect on our operating results.
FLUCTUATIONS IN OPERATING RESULTS
Our operating results have varied significantly, particularly on a quarterly
basis, as a result of a number of factors, including general economic conditions
affecting industry demand for computer products, the timing and market
acceptance of new product introductions by us and our competitors, the timing of
significant orders from and shipments to large customers, periodic changes in
product pricing and discounting due to competitive factors, and the availability
and pricing of key components, such as DRAMs, video monitors, integrated
circuits and electronic sub-assemblies, some of which require substantial order
lead times. Our operating results may fluctuate in the future as a result of
these and other factors, including our success in developing and introducing new
products, our product and customer mix, licensing costs, the level of
competition which we experience and our ability to develop and maintain
strategic business alliances.
We operate with a relatively small backlog. Revenues and operating results
therefore generally depend on the volume and timing of orders received, which
are difficult to forecast and which may occur disproportionately during any
given quarter or year. Our expense levels are based in part on our forecast of
future revenues. If revenues are below expectations, our operating results may
be adversely affected. We have experienced a disproportionate amount of
shipments occurring in the last month of our fiscal quarters. This trend
increases the risk of material quarter-to-quarter fluctuations in our revenues
and operating results.
Failure to penetrate software markets currently dominated by others could
lead to lower than expected margins and result in an adverse effect on our
operating results.
NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND ENHANCED PRODUCTS
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future results will depend to a considerable
extent on our ability to continuously develop, introduce and deliver in quantity
new hardware and software products that offer our customers enhanced performance
at competitive prices. The development and introduction of new products is a
complex and uncertain process requiring substantial financial resources and high
levels of innovation, accurate anticipation of technological and market trends
and the successful and timely completion of product development. Once a hardware
product is developed, we must rapidly bring it into volume production, a process
that requires accurate forecasting of customer requirements in order to achieve
acceptable manufacturing costs. The introduction of new or enhanced products
also requires us to manage the transition from older, displaced products in
order to
21
<PAGE>
minimize disruption to customer ordering patterns, avoid excessive levels of
older product inventories and ensure that adequate supplies of new products can
be delivered to meet customer demand. As we are continuously engaged in this
product development and transition process, our operating results may be subject
to considerable fluctuation, particularly when measured on a quarterly basis.
The inability to finance important research and development projects, delays in
the introduction of new and enhanced products, the failure of such products to
gain market acceptance, or problems associated with new product transitions
could adversely affect our operating results.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RESELLERS
We rely increasingly on independent distributors and resellers for the
distribution of our products. In early 1996, we experienced significant returns
of our software products from our distributors. Although controls have since
been improved, there can be no assurance that we will not experience some level
of returns in the future. In addition, there can be no assurance that our
distributors and resellers will continue their current relationships with us or
that they will not give higher priority to the sale of other products, which
could include products of our competitors. A reduction in sales effort or
discontinuance of sales of our products by our distributors and resellers could
lead to reduced sales and could adversely affect our operating results. In
addition, there can be no assurance as to the continued viability or the
financial stability of our distributors and resellers, our ability to retain our
existing distributors and resellers or our ability to add distributors and
resellers in the future.
RELIANCE ON INDEPENDENT CONTRACTORS
We rely on independent contractors for virtually all of the manufacture of
our thin client computing products. Our reliance on these independent
contractors limits our control over delivery schedules, quality assurance and
product costs. In addition, a number of our independent suppliers are located
abroad. Our reliance on these foreign suppliers subjects us to risks such as the
imposition of unfavorable governmental controls or other trade restrictions,
changes in tariffs and political instability. We currently obtain all of our
thin client computing products from a single supplier located in Thailand. Any
significant interruption in the supply of products from this contractor would
have a material, adverse effect on our business and operating results.
Disruptions in the provision of components by our other suppliers, or other
events that would require us to seek alternate sources of supply, could also
lead to supply constraints or delays in delivery of our products and adversely
affect our operating results. The operations of certain of our foreign suppliers
were briefly disrupted during 1992 due to political instability in Thailand.
A number of components and parts used in our products, including certain
semiconductor components, also are currently available from single or limited
sources of supply. We have no long-term purchase agreements or other guaranteed
supply arrangements with suppliers of these single or limited source components.
We have generally been able to obtain adequate supplies of parts and components
in a timely manner from existing sources under purchase orders and endeavor to
maintain inventory levels adequate to guard against interruptions in supplies.
However, our inability to obtain sufficient supplies of these parts and
components from existing suppliers or to develop alternate supply sources would
adversely affect our operating results.
INTERNATIONAL SALES
A majority of our international sales are denominated in Euros. These sales
are subject to exchange rate fluctuations which could affect our operating
results negatively or positively, depending on the value of the U.S. dollar
against the Euro. International sales and operations may also be subject to
risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of technology, political instability,
trade restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the laws
of certain countries do not protect our products and intellectual property
rights to the same extent as the laws of the United
22
<PAGE>
States. There can be no assurance that these factors will not have an adverse
effect on our future international sales and, consequently, on our operating
results.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant degree upon the continuing
contributions of our senior management and other key employees. We believe that
our future success will depend in large part on our ability to attract and
retain highly-skilled engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be successful in attracting, integrating and retaining such personnel.
Failure to attract and retain key personnel could have a material, adverse
effect on our business, operating results or financial condition.
VOLATILITY OF STOCK PRICE
The market price of our common stock has fluctuated significantly over the
past several years and is subject to material fluctuations in the future in
response to announcements concerning us or our competitors or customers,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in product pricing
policies by us or our competitors, general conditions in the computer industry,
developments in the financial markets and other factors. In particular,
shortfalls in our quarterly operating results from historical levels or from
levels forecast by securities analysts could have an adverse effect on the
trading price of the common stock. We may not be able to quantify such a
quarterly shortfall until the end of the quarter, which could result in an
immediate and adverse effect on the common stock price. In addition, the stock
market has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies and
which have been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of our common stock.
LIQUIDITY
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. Our line of credit is secured by substantially all of our
assets. Under the terms of the agreement borrowings bear interest at a rate of
prime plus 0.75%. The amount that can be borrowed at any given time is
determined by the balance of our accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth. In addition to the financing we received in March 2000,
we may be required to seek additional financing before we can achieve positive
cash flow or in order to comply with covenants under the line of credit. In that
event, no assurance can be given that additional financing will be available or
that, if available, it will be available on terms acceptable to us, or our
shareholders. If adequate funds are not available to satisfy our short-term or
long-term capital requirements, we may be required to limit our operations
significantly.
ITEM 7A. MARKET RISK SENSITIVE INSTRUMENTS
Our market risk sensitive instruments as of December 31, 1999 are primarily
exposed to interest rate risks. Because of the short-term maturities of these
instruments, a 100 basis point change in related interest rates would not have a
material effect on their fair value.
Effective January 2000 a majority of our international sales will be
denominated in Euros. These sales are subject to exchange rate fluctuations
which could affect our operating results negatively or positively, depending on
the value of the U.S. dollar against the Euro.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ 25
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 26
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... 27
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... 29
Notes to Consolidated Financial Statements.................. 30
Supplementary Data: Quarterly Financial Data (Unaudited).... 41
</TABLE>
24
<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, 1999 and 1998, 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,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Mountain View, California
February 10, except as to Note 11,
which is as of March 30, 2000
25
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................... $ 4,781 $10,045
Short-term investments.................................. 3,558 11,314
Accounts receivable, net of allowances of $5,301 and
$3,550 as of December 31, 1999 and 1998,
respectively.......................................... 21,987 21,590
Inventories............................................. 15,082 14,362
Deferred income taxes................................... -- 3,126
Prepaid assets.......................................... 4,532 3,214
------- -------
Total current assets...................................... 49,940 63,651
Property and equipment, net............................... 3,651 3,850
Deferred income taxes..................................... -- 3,496
Other assets.............................................. 3,173 4,149
------- -------
Total assets................................................ $56,764 $75,146
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................ $10,419 $10,438
Accrued expenses........................................ 4,739 5,647
Deferred revenue........................................ 3,384 6,105
Income taxes payable.................................... 277 274
Current portion of capital lease obligations............ 69 90
------- -------
Total current liabilities................................. 18,888 22,554
Long-term portion of capital lease obligations............ 69
Commitments
Shareholders' equity:
Undesignated preferred stock: 3,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common stock, $0.001 par value: 30,000,000 shares
authorized; 16,432,921 and 16,049,130 shares issued
and outstanding as of December 31, 1999 and 1998,
respectively.......................................... 16 16
Capital in excess of par value.......................... 61,333 59,721
Accumulated deficit..................................... (23,473) (7,214)
------- -------
Total shareholders' equity................................ 37,876 52,523
------- -------
Total liabilities and shareholders' equity.................. $56,764 $75,146
======= =======
</TABLE>
See accompanying notes.
26
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Hardware products and services............................ $ 98,500 $ 81,194 $100,555
Software licenses and services............................ 10,530 24,402 32,845
-------- -------- --------
Total net revenues.......................................... 109,030 105,596 133,400
Cost of revenues:
Hardware products and services............................ 63,402 59,337 71,118
Software licenses and services............................ 2,626 7,693 9,957
-------- -------- --------
Total cost of revenues...................................... 66,028 67,030 81,075
-------- -------- --------
Gross profit................................................ 43,002 38,566 52,325
Operating expenses:
Research and development.................................. 12,935 13,213 14,179
Marketing and selling..................................... 33,027 31,124 30,455
General and administrative................................ 6,885 5,231 6,102
Business restructuring.................................... (138) 996 --
Acquired in-process research and development.............. -- 1,448 --
Litigation settlement (credit)............................ -- -- (147)
-------- -------- --------
Total operating expenses.................................... 52,709 52,012 50,589
-------- -------- --------
Operating income (loss)..................................... (9,707) (13,446) 1,736
Interest income............................................. 564 1,609 1,946
Interest expense............................................ -- (14) (51)
Other income, net........................................... -- 2,090 200
-------- -------- --------
Income (loss) before income taxes........................... (9,143) (9,761) 3,831
Provision for income taxes (income tax benefit)............. 7,116 (658) 1,150
-------- -------- --------
Net income (loss)........................................... $(16,259) $ (9,103) $ 2,681
======== ======== ========
Basic earnings per share:
Net income (loss) per share............................... $ (1.00) $ (0.56) $ 0.16
======== ======== ========
Shares used in per share computations..................... 16,192 16,393 16,725
======== ======== ========
Diluted earnings per share:
Net income (loss) per share............................... $ (1.00) $ (0.56) $ 0.15
======== ======== ========
Shares used in per share computations..................... 16,192 16,393 18,313
======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
------------------- IN EXCESS (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT OF PAR DEFICIT) EQUITY
-------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1996................ 17,037 $17 $ 68,200 $ (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 and retirement of common stock....... (1,191) (1) (12,220) -- (12,221)
Net loss........................................ -- -- 2,681 2,681
------ --- -------- -------- --------
Balances as of December 31, 1997................ 16,284 16 58,614 1,889 60,519
Issuance of common stock under Stock Option Plan
and Employee Stock Purchase Plan, including
related tax benefit........................... 384 2,150 -- 2,150
Sale of common stock............................ 750 1 6,937 -- 6,938
Fair value of warrants issued for business
acquisition................................... -- 2,690 -- 2,690
Repurchase and retirement of common stock....... (1,369) (1) (10,670) -- (10,671)
Net loss........................................ -- -- (9,103) (9,103)
------ --- -------- -------- --------
Balances as of December 31, 1998................ 16,049 16 59,721 (7,214) 52,523
Issuance of common stock under Stock Option Plan
and Employee Stock Purchase Plan.............. 519 -- 2,316 -- 2,316
Repurchase and retirement of common stock....... (135) -- (704) -- (704)
Net loss........................................ -- -- (16,259) (16,259)
------ --- -------- -------- --------
Balances as of December 31, 1999................ 16,433 $16 $ 61,333 $(23,473) $ 37,876
====== === ======== ======== ========
</TABLE>
See accompanying notes.
28
<PAGE>
NETWORK COMPUTING DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating actitivites:
Net income (loss)......................................... $(16,259) $ (9,103) $ 2,681
Reconciliation of net income (loss) to net cash provided
by (used in) operating activities:
Non-cash restructuring charges (credit)................. (138) 96 --
Depreciation and amortization........................... 3,618 3,022 3,287
Deferred income taxes................................... 6,622 (820) 404
Gain on sale of investment.............................. -- (2,090) --
Acquired in-process research and development............ -- 1,448 --
Changes in:
Accounts receivable, net.............................. (397) 3,558 (3,599)
Inventories........................................... (720) 5,782 (5,636)
Prepaid expenses...................................... 229 (278) 809
Accounts payable...................................... (19) (1,729) 6,828
Income taxes payable.................................. 3 (323) 237
Accrued expenses...................................... (2,081) (3,195) (22)
Deferred revenue...................................... (1,765) (2,182) 1,432
-------- -------- --------
Net cash provided by (used in) operating activites...... (10,907) (5,814) 6,421
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments................... (26,010) (16,229) (12,649)
Sales and maturities of short-term investments........ 33,766 15,155 14,248
Changes in other assets............................... (974) (230) 2,539
Net proceeds from sale of investment.................. -- 2,402 --
Acquisition of business............................... -- (3,037) --
Property and equipment purchases...................... (2,661) (1,704) (2,816)
-------- -------- --------
Net cash provided by (used in) investing activities..... 4,121 (3,643) 1,322
-------- -------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations....... (90) (155) (748)
Repurchases of common stock........................... (704) (10,671) (12,221)
Proceeds from issuance of stock, net.................. 2,316 9,088 2,634
-------- -------- --------
Net cash provided by (used in) financing activities..... 1,522 (1,738) (10,335)
-------- -------- --------
Change in cash and cash equivalents..................... (5,264) (11,195) (2,592)
Cash and cash equivalents:
Beginning of year..................................... 10,045 21,240 23,832
-------- -------- --------
End of year........................................... $ 4,781 $ 10,045 $ 21,240
======== ======== ========
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
======== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS Network Computing Devices, Inc. was incorporated on
February 17, 1988. We provide thin client hardware and software that delivers
simultaneous, high-performance, easy-to-manage and cost effective access to any
application from thin client, UNIX and PC desktops. Our product lines include
the NCD THINSTAR Windows-based terminals and NCD EXPLORA network terminals, and
NC200 AND NC400 network computers, NCD THINPATH software to extend the
functionality reach of NCD THINSTAR Windows-based terminals, NCD THINPATH
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.
LIQUIDITY The accompanying financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, during the years ended December 31, 1999 and 1998, we
incurred losses of $16,259,000 and $9,103,000, respectively and we have an
accumulated deficit of $23,473,000 at December 31, 1999. These factors, among
others, may indicate that we will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or the amounts or classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
Our ability to continue as a going concern is dependent on our ability to
raise additional capital or obtain continued financing and ultimately to achieve
profitability and positive cash flow.
As previously disclosed, we are actively engaged in exploring several
strategic alternatives to enhance shareholder value. We are also in discussions
with third parties concerning additional investment in the Company. No
assurances can be given that we will be successful in these initiatives or that
we will achieve profitability or positive cash flow. If we are unable to
conclude any of these initiatives and bring the Company to profitability or
positive cash flow, there can be no assurances we can continue as a going
concern.
CONSOLIDATION The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. The functional
currency for the Company and its subsidiaries is the U.S. dollar. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS We consider all highly liquid investments purchased with a
maturity date of three months or less to be cash equivalents. Cash equivalents
at December 31, 1999 and 1998 consist of bank deposits, commercial paper and
corporate debt securities.
SHORT-TERM INVESTMENTS We have classified all of our 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
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," and included in other
assets. Capitalized software is amortized to operations over eighteen months to
three years, based on the expected life of the product. Capitalization ceases
when the product is available for release to customers. We had unamortized
software licenses of $126,000, $78,000, and $293,000 at December 31, 1999, 1998
and 1997, respectively. Amortization expense of capitalized software licenses
was $150,000, $215,000, and $603,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
INCOME TAXES Under the asset and liability method of SFAS No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES Our management has made a number of estimates and
assumptions relating to the valuation and reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of our 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 We
evaluate our long-lived assets and certain identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Recoverability of intangible assets is measured by a comparison of the carrying
amount to the assets' fair value calculated using discounted future cash flows
with a discount rate commensurate with the risks involved with the cash flow
stream.
NET 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 outstanding (1,588,000 shares in 1997), when dilutive,
using the treasury stock method. At December 31, 1999 and 1998 there were
4,676,490 and 4,757,098 options and warrants outstanding, respectively, that
could potentially dilute earnings per share ("EPS") in the future that were not
included in the computation of diluted EPS because to do so would have been
antidilutive for those years.
STOCK-BASED COMPENSATION We account for our stock-based compensation plans
using the intrinsic value method. As such, compensation expense is recorded on
the date of grant if the current market price of the underlying stock exceeded
the exercise price.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement as amended by SFAS No. 137, "Deferral of the Effective Date of FASB
Statement No. 133," establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The statement is effective for fiscal quarters of all
fiscal years beginning after June 15, 2000. We will adopt the standard no later
than the first quarter of fiscal year 2001 and we are in the process of
determining the impact that adoption will have on our consolidated financial
statements.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to
conform with current year presentation.
NOTE 2. ACQUISITION
On December 31, 1998, we acquired Tektronix' Network Displays Business unit
("NWD") for $3.0 million in cash and warrants to purchase one million shares of
our common stock over a term of five years at an exercise price of $8.00 per
share. The fair value of the warrants issued in the acquisition was calculated
using the Black-Scholes pricing model with the following assumptions:
contractual life of 5 years, dividend yield of 0%, risk free interest rate of
4.85% and expected volatility of 61.5%. Direct costs of the acquisition totaled
approximately $200,000. The acquisition was accounted for as a purchase business
combination with a total purchase price of $5.9 million. The purchase price was
allocated to $1.7 million of net assets acquired (primarily inventory),
$1.4 million to in-process research and development and $2.8 million to other
intangible assets which are being amortized over a 7 year useful life using the
straight-line method. In addition to acquiring certain assets of NWD,
approximately 83 former NWD employees, primarily in sales, marketing and
engineering roles, joined NCD. In conjunction with this acquisition, we
undertook various restructuring activities to eliminate redundancies with the
acquired business. We recorded a charge of approximately $1.0 million related to
these restructuring activities. NWD's results of operations have been included
in the accompanying financial statements from December 31, 1998. See Note 5
contained herein.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SHORT-TERM INVESTMENTS
The fair value of short-term investments consisted of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Corporate debt securities.................................. $3,558 $ 9,799
Commercial paper........................................... -- 1,515
------ -------
$3,558 $11,314
====== =======
</TABLE>
There were no material unrealized gains or losses at December 31, 1999 and
1998.
The maturities of available-for-sale securities as of December 31, 1999 were
as follows (in thousands):
<TABLE>
<CAPTION>
WITHIN
ONE YEAR
--------
<S> <C>
Corporate debt securities................................... $3,558
======
</TABLE>
NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Inventories as of December 31 consisted of (in thousands):
Purchased components and sub-assemblies................... $ 9,825 $10,733
Work in process........................................... 826 1,285
Finished goods............................................ 4,431 2,344
------- -------
$15,082 $14,362
======= =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Property and equipment as of December 31 consisted of (in
thousands):
Office equipment.......................................... $10,039 $14,369
Machinery and equipment................................... 5,718 6,599
Demonstration equipment................................... 3,008 3,847
Furniture and fixtures.................................... 1,757 2,117
Leasehold improvements.................................... 1,552 2,143
------- -------
22,074 29,075
Less accumulated depreciation and amortization.............. 18,423 25,225
------- -------
$ 3,651 $ 3,850
======= =======
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. CONSOLIDATED BALANCE SHEET AND STATEMENT OF CASH FLOWS COMPONENTS
(CONTINUED)
Included in property and equipment is approximately $447,000 of equipment
under capital leases as of December 31, 1999 and 1998. Accumulated amortization
related to this equipment is approximately $447,000 and $363,000 as of
December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued expenses as of December 31 consisted of (in
thousands):
Payroll-related costs..................................... $ 2,465 $ 2,904
Royalties................................................. 215 285
Warranty.................................................. 760 906
Other accrued expenses.................................... 1,299 1,552
------- -------
$ 4,739 $ 5,647
======= =======
</TABLE>
Income taxes paid were $496,000, $283,000 and $262,000 for 1999, 1998 and
1997, respectively. Interest paid was $13,000, $14,400 and $51,000 for 1999,
1998 and 1997, respectively.
NOTE 5. BUSINESS RESTRUCTURING
On December 31, 1998, we acquired certain assets of Tektronix, Inc.'s NWD
division. As a result of this acquisition, we reduced our workforce and
discontinued certain activities that were redundant with the acquired business.
As a result of the restructuring action, a charge to operations of $1.0 million
was recorded for 1998. The charge, comprising employee severance benefits
($546,000), facility exit costs ($153,000), the write-off of prepaid royalties
($96,000) and the termination of a sales consulting agreement ($201,000), has
been reported as an operating expense for 1998. The restructuring plan included
the termination of approximately 13 employees, primarily in sales and
engineering roles, and the closure of four of our offices in the United States.
Total cash charges amounted to $900,000, none of which had been paid as of
December 31, 1998 and are included in accrued expenses. By the end of 1999 it
was determined that the plan was substantially complete, and an operating credit
of $138,000 was recorded. A total of 13 employees were terminated under the plan
at a total cost of $532,000.
NOTE 6. SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM In April 1997, our Board of Directors adopted a
program to repurchase up to 1,000,000 shares of our common stock during the
12-month period ended April 30, 1998. Repurchases were made under the program
using our cash resources. Shares repurchased are available for issuance under
our stock plans and for other corporate purposes. In September 1997, the
repurchase program was completed with an aggregate of 1,000,000 shares
repurchased at prices ranging from $8.38 to $12.00 per share for a total
purchase price of $10.7 million. In November 1997, our Board of Directors
adopted an additional program to repurchase up to 1,000,000 shares of our common
stock during the 12-month period ended October 31, 1998. In July 1998, the
second repurchase program was completed with an aggregate of 1,000,000 shares
repurchased at prices ranging from $6.50 to $9.63 at a total aggregate price of
$8.5 million. In June 1998, we announced an additional program to repurchase up
to 750,000 shares of our common stock. Repurchases of 694,800 shares have been
made as of December 31, 1999 under the third program at prices ranging from
$4.94 to $8.25 at a total aggregate price of $4.4 million. Total repurchases of
2,694,800 shares were made under all three programs at prices ranging from $4.94
to $12.00 per share for a total purchase price of $23.6 million.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN In 1992, we established the 1992 Employee Stock
Purchase Plan and have reserved 1,650,000 shares of common stock for issuance
thereunder. The plan permits eligible employees to purchase common stock through
payroll deductions of up to 10 percent of their base earnings. The plan has an
annual offering period that is divided into two purchase periods of six months
each. 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 annual offering period (or
the commencement of the employee's participation, if later) or the end of the
current six month purchase period. As of December 31, 1999, 1,468,501 shares
have been issued under this plan, of which 184,194 were issued in 1999.
STOCK OPTION PLANS As of December 31, 1999, we had reserved 548,000 shares,
500,000 shares and 300,000 shares of common stock for issuance under our 1999
Stock Option Plan, the 1999 Non Qualified Stock Option Plan and the 1994 Outside
Directors' Stock Option Plan, respectively ("collectively the Plans"). During
1999 our 1989 Stock Option Plan expired and was replaced by the 1999 Stock
Option Plan. A total of 548,000 shares that were still available for grant at
the time the 1989 Stock Option Plan expired were allocated to the 1999 Stock
Option Plan. Under the 1999 Stock Option Plan, options are granted to employees,
officers, directors and consultants to purchase shares of our common stock at
not less than the fair market value of common stock at the grant date (for
incentive stock options) or 85% of the fair market value of such common stock
(for nonstatutory stock options). Options generally vest and become exercisable
to the extent of 25% one year from grant date with the remainder vesting ratably
over the 36-month period thereafter. Prior to August 1994, the options generally
expired five years from grant date. Since August 1994, the options expire ten
years from grant date. Under the 1994 Outside Directors' Stock Option Plan,
options are granted to outside directors to purchase shares of our common stock
at not less than the fair market value of common stock at the grant date.
Options vest and become exercisable to the extent of 25% 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, 1999, 2,452,598 options
were exercisable under the Plans.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $3.98, $5.49, and $6.37, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999--dividend yield of 0%, expected volatility of
83%, risk-free interest rate of between 4.68% and 6.41%, and an expected life of
5 years; 1998--dividend yield of 0%, expected volatility of 84%, risk-free
interest rate of between 4.68% and 4.71%, and an expected life of 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.
We apply Accounting Principles Board ("APB") Opinion No. 25 in accounting
for our stock options issued to employees and, accordingly, no compensation cost
has been recognized for our stock plans in the accompanying consolidated
financial statements. Had we determined compensation cost based on the fair
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
value at the grant dates for the Plans under SFAS No. 123, our net income (loss)
and income (loss) per share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported............................................... $(16,259) $(9,103) $2,681
Pro forma................................................. (19,056) (12,396) (554)
Basic income (loss) per share:
As reported............................................... $ (1.00) $ (0.56) $ 0.16
Pro forma................................................. (1.18) (0.76) (0.03)
Diluted income (loss) per share:
As reported............................................... $ (1.00) $ (0.56) $ 0.15
Pro forma................................................. (1.18) (0.76) (0.03)
</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, we 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 our stock. The
1997 cancellations and grants in the summary below and pro forma amounts above
include the 316,120 options.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
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, 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
Options authorized........................................ 1,098,000 -- --
Options granted........................................... (1,029,400) 1,029,400 5.91
Options expired........................................... (841,979) -- --
Options cancelled......................................... 765,259 (765,259) 7.30
Options exercised......................................... -- (344,749) 4.17
---------- --------- -----
Balances as of December 31, 1999............................ 350,460 3,676,490 $5.37
========== ========= =====
</TABLE>
The following table summarizes information about options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- ----------------------------
WEIGHED-
AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCUSE PRICE
- ---------------------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.50...................... 1,385,563 6.44 $ 3.50 1,328,637 $ 3.50
3.56 to 5.38.............. 928,895 7.71 4.69 413,407 4.03
5.46 to 7.88.............. 737,821 7.76 6.97 344,226 7.04
7.98 to 10.44............. 594,211 7.99 8.47 351,328 8.56
12.62 to 12.63............. 30,000 7.41 12.63 15,000 12.63
--------- ---- ------ --------- ------
$ 3.50 to 12.63............. 3,676,490 7.28 $ 5.37 2,452,598 $ 4.87
========= =========
</TABLE>
We have warrants outstanding to purchase up to 1,000,000 shares of our
common stock at an exercize price of $8.00. The warrants are exercizable until
they expire on December 31, 2003
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The components of our provision for income taxes (income tax benefit) for
the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal................................................... $ -- $(202) $ (226)
State and other........................................... 494 101 312
------ ----- ------
Total current............................................... 494 (101) 86
------ ----- ------
Deferred
Federal................................................... 5,433 (710) 355
State and other........................................... 1,189 (110) 49
------ ----- ------
Total deferred.............................................. 6,622 (820) 404
------ ----- ------
Charge in lieu of income taxes associated with the exercise
of stock options.......................................... -- 263 660
------ ----- ------
$7,116 $(658) $1,150
====== ===== ======
</TABLE>
Total income tax expense (benefit) differs from the expected tax expense
(benefit) (computed by applying the U.S. federal income tax rate of 34% to loss
before income taxes) as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
Tax expense (benefit) at federal statutory rate............. $(3,109) $(3,319) $1,303
State income taxes, net of federal benefit.................. 805 67 30
Tax exempt investment income................................ -- -- (53)
Research and experimental credit............................ (342) (438) (63)
Not operating losses and temporary differences for which no
tax benefit is recognized................................. 9,799 2,995 --
Other....................................................... (37) 37 (67)
------- ------- ------
$ 7,116 $ (658) $1,150
======= ======= ======
</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>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accruals, allowances and reserves......................... $5,534 $6,152
Net operating loss and tax credit carryforwards........... 12,453 5,566
Property and equipment, principally due to differences in
depreciation and capitalized leases..................... 196 626
Intangible assets......................................... 627 579
------ ------
Total gross deferred tax assets............................. 18,810 12,923
Less valuation allowance.................................... 18,810 6,305
------ ------
Deferred tax asset.......................................... -- 6,618
------ ------
Deferred tax liabilities.................................... -- --
------ ------
Net deferred tax assets..................................... $ -- $6,618
====== ======
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
In light of our recent history of operating losses, we have provided a
valuation allowance for all of our deferred tax assets as we are presently
unable to conclude that it is more likely than not that the deferred tax assets
will be realized. As a result, the deferred tax valuation allowance increased by
$12.5 million from 1998. As of December 31, 1999, we have a net operating loss
carryover for federal and California income tax purposes of approximately
$23.2 million and $6.9 million, respectively. In addition, we have federal and
California research and development credit carryforwards of $1.7 million and
$1.4 million, respectively. Our federal net operating loss and research and
development credit carryforwards will expire in the years 2010 through 2019 if
not utilized. Our California net operating loss carryforwards will expire in the
years 2000 through 2004. The California research and development credit can be
carried forward indefinitely.
NOTE 8. CREDIT CONCENTRATIONS
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash equivalents, short-term investments and
trade receivables. We place our cash equivalents and short-term investments with
high-credit qualified financial institutions and, by policy, limits the amount
of credit exposure to any one financial institution. Concentrations of credit
risk with respect to trade receivables have increased as we have moved to a two
tier distribution model. Four customers, Adtcom, Tech Data, Ingram Micro and
UCSI Distribution comprise more than 50% of our gross trade receivables.
NOTE 9. COMMITMENTS AND CONTINGENCIES
We lease our principal facilities under noncancellable operating lease
agreements that expire through 2003. We also lease office facilities in several
locations in the United States, and in locations in Australia, Canada, France,
Germany, Japan, Sweden and the United Kingdom, which are used as sales offices.
Rent expense was approximately $2,440,000, $2,377,000 and $2,552,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, net of sublease
income of $710,000, $750,000, and $700,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
We also lease certain equipment under capital leases. As of December 31,
1999, 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,
2000...................................................... $69 $2,551
2001...................................................... -- 1,267
2002...................................................... -- 822
2003...................................................... -- 279
Thereafter................................................ -- 141
--- ------
Total minimum lease payments................................ 69 $5,060
======
Less amounts representing interes........................... --
---
Present value of minimum lease payments..................... 69
Less current portion........................................ 69
---
Long-term capital lease obligations......................... $--
===
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The above future operating lease payments are anticipated to be offset by
the following sublease contract income:
<TABLE>
<S> <C>
2000........................................................ 746
2001........................................................ 307
------
Total sublease income....................................... $1,053
======
</TABLE>
NOTE 10. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
We have adopted the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers. The
method for determining what information to report is based on the way management
organizes data for making operating decisions and assessing financial
performance. Our chief operating decision maker is considered to be its
executive staff, consisting of the Chief Executive Officer and the Chief
Financial Officer. Primarily because we operate in one industry, thin client
computing, including related hardware and software, the executive staff reviews
financial information presented on a basis consistent with that presented in the
Consolidated Statements of Operations.
Sales to Adtcom and Tech Data represented 18% and 15%, respectively, of net
revenue for the year ended December 31, 1999. Sales to IBM accounted for 29% and
26% of net revenues for the years ended December 31, 1998 and 1997,
respectively.
Export sales to our international customers outside North America, primarily
Europe, comprised approximately 40%, 35% and 34% of net revenues for the years
ended December 31, 1999, 1998 and 1997, respectively.
International revenues by country are as follows as a percentage of total
international revenues:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Germany.................................................... 51% 23% 19%
France..................................................... 16% 15% 23%
United Kingdom............................................. 12% 40% 39%
Other...................................................... 21% 22% 19%
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
</TABLE>
Net fixed assets by region are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
United States............................................... $2,841 $3,239
Europe...................................................... 754 572
Other....................................................... 56 39
------ ------
Total....................................................... $3,651 $3,850
====== ======
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUBSEQUENT EVENTS
In January 2000, we acquired the business of Multiplicity LLC, a privately
held developer of advanced server management software for Microsoft's Windows NT
and Windows 2000 operating systems. The acquisition will be accounted for using
the purchase method. The purchase price was approximately $2.2 million plus a
stream of future payments based on revenue for the four year period following
the acquisition. We acquired assets and technology for cash. We expect to record
a charge for purchased in-process research and development in the first quarter
of 2000. Multiplicity LLC provides strategic performance analysis and capacity
planning solutions for networked Windows NT and Windows 2000 servers.
On March 30, 2000, we finalized a working capital line of credit with a
major financial institution, which provides us with up to $15.0 million of
available credit. Our line of credit is secured by substantially all of our
assets. Under the terms of the agreement borrowings bear interest at a rate of
prime plus 0.75%. The amount that can be borrowed at any given time is
determined by the balance of our accounts receivable. The agreement also
contains certain covenants, including the maintenance of minimum defined levels
of tangible net worth.
41
<PAGE>
QUARTERLY FINANCIAL DATA
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Hardware products and services..................... 22,785 25,341 26,859 23,515
Software licenses and services..................... 3,639 2,533 2,433 1,925
------ ------ ------ ------
Total net revenues................................. 26,424 27,874 29,292 25,440
Gross profit....................................... 11,250 11,513 11,545 8,694
Operating income (loss)............................ (2,232) (1,879) (588) (5,008)
Income before income taxes......................... (1,988) (1,783) (463) (4,909)
Net income......................................... (1,988) (1,783) (7,414) (5,074)
Net income per share:
Basic............................................ (0.12) (0.11) (0.46) (0.31)
Diluted.......................................... (0.12) (0.11) (0.46) (0.31)
Shares used in per share computations:
Basic............................................ 16,054 16,135 16,219 16,356
Diluted.......................................... 16,054 16,135 16,219 16,356
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
</TABLE>
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In August 1999 Mr. Gilbertson became Chairman of the Board of Directors.
Prior to that Mr. Gilbertson had served as President and Chief Executive Officer
since joining us in May 1996. Prior to joining us, 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. Prior thereto, he served as President and Chief Executive Officer of Data
Switch Corporation. Mr. Gilbertson holds an MBA fron 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.
In August 1999 Mr. Morin was promoted to President and Chief Executive
Officer. Prior to that Mr. Morin had served as Executive Vice President,
Operations & Finance and Chief Financial Officer since joining us in May 1996.
Prior to joining us, Mr. Morin served as Senior Vice President, Finance and
Administration for Memorex Telex Corporation from 1993 to 1996. Prior thereto,
he worked at Data Switch, where he was Executive Vice President. Mr. Morin's
background also includes more than ten years with Thyssen Bornemisza Inc. as
head of corporate development and general manager of several of its
subsidiaries. Mr. Morin holds MBAs from INSEAD and Harvard.
Mr. Wood joined us in August 1999 after two years as CFO at Sutmyn Storage
Corp. a Santa Clara, CA data storage company. Mr. Wood had joined Sutmyn
following seven years at Memorex Telex, most recently as senior vice president
of finance. His prior experience includes serving as a principal in the San
Francisco office of Ernst & Young. A 1980 graduate of the University of San
Diego, Mr. Wood is a CPA and also holds a J.D. degree from the University of San
Francisco School of Law.
In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President International
Operations since joining us in July 1997. Mr. DeSantis came to us from
Cincinnati Bell where he held positions as Vice President of European Operations
and International Sales. Mr. DeSantis holds a degree in Philosophy and
Mathematics from Fairfield University, and has completed post graduate work at
Stanford University.
Mr. Greer has served on our Board of Directors since November 1992.
Mr. Greer has been a senior managing director of Weiss, Peck & Greer, L.L.C., an
investment management company, or its predecessor, since 1970. Mr. Greer is also
a director of Federal Express Corporation and Robert Mondavi Corp., a winemaker.
Mr. Klein has served on our Board of Directors since March 1998. Since
January 1998 Mr. Klein has served as President and Chief Operating Officer of
NuvoMedia, Inc., a designer and developer of electronic books. From
February 1988 to December 1997, Mr. Klein served Network Computing Devices, Inc.
in various capacities, most recently as our Chief Technical Officer from
June 1996 to December 1997.
Dr. Low has served on our Board of Directors since December 1995. Dr. Low
has been President and Chief Executive Officer of PRL Associates, a technology
consulting firm, since 1992. Prior to forming PRL Associates, from 1957 to 1992,
Dr. Low served in various capacities at International Business Machines
Corporation ("IBM"), most recently as President of the General Products Division
from 1987 to 1990 and as General Manager, Technology and Products and a member
of IBM's Corporate Management Board from 1990 to 1992. Dr. Low held the title of
Vice President at IBM from 1984 to 1992. Dr. Low is also a director of Applied
Materials Corporation, a semiconductor equipment manufacturer, Solectron
Corporation and Veeco Instruments, as well as several privately-held
corporations.
43
<PAGE>
Mr. MacDonald has served on our Board of Directors since May 1995. From
October 1997 to April 1998, Mr. MacDonald served as a consultant for Active
Software, Inc., a software company. Mr. MacDonald also served as President and
Chief Executive Officer of Active Software from April 1996 to September 1997.
Mr. MacDonald was employed by Adobe Systems Incorporated, a software company,
from 1983 to March 1996, where he served as Vice President, Sales and Marketing
from 1983 to 1989 and as Senior Vice President and General Manager from 1989 to
1996. Mr. MacDonald is also a director of Verity, Inc., a software company as
well as an independent consultant for various companies in the software
industry.
Mr. Preuss has served on our Board of Directors since April 1995 and as
Chairman of the Board from January 1996 to August 1999. Mr. Preuss has served as
President of The Preuss Foundation, Inc., a non-profit corporation that sponsors
cancer research and related seminars and conferences, since it was founded in
1985. From 1970 to 1986, Mr. Preuss was President and Chairman of the Board of
Integrated Software Systems Corporation, which he founded. Mr. Preuss currently
serves as a director of Overland Data, a manufacturer of high-performance tape
solutions for back-up, interchange and archival storage. Mr. Preuss is also a
Regent of the University of California.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities. Officers, directors and greater than 10% beneficial owners
are required by SEC regulation to furnish us with copies of all reports they
file under Section 16(a). To our knowledge, based solely on our review of the
copies of such reports furnished to us and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to our
officers, directors and greater than 10% beneficial owners were complied with
during the year ended December 31, 1999, except for one late Form 5 filed by
Philip Greer reporting options granted to him in May 1999 pursuant to our
Outside Directors Stock Option Plan.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued to or on behalf of our Chief Executive Officer and
each of our four other most highly compensated executive officers (determined as
of December 31, 1999) (collectively, the "Named Officers") for the fiscal years
ended December 31, 1997, 1998 and 1999:
44
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
----------------------- STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION(2)
- --------------------------- -------- --------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Rudolph G. Morin(3).................... 1999 $298,333 $50,000 85,000 $ 7,200(4)
President and Chief Executive 1998 276,667 -- -- 14,267(4)
Officer 1997 257,500 31,250 -- 14,172(4)
Robert G. Gilbertson(5)................ 1999 $270,833 $ -- -- $ --
Former President and Chief 1998 314,583 9,591 -- 5,213
Executive Officer 1997 300,000 37,500 -- 4,950
John DeSantis(6)....................... 1999 $267,117(8) $35,682 85,000 $64,628(7)
Former Senior Vice President -- 1998 205,114(8) 74,094(8) -- --
Sales and Marketing 1997 102,206(8) 43,649(8) -- --
</TABLE>
- ------------------------
(1) Includes amounts (if any) deferred under the 401(k) Plan and commissions
earned in 1999.
(2) Except as otherwise noted, consists of the dollar value of premiums paid on
life insurance for the benefit of the Named Officer.
(3) Mr. Morin joined us in May 1996 and was promoted to President and Chief
Executive Officer in August 1999.
(4) Includes $7,200, $7,200 and $7,800 paid for automobile allowance in 1999,
1998 and 1997, respectively.
(5) Mr. Gilbertson joined us as President and Chief Executive Officer in
May 1996. In August 1999 he resigned as President and Chief Executive
Officer and was simultaneously appointed Chairman of the Board of Directors.
(6) Mr. DeSantis joined us in July 1997 and was promoted to Senior Vice
President, Sales and Marketing in April 1999. Mr. DeSantis' employment
terminated on April 3, 2000.
(7) Consists of $64,628 for relocation expenses.
(8) In April 1999 Mr. DeSantis was promoted to Senior Vice President, Sales and
Marketing. Prior to that Mr. DeSantis had served as Vice President
International Operations from July 1997 through March 1999. Of the $267,117
salary earned by Mr. DeSantis during 1999, $51,367 was earned during the
period January through March 1999 while serving in the capacity of Vice
President International Operations.
STOCK OPTION GRANTS
The following table contains information concerning grants of stock options
under our 1999 Stock Option Plan (the "1999 Option Plan") to the Named Officers
during the year ended December 31, 1999:
45
<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OPTION TERM(1)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (SHARES)(2) FISCAL YEAR(3) ($/SHARE) DATE 5%($) 10%($)
- ---- ----------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rudolph G. Morin............. 85,000 10.34% $5.375 5/4/09 $287,326 $728,141
Robert G. Gilbertson......... -- -- -- -- -- --
John DeSantis................ 85,000 10.34% $5.375 5/4/09 $287,326 $728,141
</TABLE>
- ------------------------
(1) Gains are reported net of the option exercise price but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of our Common Stock, as well as the
optionee's continued employment through the vesting period.
(2) Each option vests and becomes exercisable to the extent of 25% of the
underlying shares one year following the date of grant, with the remainder
vesting on a monthly basis ratably over the 36-month period thereafter.
(3) Options to purchase an aggregate of 821,900 shares of Common Stock were
granted to employees during the year.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information with respect to the Named Officers
concerning the exercise of options during 1999 and unexercised options held as
of December 31, 1999:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rudolph G. Morin......... -- -- 350,000 85,000 $1,531,250 $212,500
Robert G. Gilbertson..... -- -- 700,000 -- $3,062,500 --
John DeSantis............ -- -- 59,895 100,105 -- $212,500
</TABLE>
- ------------------------
(1) Based on the closing price of $7.875, as reported on The Nasdaq National
Market on December 31, 1999 (the last trading day prior to the fiscal
year-end).
(2) Sale price at time of exercise less exercise price.
COMPENSATION OF DIRECTORS
Non-employee directors are paid an annual retainer of $15,000 per calendar
year, payable semiannually, plus a fee of $1,500 for each meeting of the Board
of Directors they attend and $500 for each meeting of a committee they attend,
plus reimbursement for transportation and other expenses incurred in attending
such meetings. In addition to the foregoing compensation, Directors Preuss and
Low also receive a fee of $1,500 for each meeting of the Executive Committee
they attend. Under the 1994 Outside Directors' Stock Option Plan (the
"Directors' Plan"), each non-employee director is granted an initial option for
30,000 shares of Common Stock, followed by annual grants of options for 7,500
shares each,
46
<PAGE>
subject to the director's continuous service on the Board of Directors. In 1999,
no other compensation was paid to a director serving in such capacity.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
We entered into an employment agreement with Rudolph G. Morin effective
May 28, 1996. The original term of the agreement was two years and is subject to
automatic annual renewal for successive one-year terms unless either party
provides notice of termination at least 60 days prior to the end of each term.
The agreement fixes Mr. Morin's base salary, subject to increases, if any. On
August 25, 1999, the Compensation Committee approved an increase in Mr. Morin's
annual salary from $285,000 to $325,000, effective August 27, 1999. The
agreement provides for an incentive bonus award based on the achievement of
certain financial objectives, up to a maximum amount equal to 300% of base
salary. The agreement also provides for reimbursement of reasonable
out-of-pocket and ordinary expenses for commuting or relocating to the Mountain
View area and necessary business expenses incurred in performing services as
President and Chief Executive Officer and in his former role as Executive Vice
President, Operations & Finance and Chief Financial Officer. In May 1999, the
Compensation Committee approved a grant of 85,000 options to Mr. Morin under the
1999 Stock Option Plan. In 1996 pursuant to his agreement, Mr. Morin received
350,000 options to purchase shares of common stock under the 1989 Option Plan.
The agreement provides that these options will vest in full and become fully
exercisable in the event of any change in control. In the event Mr. Morin is
terminated other than for cause, or if he voluntarily terminates his employment
because of a material change in his job duties or title or specified acts of
misconduct by us, he is entitled under the agreement to receive a severance
payment equal to his then-current base salary for a period equal to the term of
employment remaining under the agreement (but not less than 12 months) and to
receive up to $40,000 in outplacement assistance.
We entered into an employment agreement with Robert G. Gilbertson effective
May 20, 1996. The agreement originally fixed Mr. Gilbertson's annual salary at
$300,000. On May 28, 1998, the Compensation Committee approved an increase in
Mr. Gilbertson's salary from $300,000 to $325,000, which was subsequently
reduced to $162,500 when Mr. Gilbertson assumed a role as half-time employee.
Mr. Gilbertson's agreement remains subject to further annual increases, if any,
and provides for an incentive bonus award based on the achievement of certain
financial objectives, up to a maximum amount equal to 300% of base salary. The
agreement also provides for reimbursement of reasonable out-of-pocket and
ordinary expenses for commuting or relocating to the Mountain View area and
necessary business expenses incurred in performing services as Chairman of the
Board. As part of his agreement, Mr. Gilbertson has been granted options to
purchase 700,000 shares of Common Stock. The agreement provides that these
options will become fully exercisable in the event of a change of control. The
agreement provides that all stock options currently held by Mr. Gilbertson under
the 1989 Option Plan and other outside plans will vest in full and become fully
exercisable in the event of any change in control after six months from
employment date. In the event Mr. Gilbertson is terminated other than for cause,
or if he voluntarily terminates his employment because of a material change in
his job duties or title or specified acts of misconduct by us, he is entitled
under the agreement to receive a severance payment equal to his then-current
base salary for a period equal to the term of employment remaining under the
agreement (but not less than 12 months) and to receive up to $40,000 in
outplacement assistance.
In April 2000, we entered into a Confidential Separation Agreement with John
DeSantis pursuant to which Mr. DeSantis resigned as Senior Vice President, Sales
and Marketing effective April 3, 2000. The agreement provides that, for a period
of six (6) months after April 3, 2000, Mr. DeSantis will receive severance
payments of $21,667 per month. Under the agreement, Mr. DeSantis has agreed to
provide consulting services through October 3, 2000 to facilitate the transfer
of responsibilities as Senior Vice President, Sales and Marketing and to hold
himself available to provide additional part-time consulting services as needed,
on a schedule consistent with such duties as Mr. DeSantis may have as a
full-time
47
<PAGE>
employee elsewhere. The agreement also provides that the stock options granted
to Mr. DeSantis will continue to vest through October 3, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to us relating to
the beneficial ownership of our Common Stock by (i) each person who is known by
us to be the beneficial owner of more than 5% of the outstanding shares of our
Common Stock, (ii) each executive officer named in the tables under "Executive
Compensation," (iii) each director, and (iv) all executive officers and
directors as a group, as of February 29, 2000:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS OWNED(1) PERCENT
- ---------------- --------- --------
<S> <C> <C>
Dimensional Fund Advisors Inc.(2)......................... 943,200 5.81%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Kiskiminetas Springs School(3)............................ 1,036,800 6.40%
1888 Brett Lane
Saltsburg, PA 15681
Alan Andreini(4).......................................... 1,171,600 7.20%
395 Hudson Street
New York, NY 10014
Robert G. Gilbertson(5)................................... 712,849 4.32%
Rudolph G. Morin(6)....................................... 361,282 2.20%
Gregory S. Wood........................................... 1,233 *
Peter Preuss(7)........................................... 111,250 *
Douglas H. Klein(8)....................................... 164,884 1.00%
Paul Low(9)............................................... 111,250 *
John DeSantis(10)......................................... 74,171 *
Philip Greer(11).......................................... 55,950 *
Stephen A. MacDonald(12).................................. 41,250 *
All executive officers and directors as a group (9
persons)(13)............................................ 1,634,119 9.91%
</TABLE>
- ------------------------
* Less than 1%
(1) Except as indicated and pursuant to applicable community property laws, we
believe that all persons named in the table have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them.
(2) Pursuant to Schedule 13G filed by Dimensional Fund Advisors Inc.
("Dimensional") on February 11, 2000, Dimensional is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940 which
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "Funds"). In its role as
investment advisor or manager, Dimensional possesses voting and investment
power over the securities described in this table and owned by the Funds.
All securities reported in this table are owned by the Funds, and
Dimensional disclaims beneficial ownership of such securities.
(3) Based on a Schedule 13G filed by Kiskiminetas Springs School
("Kiskiminetas") on February 10, 2000, Kiskiminetas is a non-profit
educational institution that has an endowment composed of Network Computing
Devices, Inc. common stock and certain other securities. The voting power
and the investment power of Kiskiminetas over the shares of common stock
vested in the Finance
48
<PAGE>
Committee of the Board of Trustees of Kiskiminetas (the "Finance
Committee"), which is exercised by the approval of the majority of the
members thereof. The Finance Committee is composed of seven members. The
Members of the Finance Committee are Alan J. Andreini, Michael Yukevich,
Jr., John A. Pidgeon, Allen R. Glick, Carl L. Kalnow, James P. Moore, Jr.,
Maynard H. Murch, IV, and Janice Fuellhart. Since the decision-making power
is vested in the Finance Committee, we need not be concerned with which
individuals are responsible for administering which brokerage account.
(4) On February 14, 2000, Alan Andreini filed a Schedule 13G Amendment
reflecting ownership of securities listed in this table for his own account
and by persons for whom he exercises trading authority. As of December 31,
1999, Mr. Andreini's accounts held 934,500 shares of common stock. As of
December 31, 1999, Mr. Andreini was authorized to exercise trading authority
over: (i) an account of Kiskiminetas at PaineWebber, which held 170,000
shares of common stock; (ii) the account of The Andreini Foundation (the
"Foundation") which held 23,500 shares of common stock; (iii) the account of
John D. Andreini (who is deceased) and Blanche M. Andreini (the "Parents")
at Cheevers Hand & Angeline, Inc., which held 41,700 shares of common stock;
and (iv) an account at Piper Jaffray, Inc. for the benefit of his son, Alan
J. Andreini, Jr., under Illinois Uniform Transfers to Minors Act, which held
2,000 shares of common stock. Pursuant to the rules promulgated under the
federal securities laws, Mr. Andreini may be deemed to be the beneficial
owner of the common stock owned by each such person because he has shared
investment and voting power in respect of the account of Kiskiminetas and
the account of the Parents, and has sole investment and voting power in
respect of the Foundation and of the account of his son. Mr. Andreini
disclaims beneficial ownership of the common stock held by Kiskiminetas, the
Parents and the Foundation.
(5) Includes 700,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(6) Includes 350,000 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(7) Includes 50,000 vested shares underlying options held by Stephen A. Hurwitz
as Trustee for Mr. Preuss' son, with respect to which Mr. Preuss disclaims
beneficial ownership. Also includes 61,250 shares of Common Stock that may
be acquired upon exercise of stock options that are currently exercisable or
will become exercisable within 60 days of February 29, 2000.
(8) Includes 157,666 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(9) Includes 111,250 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(10) Includes 61,979 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(11) Includes 7,200 shares held by Norman Gold as Trustee for Mr. Greer's
daughters, with respect to which Mr. Greer disclaims beneficial ownership.
Also includes 48,750 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable or will become
exercisable within 60 days of February 29, 2000.
(12) Includes 41,250 shares of Common Stock that may be acquired upon exercise
of stock options that are currently exercisable or will become exercisable
within 60 days of February 29, 2000.
(13) Includes 1,582,145 shares of Common Stock that may be acquired upon
exercise of stock options that are currently exercisable or will become
exercisable within 60 days of February 29, 2000.
49
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Bylaws provide that we shall indemnify our directors and officers to the
full extent permitted by Delaware law. We have entered into indemnification
agreements with our officers and directors containing provisions that may
require us, 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. We maintain
insurance policies covering officers and directors under which the insurer has
agreed to pay the amount of any claim made against our officers or directors for
wrongful acts that such officers or directors may otherwise be required to pay
or for which we are required to indemnify such officers and directors, subject
to certain exclusions.
50
<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 24 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, 1999:
None.
51
<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.
<TABLE>
<S> <C> <C>
NETWORK COMPUTING DEVICES, INC.
By: /s/ RUDOLPH G. MORIN
-----------------------------------------
Rudolph G. Morin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Dated: April 14, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RUDOLPH G. MORIN President, Chief Executive Officer
--------------------------------- and Director (Principal Executive April 14, 2000
Rudolph G. Morin Officer)
/s/ GREGORY S. WOOD Vice President, Chief Financial
--------------------------------- Officer and Secretary (Principal April 14, 2000
Gregory S. Wood Financial and Accounting Officer)
/s/ ROBERT G. GILBERTSON
--------------------------------- Chairman of the Board of Directors April 14, 2000
Robert G. Gilbertson
/s/ PETER PREUSS
--------------------------------- Director April 14, 2000
Peter Preuss
/s/ PHILIP GREER
--------------------------------- Director April 14, 2000
Philip Greer
/s/ DOUGLAS KLEIN
--------------------------------- Director April 14, 2000
Douglas Klein
/s/ PAUL R. LOW
--------------------------------- Director April 14, 2000
Paul R. Low
/s/ STEPHEN A. MACDONALD
--------------------------------- Director April 14, 2000
Stephen A. MacDonald
</TABLE>
52
<PAGE>
SCHEDULE II
NETWORK COMPUTING ACCOUNTS AND RESERVES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
CHARGED TO CHARGED TO
BALANCE AT GROSS OTHER BALANCE
BEGINNING REVENUES AND ACCOUNTS-- DEDUCTIONS-- AT END
OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
---------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful accounts....... $ 487 $ -- $ -- $ 2(1) $ 485
Sales returns and allowances.......... 3,063 8,871 -- 7,118(2) 4,816
Warranty reserve...................... 906 1,009 -- 1,155(3) 760
1998
Allowance for doubtful accounts....... $ 646 $ 203 $ -- $ 362(4) $ 487
Sales returns and allowances.......... 3,638 3,196 -- 3,771(5) 3,063
Warranty reserve...................... 631 389 -- 114(3) 906
1997
Allowance for doubtful accounts....... $1,111 $ 210 -- $ 675(6) $ 646
Sales returns and allowances.......... 3,486 1,372 -- 1,220(7) 3,638
Warranty reserve...................... 495 615 -- 479(3) 631
</TABLE>
- ------------------------
(1) Includes accounts written off of $2
(2) Includes amounts credited to income of $3,062 and accounts written off of
$4,056
(3) Warranty costs incurred
(4) Includes amounts credited to income of $210 and accounts written off of $152
(5) Includes amounts credited to income of $2,396 and accounts written off of
$1,375
(6) Includes amounts credited to income of $150 and accounts written off of $525
(7) Includes amounts credited to income of $907 and accounts written off of $313
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1(1) Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
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 International Business
Machines Corporation ("IBM"), as amended December 20,
1995.
10.40(5)+ X-Station Terminal Transition Agreement dated November 29,
1995 between Registrant and IBM, as amended December 13,
1995.
10.42(6)+ Alliance Agreement dated June 27, 1996 by and between the
Registrant and IBM.
10.44(7) IBM Letter of Intent and Funding Agreement.
10.45(7)+ Attachment 2 to Article 1--Development of the Alliance
Agreement dated November 4, 1997 between Registrant and
IBM.
10.46(7) Attachment 3 to Article 2--Manufacturing of the Alliance
Agreement dated November 4, 1997 between Registrant and
IBM.
10.47(8)+ Development and License Agreement dated March 6, 1998
between Registrant and Intel Corporation.
10.48(9) Asset Purchase Agreement dated December 31, 1998 between
Registrant and Tektronix, Inc.
10.49 Asset Purchase Agreement dated January 7, 2000 by and
between the Registrant and Multiplicity LLC
10.50 Global Procurement Agreement dated January 30, 2000 by and
between Registrant and Hitachi
10.51* Incentive Stock Option Agreement.
10.52* 1999 Stock Option Plan.
21.1 List of subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Constitutes a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form 10-K.
+ Confidential treatment has been granted as to a portion of this exhibit.
(1) Incorporated by reference to identically numbered exhibit to Registrant's
Form 8-A Registration Statement filed on January 14, 1999.
(2) Incorporated by reference to identically numbered exhibit to Registrant's
Form S-1 Registration Statement (No. 33-47246) which became effective on
June 4, 1992 (the "1992 Registration Statement").
(3) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1993.
(4) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1994.
(5) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1995.
(6) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1996.
(7) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1997.
(8) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-Q Report for the quarter ended March 31, 1998.
(9) Incorporated by reference to identically numbered exhibit to Registrant's
Form 10-K Report for the year ended December 31, 1998.
<PAGE>
EXHIBIT 10.49
ASSETS PURCHASE AGREEMENT
BETWEEN
MULTIPLICITY, L.L.C.
AND
NETWORK COMPUTING DEVICES, INC.
DATED
AS OF JANUARY 7, 2000
<PAGE>
ASSETS PURCHASE AGREEMENT
This ASSETS PURCHASE AGREEMENT (this "Agreement") made as of January 7,
2000, by and between Multiplicity, L.L.C., an Indiana limited liability company,
having an address of 9000 Keystone Crossing, Suite 900, Indianapolis, IN 46 240
(the "Company"), and Network Computing Devices, Inc., a Delaware corporation,
having an address of 350 N. Bernardo Avenue, Mountain View, CA 94043 (the
"NCD").
WHEREAS, NCD desires to purchase, pay for and acquire from the Company,
and the Company desires to sell, assign and transfer to NCD, substantially all
of the assets and business of the Company, subject to the conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used in this Agreement shall have
the meanings assigned to them elsewhere in this Agreement or as specified below:
"Articles of Organization" shall mean the Company's Articles of
Organization.
"Change of Control" of NCD shall mean (i) any transaction or series of
transactions pursuant to which any person or entity not currently an affiliate
of NCD acquires all, a majority of, or a controlling block of not less than
forty (40%) percent of the voting securities of NCD; or (ii) the merger or
combination of NCD with any other entity as a consequence of which the
shareholders of NCD prior to such merger or combination own less than half of
the voting securities of the surviving entity; or (iii) the election of a new
Board of Directors, a majority of whose Members are persons who were not
directors of NCD prior to such election.
"Closing Certificate" shall mean a certificate that (a) the Company
made or has caused to be made such investigations as are reasonably necessary in
order to permit it to verify the accuracy of the information set forth in such
certificate and (b) that such certificate does not misstate any material fact
and does not omit to state any fact necessary to make the certificate not
misleading.
"Confidential Information" shall mean each party's confidential or
secret processes, inventions, discoveries, improvements, formulae, plans,
materials, devices or ideas or other know-how, whether patentable or not, with
respect to any confidential or secret development or research work or with
respect
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to any other confidential or secret aspects of the business (including, without
limitation, customer lists, supplier lists and pricing arrangements with
customers or suppliers).
"Contracts Rights" shall mean rights of the Company under sales
agreements, franchises, license agreements, lease agreements, maintenance
agreements, procurement agreements, consultant agreements, employee agreements,
invention agreements and all other agreements of whatever nature or kind
relating to Software or Intellectual Property Rights.
"Designated Persons" shall mean the former and present Members,
officers and employees of the Company.
"Intellectual Property Rights" shall mean all intellectual property
rights, including, without limitation, all customer lists, price lists, sales
records, software, processes, inventions, trade secrets, know-how, development
tools and other proprietary rights owned by the Company pertaining to any
product or service manufactured, marketed or sold, or proposed to be
manufactured, marketed or sold (as the case may be), by the Company as of the
closing Date, including, but not limited to, the Software, or used, employed or
exploited in the development, license sale, marketing or distribution or
maintenance thereof, and all documentation and media constituting, describing or
relating to the above, including, without limitation manuals, memoranda,
know-how, records and disclosures, patents, patent applications, patent rights,
trademarks, trademark applications, trade names, service marks, service mark
applications, copyrights, copyright applications, know-how, franchises,
licenses, trade secrets, proprietary processes and formulae.
"Operating Agreement" shall mean the Company's Operating Agreement
Dated December 30, 1997, as amended to date, a true and complete copy of which
shall have been initialed by the Company and delivered to the Purchaser prior to
the Closing.
"Person" shall mean and include an individual, a corporation, a
partnership, a trust, an unincorporated organization, a limited liability
company, a joint stock company, a joint venture and a government or any
department, agency or political subdivision thereof.
"Purchaser", as used herein shall mean NCD, or any wholly-owned
subsidiary of NCD to which this Agreement has been duly assigned prior to
Closing, provided that any such assignment is reasonably acceptable to the
Company.
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<PAGE>
"Software" shall mean all software (including object and source code,
in machine readable and listing form), documentation (including internal
documentation, documentation made available to customers and training
materials), flowcharts, source code notes, software tools, compilers, test
routines and information, in whatever form, and all revisions, release levels
and versions of the foregoing offered for sale or license by the Company,
developed by or for the Company or in the possession of the Company as of the
Closing Date.
"Subsidiary" shall mean any entity of which the securities (including
stock, partnership interests, Membership interests, etc.) having a majority of
the ordinary voting power are, at the time as of which any determination is
being made, owned by the Company either directly or through one or more
Subsidiaries.
In addition, the following terms shall have the meaning ascribed to
each such term in the Section of the Agreement set forth opposite such term:
<TABLE>
<S> <C>
"Affiliate" 8.2(b)
"Assignment and Assumption" 2.4(b)
"Assets" 2.1
"Assumed Obligations" 2.4(a)
"Base Price" 4.2
"Controlling Purchaser Party" 8.2(c)
"Earn-Out" 4.3
"Earn-Out Year" 4.3
"Excluded Assets" 2.2
"Extraordinary Events" 8.2(c)
"Inventory" 2.1(c)
"Loan" 4.2
"Multiplicity Products" 4.4
"Purchase Price" 4.1
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<PAGE>
"Revenue" 4.4
"ROFF" (Right of First Refusal) 8.2(b)
"Transfer Instrument" 2.3
"Trigger Point" 4.3
</TABLE>
2. TRANSFER OF ASSETS.
2.1 PURCHASE AND SALE OF ASSETS. Upon the terms and subject to the
conditions set forth in this Agreement at the Closing (as such term is
hereinafter defined) the Company shall sell, grant, convey, assign, transfer and
deliver to the Purchaser, all of the assets and business of the Company (the
"Assets"), other than those assets specifically excluded pursuant to Section 2.2
of this Agreement. "Assets" as used herein shall include without limiting the
generality of the foregoing:
The Purchaser shall purchase and accept delivery of, all of the
tangible and intangible assets and properties of every kind and description,
wherever located, owned by the Company or in which the Company has an interest
as of the Closing Date (as hereinafter defined), other than those assets
specifically excluded pursuant to Section 2.2 of this Agreement, including,
without limiting the generality of the foregoing:
(a) All software;
(b) All Intellectual Property Rights of the Company;
(c) All inventories of software, or any portions thereof
(hereinafter the "Inventory");
(d) The Company's right, title and interest in the leases
listed on Schedule 2.1(d) attached hereto, including
all sub-leases, licenses, options and related
agreements, if any (the "Third-Party Leases");
(e) All copyrights and patents of the Company;
(f) All capital improvements, rent security on leases
being assumed by the Purchaser and all other deposits
and prepayments made by the Company which relate to
the assets being purchased by the Purchaser
hereunder;
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<PAGE>
(g) All furniture, fixtures, leasehold improvements,
machinery, equipment, computers, computer software,
and office furnishings and equipment owned or leased
by the Company;
(h) All vendor and vendor ID numbers of the Company;
(i) All books, files, papers, records and other data of
the Company (excluding the Company's minute books and
Member records) relating to the assets, business and
operations of the Company.
(j) All other tangible and intangible property of the
Company of any kind,
(k) The Company's franchises, permits and licenses to
conduct its business as conducted (other than the
Company's franchise as a limited liability Company),
contracts and agreements, customer lists, restrictive
covenants and similar obligations of present and
former Members, officers and employees, and all other
property and rights of every kind or nature owned by
the Company whether or not specifically referred to
in this Agreement and whether or not carried on the
books of the Company as an asset, except for those
assets specifically excluded herein.
2.2 EXCLUDED ASSETS. It is specifically understood and agreed by the
parties hereto that the Company is not selling, and the Purchaser is not
purchasing, the following assets of the Company (the "Excluded Assets"):
(a) Any cash and cash equivalents on hand and in bank accounts and
all securities;
(b) The accounts receivable of the Company, including accounts
receivable from officers or affiliates of the Company Members;
(c) The Company's franchise as a limited liability company, and
its minute books and Member interest;
(d) The personal effects of the Designated Persons set forth on
Schedule 2.2(d);
(e) Any claims or rights against customers and creditors accrued
prior to the Closing Date; and
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<PAGE>
(f) Any claims pursuant to policies of insurance or fidelity bonds
to the extent accrued prior to the Closing Date.
2.3 METHOD OF CONVEYANCE. The sale, transfer, conveyance, assignment
and delivery by the Company of the Assets to the Purchaser in accordance with
Section 2.1 hereof shall be effected on the Closing Date by the Company's
execution and delivery of instruments of conveyance and transfer by Bill of
Sale, in the form annexed as Exhibit A hereto (the "Transfer Instrument") or
such other instruments of conveyance as counsel for the Purchaser shall deem to
be reasonably required to transfer instruments. At the Closing, Company shall
transfer to the Purchaser, good and valid title to all of the Assets, free and
clear of any and all liens, encumbrances, claims and other restrictions of any
kind or nature whatsoever and subject only to the liabilities to be specifically
assumed by the Purchaser pursuant to Section 2.4 hereof.
2.4 ASSUMED OBLIGATIONS.
(a) On the Closing Date, the Purchaser shall assume, and shall agree to
satisfy and discharge as the same shall become due: only those
pre-closing liabilities and obligations of the Company, and agreements
and engagements of the Company listed on Schedule 2.4(a) hereof and
those fulfillment obligations arising post-closing in connection with
the processing and delivery to customers of confirmed customer orders
entered into by the Company in the ordinary course of business
(collectively as the "Assumed Obligations").
(b) In confirmation of the Purchaser's assumption of the Assumed
Obligations as set forth in this Section 2.4, the Purchaser shall
execute and deliver to the Company at Closing an Assignment and
Assumption Agreement in the form attached hereto as Exhibit B (the
"Assignment and Assumption").
(c) Except as set forth in this Section 2.4, the Purchaser shall not
assume or be responsible for any liability, obligation, debt or
commitment of the Company, including but not limited to: (a)
liabilities or obligations incident to, or arising out of or incurred
with respect to, this Agreement and the transactions contemplated
hereby (including any and all sales, use, income or other taxes arising
out of the transactions contemplated hereby), or (b) liabilities or
obligations which otherwise arise or are asserted by reason of events,
acts or transactions occurring, or the operation of the Company's
business, prior to the Closing Date.
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<PAGE>
3. BULK TRANSFER LAW COMPLIANCE.
This Agreement, and Purchaser's obligations hereunder, are conditioned
upon the Company's compliance with the Indiana Uniform Commercial Code-Bulk
Transfers Law, or the receipt of opinion of counsel to the Company, reasonably
satisfactory to counsel to the Purchase, that the transaction is exempt from the
provisions thereof.
4. PURCHASE PRICE
4.1 PURCHASE PRICE. The aggregate Purchase Price for the Assets (the
"Purchase Price") shall be the sum of the Base Price (as hereinafter defined)
and the Earn-Out (as hereinafter defined).
4.2 BASE PRICE. The Base Price shall be U.S. Two Million One Hundred
Thousand Dollars ($2,100,000) payable by the Purchaser to the Company at the
Closing, plus the forgiveness by Purchaser of a Seventy-Five ($75,000) Thousand
Dollar loan ("Loan") advanced by it to the Company.
4.3 EARN-OUT. In addition to the Base Price, the Purchaser shall pay to
the Company an amount (the "Earn-Out") based upon a percentage of Revenue (as
hereinafter defined) realized from the sale of Multiplicity Products (as
hereinafter defined) during each Earn-Out Year (as hereinafter defined).
(a) First Earn-Out Year - Ten percent (10%) of Revenue up to Three
Million Dollars ($3,000,000) and Twenty percent (20%) of
Revenue in excess of $3,000,000;
(b) Second Earn-Out Year- Nine percent (9%) of Revenue up to Nine
Million Dollars ($9,000,000) and Eighteen percent (18%) of
Revenue in excess of $9,000,000;
(c) Third Earn-Out Year - Eight percent (8%) of Revenue up to
Fifteen Million Dollars ($15,000,000) and Sixteen percent
(16%) of Revenue in excess of $15,000,000.
(d) Fourth Earn-Out Year - Five percent (5%) of Revenue.
The term "Earn-Out Year" shall mean four consecutive one-year periods, the first
of which shall commence on the earlier of (i) the first day of any month in
which the Purchaser recognizes Revenue of not less than Ten Thousand Dollars
($10,000) from the Multiplicity Products or (ii) May 1, 2000.
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<PAGE>
By way of illustration, if Revenue in the Second Earn-Out Year is
Fifteen Million Dollars ($15,000,000), then the Earn-Out due the Company shall
be the sum of (.09 x $9,000,000) and (.18 x $6,000,000), or One Million Eight
Hundred Ninety Thousand Dollars ($1,890,000).
If there is a material change in the outlook for sales of the
Multiplicity Products, the parties shall negotiate in good faith the reduction
of the Trigger Point for the doubling of the Earn-Out payment rate in the
successive years. ("Trigger Point" means the $9,000,000 amount in the Second
Earn-Out year and the $15,000,000 amount in the Third Earn-Out Year.)
4.4 MULTIPLICITY PRODUCTS AND REVENUE. For the purposes of this
Agreement; (a) the term "Multiplicity Products" shall mean all software
developed by the Company as of the Closing Date and any derivative software
products in existence or developed during the Earn-Out period and/or any part
thereof; (b) the term "Revenue" shall mean all revenues in respect of
Multiplicity Products booked, recognized or recorded by the Purchaser during an
Earn-Out Year, as determined on the accrual basis of accounting and in
accordance with generally accepted accounting principles consistently applied,
without reduction for non-cash expenses except for normal returns and customer
discounts, including all (i) fees from the sale, licensing, maintenance, support
and customization of Multiplicity Products,(ii) fees from training and
consultation related to Multiplicity Products, (iii) revenues received from
original equipment manufacturer agreements pertaining to Multiplicity Products,
(iv) fees from pay-per-use services, (v) Multiplicity Products web portal
revenue (whether generated from sales, advertisements, Internet partner fees,
pass-through transactions or referral fees), and (vi) revenues received or
realized from the embedding of Multiplicity Products in the hardware or software
of the Purchaser or of any venture in which the Purchaser is a partner, Member
or stockholder.
In the event of any bundled sales of Multiplicity Products with other
products of the Purchaser, the total sales price shall be apportioned as between
the components proportionate to the stand-alone prices of such components.
4.5 PAYMENT OF EARN-OUT. A determination as to the amount of the
Earn-Out due to the Company shall be forwarded to the Company within thirty (30)
days after the end of each calendar quarter, and shall be accompanied by (i) a
report substantially in the form set forth on Schedule 4.5, and (ii) the
Purchaser's check (or, if the
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<PAGE>
Company requests, a wire transfer) in payment of the full amount thereof.
Earn-Out amounts not paid when due shall accrue interest at the rate of one and
one-half percent (1.5%) per month.
The Company shall have the right, within a period of fifteen (15) days
after receipt of the determination of the Earn-Out, to notify the Purchaser that
the Company wishes to have an accountant of its choosing verify the Earn-Out
amount. This right may not be exercised more than once annually, but if so
exercised would apply to the prior four calendar quarters. The Purchaser shall
provide the Company's accountant with all documents reasonably required to
verify the Earn-Out amount. Such notice and examination shall be completed
within forty-five (45) days of the Company's receipt of the initial
determination. If the accountant for the Company shall determine that there is
an understatement of the amount due the Company and the accountants for the
Purchaser and the Company cannot agree, then the accountants for both the
Purchaser and the Company shall select a third party independent accounting firm
to make such review and the determination of such third party accountant shall
be binding upon both the Purchaser and the Company. If the accountant for the
Company shall determine that there was an understatement of the amount due the
Company and the accountant for the Purchaser agrees, and the amount of such
understatement varies by less than ten percent (10%) from the Purchaser's
original Earn-Out determination, the Company shall bear the expense of its
accountant. If the accountant for the Company and the Purchaser agree that the
Purchaser understated the Earn-Out by ten percent (10%) or more, the Purchaser
shall reimburse the Company for the reasonable expenses of its accountant
relating to such determination. If such third party accountant is required to be
retained, the expense thereof shall be borne (i) equally by Purchaser and by the
Company, if such accountant determines the Earn-Out amount is within ten percent
(10%) of the Purchaser's Earn-Out determination, and (ii) by the Purchaser, if
such accountant determines the Purchaser understated the Earn-Out amount by ten
percent (10%) or more.
4.6 MINIMUM EARN-OUT PAYMENTS. Notwithstanding any other provision
herein contained, the parties have fixed certain minimum Earn-Out payments, as
follows:
(a) For each managed session or equivalent of
Multiplicity Products provided by Purchaser to any
customer, a minimum of One Dollar ($1.00).
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<PAGE>
(b) None of the sums set forth in Section 4.6 hereof
shall become due and payable under any event if: The
Purchaser has complied with its obligations to make
Earn-Out payments to the Company and the fact that
the Company has not received any amount of Earn-Out
payments is not due to any clear and specified
default by the Purchaser. Both parties recognize that
the Earn-Out payments are conditional upon receipt of
Revenues, and to that extent are speculative. Neither
party has made any guarantees to the other of minimum
Earn-Out payments.
4.7 ALLOCATION OF PURCHASE PRICE. The parties agree that the Base
Purchase Price shall be allocated as set forth in Schedule 4.7, and that the
Earn-Out payments, when paid, shall further be allocated as set forth in
Schedule 4.7. The parties acknowledge that the allocation of the Purchase Price
hereunder was bargained for and negotiated and each agrees to report this
transaction for all purposes, including financial reporting and tax purposes, in
a manner consistent with such allocation in accordance with all applicable
regulations of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder. Neither party shall voluntarily take any inconsistent
position thereafter whether in the course of an Internal Revenue Service audit
or otherwise.
4.8 PUBLIC OFFERING RIGHTS. In the event Revenues realized from
Multiplicity Products become a substantial part (ten (10%) percent or more) of
the revenues of NCD on a consolidated basis, and in the event that NCD shall
thereafter file a registration statement relating to any underwritten public
offering of its capital stock, or of the capital stock of any subsidiary or
business unit thereof containing the Multiplicity Products or any "tracking"
stock thereof, none of which is currently contemplated, then, subject to the
consent of the underwriters, which the Purchaser shall exercise its best efforts
to obtain, the current unit holders of the Company shall be offered, the option
to subscribe as "friends" of the Company and to, purchase and pay for a small
fraction (approximately 2%) of such underwritten securities, in amounts to be
determined by the underwriter, at the same price and on the same terms as such
securities are being offered to the public. This right shall terminate on
December 31, 2004. No representation has been made that this provision is or
will be of value to the Unit holders or that if an offering of the type
described becomes available, that the right to subscribe will be a valuable
right. Any such right will require the delivery of a valid prospectus.
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<PAGE>
5. CLOSING. Subject to the satisfaction of the conditions set forth in
Sections 9 and 10 hereof, the closing of the transactions contemplated by this
Agreement (the "Closing") shall occur at the offices of the Purchaser at 11:00
a.m. PST on January 7, 2000, or at such other time and place as the parties may
mutually agree (the "Closing Date").
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In order to induce
the Purchaser to enter into and consummate the transactions contemplated hereby,
the Company hereby represents and warrants to and covenants and agrees with, the
Purchaser, as of the date hereof and as of the Closing Date, as follows:
6.1 ORGANIZATION. The Company (a) is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Indiana, (b) has all requisite corporate power and authority to own, lease and
operate its properties, to carry on its business as presently conducted and to
execute, deliver and perform this Agreement, and (c) has never conducted
business under any name other than that set forth in this Agreement.
6.2 AUTHORIZATION OF THIS AGREEMENT. Except as set forth on Schedule
6.2, the execution, delivery and performance by the Company of this Agreement
and of each and every Agreement, document and instrument contemplated hereby and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by all requisite action, and the Agreement constitutes, and when
executed and delivered the Instruments of Conveyance and the Assignment and
Assumption will constitute, the valid and binding obligation of the Company,
each enforceable in accordance with their terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity.
Except as set forth on Schedule 6.2, the execution and delivery of this
Agreement by the Company, the consummation of the transactions contemplated
hereby and compliance with the provisions hereof by each of the Company, will
not (a) violate any provision of law, statute, rule or regulation, or any
ruling, writ, injunction, order, judgment or decree of any court, administrative
agency or other governmental body applicable to the Company or (b) conflict with
or result in any breach of any of the terms, conditions or provisions of, or
constitute (with due notice or lapse of time, or both) a default (or give rise
to any right of termination, cancellation or acceleration) under, the Articles
of Organization or Operating Agreement, or under any note, indenture, mortgage,
lease, purchase or sales order or other material
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<PAGE>
contract, agreement or instrument to which the Company is a party or by which it
or any of its property is bound or affected, or (c) result in the creation of
any lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company.
6.3 NO CONSENTS OR APPROVALS REQUIRED. Except as set forth on Schedule
6.3, no consent, approval or authorization of, or declaration to, or filing
with, any Person is required for the valid authorization, execution, delivery
and performance by the Company of this Agreement.
6.4 EQUITY INVESTMENTS. The Company has never had, nor does it
presently have, any Subsidiaries, nor has it owned, nor does it presently own,
any capital stock or other proprietary interest, directly or indirectly, in any
corporation, limited liability company, association, trust, partnership, joint
venture or other entity.
6.5 FINANCIAL INFORMATION.
(a) The Company has previously delivered to the Purchaser an
unaudited balance sheet of the Company (the "Balance Sheet") for the period
ended November 30, 1999 (the "Balance Sheet Date"), and the related statement of
operations,(all of the foregoing, collectively, the "Financial Statements").
(b) The Financial Statements (together with any notes thereto)
(i) are true, correct and complete in all material respects, (ii) are in
accordance with the books and records of the Company, (iii) fairly present the
financial condition of the Company as of the date indicated and the results of
operations of the Company for the period indicated and (iv) have been prepared
in accordance with generally accepted accounting principles consistently
applied.
6.6 ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) which
were not provided for or disclosed in the Financial Statements. To the Company's
knowledge, all liability reserves established by the Company are adequate in all
respects. There are no loss contingencies (as such term is used under applicable
standards issued by the Financial Accounting Standards Board) which were not
adequately provided for in the Financial Statements.
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6.7 ABSENCE OF CHANGES. Since the Balance Sheet Date, the Company has
conducted its business only in the ordinary course consistent with past practice
and there has not been, and the Company has not agreed to cause:
(a) any borrowing or agreement to borrow any funds or to
create any liability or obligation of any nature whatsoever (contingent or
otherwise), other than (i) current liabilities or obligations incurred in the
ordinary course of business; and (ii) the Loan.
(b) any waiver of any material right of the Company or the
cancellation of any debt or claim held by the Company;
(c) any declaration or payment of dividends on, or other
distributions with respect to, or any direct or indirect redemption or
acquisition of, or any sale or issuance of any Membership interest in the
Company, or any agreement or commitment therefor;
(d) any mortgage, pledge, lien, sale, assignment or transfer
of any tangible or intangible assets of the Company, except with respect to
tangible assets in the ordinary course of business consistent with past
practice;
(e) any loan or advance or guarantee of indebtedness by the
Company to any Person or any agreement or commitment therefor except as noted in
subsection (a) above;
(f) any damage, destruction or loss (whether or not covered by
insurance) other than ordinary wear and tear adversely affecting the assets,
property or business of the company;
(g) any increase, direct or indirect, in the compensation paid
or payable to Designated Persons;
(h) any change in the accounting or tax reporting methods or
practices followed by the Company;
(i) any adverse change in any material contract or agreement
by which the Company or its assets are bound;
(j) any change in the Company's accounting, tax reporting,
billing or collections principles, methods, policies or procedures, nor any
failure on the part of the Company to comply with such principles, methods,
policies and procedures; or
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(k) any strike or any material controversies or unsettled
grievances pending or threatened, between the Company and any of its employees
or a collective bargaining organization representing or seeking to represent
such employees.
6.8 TAX MATTERS. All federal, state and local tax returns and tax
reports (collectively the "Returns")required to be filed by the Company have
been filed with the appropriate governmental agencies in all jurisdictions in
which such returns and reports are required to be filed and all of the foregoing
are true and correct and complete. All taxes (including interest and penalties)
required to have been paid with such Returns or accrued by the Company have been
fully paid or are adequately provided for in the Financial Statements (the
"Service"). No issues have been raised by the Service or any other taxing
authority in connection with any of the Returns, and no waivers of statutes of
limitations have been given or requested with respect to the Company. All
deficiencies asserted or assessments (including interest and penalties) made as
a result of any examination by the Service or by appropriate state or
departmental tax authorities of the federal, state or local income tax, sales
tax or franchise tax returns of or with respect to the Company have been fully
paid or are adequately provided for on the Balance Sheet and no proposed (but
unassessed) additional taxes, interest or penalties have been asserted. The
Company has not elected to be treated as an "S" corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Internal
Revenue Code of 1986, as amended (the "Code"), nor has it made any other
elections pursuant to the Code (other than elections which relate solely to
matters of accounting, depreciation or amortization) which would have a material
adverse effect on the Company, its financial condition, its business as
presently conducted or presently proposed to be conducted or any of its
properties or assets.
6.9 ASSETS. Except as set forth on Schedule 6.9, the Company has good
and marketable title to all of the property and assets, real, personal or fixed,
tangible or intangible, reflected as assets in the Financial Statements, used in
the business of the Company, or acquired by the Company since the Balance Sheet
Date (other than assets disposed of in the ordinary course of business since
that date), subject to no mortgages, liens, security interests, pledges, charges
or other encumbrances of any kind. The Company is not obligated under any
contract or agreement or subject to any charter or other corporate restriction,
which materially adversely affects the Company's business, properties, assets,
prospects or condition (financial or otherwise). The Company's
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equipment and other tangible assets are in good operating condition in all
material respects and are fit for use in the ordinary course of business.
6.10 CONTRACT RIGHTS, INTELLECTUAL PROPERTY RIGHTS, AND SOFTWARE.
(a) A complete list of the Company's material Contract Rights,
Intellectual Property Rights and Software is set forth on Schedule 6.10. Except
as set forth on Schedule 6.10, no third party has any ownership right title,
interest, claim in or lien on any of the Company's Intellectual Property Rights.
There are no Contract Rights, Intellectual Property Rights, or Software
necessary or required to enable the Company to carry on its business as now
conducted and as presently proposed to be conducted, which the Company does not
own. No Person is entitled to collect fees, royalties, or other payments
relating to the Company's use of Contract Rights, Intellectual Property Rights,
or Software in its business, except as set forth in Schedule 6.10.
(b) The Company's Software and Intellectual Property Rights
have not violated or infringed, and are not currently violating or infringing,
and the Company has not received any communications alleging that the Company
(or any of its employees or consultants) has violated or infringed or, by the
Company conducting its business as presently proposed to be conducted, would
violate or infringe, any patents, copyrights, trade secrets, trademarks or other
proprietary rights of any other person or entity which violation or infringement
would have a material adverse effect on the operations or financial condition of
the Company.
6.11 LITIGATION. There is no action, suit, proceeding, claim,
arbitration or investigation ("Action") pending (or currently threatened)
against the Company, its activities, properties or assets or against any
Designated Person in connection with such Designated Person's relationship with,
or actions taken on behalf of, the Company, and there is no factual basis for
any such Action. The Company is not a party to or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality and there is no factual basis for any such Action. The
Company is not a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality and there is no Action by the Company currently pending or which
the Company intends to initiate.
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6.12 NO DEFAULTS. Except as set forth in Schedule 6.12, the Company is
not in default (a) under its Articles of Organization or Operating Agreement, or
under any note, indenture, mortgage, lease or any other material contract,
agreement or instrument to which the Company is a party or by which it or any of
its property is bound or affected or (b) with respect to any order, writ,
injunction, judgment or decree of any court or any federal, state, municipal or
other domestic or foreign governmental department, commission, board, bureau,
agency or instrumentality. There exists no condition, event or act which
constitutes, or which after notice, lapse of time or both, would constitute, a
default under any of the foregoing.
6.13 EMPLOYEES.
(a) The Company is not bound by or subject to any contract,
commitment or arrangement with any labor union, and to the Company's knowledge,
no labor union has requested, sought or attempted to represent any employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending nor, to the Company's knowledge,
threatened.
(b) The Company is not aware that any Designated Person or
consultant who is currently employed or engaged by the Company intends to
terminate his or her employment or engagement with the Company, nor does the
Company have any present intention to terminate the employment or engagement of
any Designated Person or consultant.
(c) The Company is not aware that any Designated Person or
consultant presently associated with the Company is obligated under any
restrictive agreement (including licenses, covenants or commitments of any
nature) that would interfere with the use of his or her best efforts to carry
out his or her duties for the Purchaser subsequent to closing or conflict with
the Purchaser carrying on the Company's business as presently conducted or
proposed.
6.14 COMPLIANCE WITH LAWS. LICENSES AND PERMITS. The Company (a) has
complied in all material respects with all federal, state, local and foreign
laws, ordinances, regulations and orders applicable to its business or the
ownership of its assets and has received no notice of non-compliance therewith
and (b) has obtained all licenses and permits necessary or required to enable it
to carry on its business as now conducted and as presently proposed to be
conducted, as to which failure to comply or obtain would have
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material adverse effect on the operations or financial condition of the Company.
Such licenses and permits are in full force and effect, and no proceeding is
pending or threatened, to revoke or limit the same.
6.15 INSURANCE. Schedule 6.15 attached hereto contains a description of
each insurance policy maintained by the Company with respect to its properties,
assets and business. Each such policy is valid and enforceable and duly in force
and all premiums with respect thereto are paid to date. The Company believes
that the amounts of coverage under such policies of insurance are adequate.
6.16 AGREEMENTS. Schedule 6.16 attached hereto is a list of all
material contracts, commitments and agreements, written or oral, to which the
Company is a party. True and correct copies of all such contracts, commitments
and agreements have been or will be delivered to the Purchaser. Except as
contemplated hereby, the Company is not a party to any written or oral
agreements which would constitute a critical commitment for the Company.
6.17 COMPLIANCE WITH ERISA. Except as set forth on Schedule 6.17, the
Company does not (a) maintain, and it has never maintained, any employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or (b) contribute to, and has never contributed to, any such employee
benefit plan maintained by any other person or entity. The Company is in
compliance with applicable provisions of ERISA, the regulations and published
authorities thereunder, and all other laws applicable with respect to all such
employee benefit plans, agreements and arrangements. No civil action has been
brought against the Company pursuant to ERISA, and no such action is pending or
threatened in writing or orally against any fiduciary of any such plan, and
there exists no grounds for any such action.
6.18 DISCLOSURE. No written document, certificate, instrument or
statement furnished to the Purchaser by or on behalf of the Company in
connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein and therein not misleading.
6.19 CONFLICTS OF INTEREST. Except as set forth on Schedule 6.19, no
officer or Member of the Company has any direct or indirect interest (a) in any
entity which does business with the Company, or (b) in any property, asset or
right which is used by the Company in the conduct of its business, or (c) in any
contractual relationship with the Company other than as an employee, director or
shareholder.
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6.20 ABSENCE OF RESTRICTIVE AGREEMENTS. No employee of the Company is
subject to any secrecy or non-competition agreement or any agreement or
restriction of any kind that would impede in any way the ability of such
employee to carry out fully all activities of such employee in furtherance of
the business of the Purchaser.
6.21 COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) No real property owned or leased by the Company (the
"Property") includes hazardous or regulated substances or hazardous wastes as
defined in any federal, state, local or other governmental statutes, laws,
regulations, rules, ordinances, codes, standards, orders, licenses and permits
relating to environmental, public health and safety matters (hereinafter
collectively referred to as "Environmental Laws").
(b) Neither the Property nor the Company is subject to any
pending investigation or inquiry by any governmental authorities or any remedial
obligations under any applicable Environmental Laws.
6.22 REAL PROPERTY. Except as set forth in Schedule 6.22, the Company
owns no real property or interest in real property.
6.23 REAL PROPERTY LEASES. Schedule 6.23 contains a true, correct and
complete list of all of the real property leases (the "Leases") to which the
Company is a party, including the street address of each property, the name and
address of each landlord and the expiration date of each lease, exclusive of any
options. A True, correct and complete copy of each of the Leases and any and all
amendments to any of them have been delivered to the Purchaser. The Company has
no obligation which it has been required, as tenant under any Lease, to perform
through the date hereof, which it has not performed, and the Company has no
verbal understandings with any lessors that are not evidenced in writing in the
Leases. The Company is not in default under any such Lease. Except for
obligations under the Leases that have not yet become payable, there are no
claims or offsets against the Company under any Lease. The applicable federal,
state or local law, rule, regulation or procedure relating to any Lease, or with
respect to any leasehold improvement or fixture owned by the Company.
6.24 TANGIBLE ASSETS. Except as set forth on Schedule 6.24, the Company
has good and marketable title to all of its tangible assets, free and clear of
any and all liens, and such tangible assets are in good condition and in a state
of good maintenance and repair, and are suitable for the purposes used.
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6.25 PRODUCT QUALITY, WARRANTY CLAIMS, PRODUCT LIABILITY. All products
and services sold, provided or delivered by the Company to its customers on or
prior to the Closing Date conform or will conform in all material respects to
applicable contractual commitments, express or implied warranties, product and
service specifications and quality standards and, the Company has no liability
(and there is no basis for any present or future Action against the Company
giving rise to any liability) for replacement or repair thereof or other damages
in connection therewith. No product liability claims have been asserted against
the Company.
6.26 SOFTWARE. Except as set forth on Schedule 6.26 there are no
errors, malfunctions, and/or defects in the Software known as of the date of
this Agreement which materially adversely affect the performance of the
Software; there is no known unauthorized use of the Software or any portion
thereof by any third party; and the Software and all portions thereof have been
licensed for use by third parties only in accordance with the terms and
conditions of the Company's Software License Agreement, the form of which is
attached to Schedule 6.26.
6.27 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. The accounts receivable of
the Company reflected on the Balance Sheet or thereafter acquired by it, have
been collected or are collectible at the aggregate gross recorded amounts
thereof. The accounts payable of the Company reflected on the Balance Sheet or
thereafter incurred by it, have been paid or are payable at the aggregate gross
recorded amounts thereof. The Company shall continue to pay all accounts payable
incurred up to and including the Closing Date in a timely manner.
6.28 SUPPLY OF SUPPLIES, INVENTORY AND EQUIPMENT. The Company is not a
party to any arrangement or agreement which prohibits, limits or restricts its
ability to obtain its supplies, inventory or equipment.
6.29 WARN LIABILITIES. The Company has not (i) incurred any liability
under the federal Worker Adjustment Retraining and Notification Act of 1989
("WARN"); and (ii) assuming the Purchaser extends offers of employment to
substantially all of the Company's employees, and continues to operate the
Company's business in the ordinary course in the same general manner as operated
by the Company prior to the Closing, the Purchaser will not incur any liability
under WARN by reason of any such actions taken by the Company prior to the
Closing.
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6.30 YEAR 2000 COMPLIANCE OF SOFTWARE. The Software is able to
accurately process, calculate, compare, and sequence date/time data including
leap year calculations from into, and as between the twentieth and twenty-first
centuries, and the years 1999 and 2000.
6.31 NO BROKER FEE. The Company has not dealt or negotiated with any
Person who has or will have, as a result of the transaction contemplated by this
Agreement, any right, interest or claim against or upon the Purchaser for any
commission, fee or other compensation as a finder or broker.
7. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
hereby represents and warrants to and covenants and agrees with, the Company, as
of the date hereof and as of the Closing Date, as follows:
7.1 ORGANIZATION. The Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Purchaser has all requisite power and authority to own, lease and operate
its properties, to carry on its business as presently conducted, to execute this
Agreement and perform its obligations under this Agreement.
7.2 AUTHORIZATION OF THIS AGREEMENT. The execution, delivery and
performance by the Purchaser of this Agreement and of each and every Agreement,
document and instrument contemplated hereof, and the consummation of the
transactions contemplated thereby have been duly authorized by all requisite
action, and the Agreement constitutes the valid and binding obligation of the
Company enforceable in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium and similar laws affecting
creditors rights generally and to general principles of equity.
7.3 NO BROKER FEE. The Purchaser has not dealt or negotiated with any
Person who has or will have, as a result of the transaction contemplated by this
Agreement, any right, interest or claim against or upon the Company for any
commission, fee or other compensation as a finder or broker.
7.4 NO CONFLICT. The execution and delivery of this Agreement by the
Purchaser, the consummation of the transactions contemplated hereby and
compliance with the provisions hereof by the Purchaser will not (a) violate any
provision of law, statute, rule or regulation, or any ruling, writ, injunction,
order, judgment or decree of any court, administrative agency or other
governmental body applicable to the Purchaser or (b) conflict with or result in
any breach of any of the terms, conditions or
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provisions of, or constitute (with due notice or lapse of time, or both) a
default (or give rise to any right of termination, cancellation or acceleration)
under, the certificate of incorporation or bylaws of the Purchaser or under any
note, indenture, mortgage, lease, purchase or sales order or other material
contract, agreement or instrument to which the Purchaser is a party.
8. COVENANTS; OTHER AGREEMENTS.
8.1 PRE-CLOSING. Prior to the Closing, the Company hereby covenants and
agrees to:
(a) Conduct the business of the Company in the ordinary course
including, but not limited to, continued development of Software, retention of
employees, and payment of ordinary and normal business expenses;
(b) Comply in all material respects with all contractual
obligations and legal requirements applicable to it;
(c) Refrain from entering into any distribution, licensing,
financing or other agreements outside the normal course of business, without the
prior written consent of the Purchaser;
(d) Permit the Purchaser and any of its employees, agents and
representatives and their representatives to have reasonable access to the
Company's books and records during normal business hours.
(e) Refrain from taking any action that would cause any
representation or warranty made herein to be untrue in any material respect or
materially misleading;
(f) Provide the Purchaser with such other instruments,
agreements and documents as the Purchaser may reasonably request in order to
complete its due diligence review of the Company;
(g) Preserve, renew, and keep in full force and effect its
corporate existence and rights and franchises with respect thereto and maintain
in full force and effect all material permits, licenses, approvals, contracts,
etc. necessary to carry on the business as presently or proposed to be
conducted; and
(h) Obtain any and all consents, approvals or authorizations
of, and submit any and all declarations to, and make any filings with any Person
that is required for the valid authorization, execution, delivery and
performance by the Company
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of this Agreement and for the consummation of the transactions contemplated
hereby.
(k) Prevent the occurrence of any lien or encumbrance on any
of the Assets.
8.2 POST-CLOSING. Following the Closing, the Purchaser hereby covenants
and agrees as follows:
(a) The Purchaser shall use its commercially reasonable
efforts to diligently market the Multiplicity Products; and
(b) The Purchaser hereby gives the Company, in the event of
any sale of the portion of the Purchaser's business comprising the Multiplicity
Products, whether sold on a stand-alone basis or as part of a sale of a group of
related businesses, the right of first refusal ("ROFF") to purchase the assets
proposed to be sold, on the same terms and conditions which the Purchaser
proposes to accept from any other BONA FIDE offeror. The Purchaser shall give
the Company prompt written notice that it contemplates sale of the Business and
the terms and conditions of any such bona fide offer which it finds
satisfactory. The Company shall have twenty (20) days following receipt of such
notice within which to give the Purchaser written notice of its intent to
exercise the ROFF. If the Company does not give notice of its exercise of the
ROFF together with a non-refundable deposit in the amount of ten percent (10%)
of the cash portion of the purchase price within such twenty (20) day period,
then the ROFF will become null and void as to that offer only and the Purchaser
may sell the assets proposed to be sold on substantially the same terms and
conditions offered to the Company to any other offeror within the next
succeeding six (6) month period. If the Purchaser intends to sell the assets on
substantially different terms and conditions or after the six (6) month period,
the ROFF shall apply to any such subsequent offering. If the Company gives
written notice of its exercise of the ROFF at any time and then defaults in the
exercise thereof, the ROFF shall become null and void and the Company shall
forfeit its deposit. For purposes hereof, the term "bona fide offeror" means an
entity which is not related to, affiliated with or under common control with the
Purchaser or its parent company (an "Affiliate").
The ROFF shall continue for a period of five (5) years from the Closing
Date. The ROFF shall be binding on the Purchaser, and its Parent Company, all
Affiliates, successors and assigns thereof including any estate created by any
bankruptcy or reorganization (collectively, "Purchaser Parties"), and the ROFF
shall not be affected by any [continued on next page]
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bankruptcy or reorganization of the Purchaser Parties or any of them or their
permitted assigns,.
(c) Upon the occurrence of any Extraordinary Event, as defined
in subparagraph (d) hereof, and the declaration thereof by the Company in
writing, within six (6) months after the occurrence thereof, Purchaser shall
provide to the Company, in lieu of any further Earn-Out payments to the Company,
an irrevocable permanent non-royalty bearing license to manufacture, sell,
sublicense, lease, and use the Multiplicity Products, and the Company shall have
the further right to (on proof of the occurrence of any Extraordinary Event and
such timely declaration) enjoin and permanently preclude the manufacture, sale
and use of the Multiplicity Products by Purchaser Parties, and their successors
and assigns.
(d) "Extraordinary Events" as used herein shall mean only: (i)
The Purchaser Party which control the Business ("Controlling Purchaser Party")
shall commence any case, proceeding or other action (A) under any existing or
future law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up
liquidation, dissolution, composition or other relief with respect to it or its
debts, or (B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its creditors; or
(ii) there shall be commenced against such Controlling Purchaser Party any case,
proceeding or other action of a nature referred to in clause (i) above which (A)
results in the entry of an order for relief or any such adjudication or
appointment, or (B) remains undismissed, undischarged or unbonded for a period
of 60 days; or (iii) there shall be commenced against such Controlling Purchaser
Party any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of the Business which results in the entry of an order for any
such relief which shall not have been vacated, discharged, or stayed or bonded
pending appeal, within 60 days from the entry thereof; or (iv) such Controlling
Purchaser Party shall take any action in furtherance of, or indicating its
consent to, approval of or acquiescence in, any of the acts set forth in clause
(i), (ii) or (iii) above; or (v) the failure of the Purchaser to pay Earn-Out
amounts when due, which failure continues for not less than sixty (60) days
after written demand for payment; (vi) after the sale of Purchaser or the
Controlling Purchaser Party, or after a Change of Control of the Purchaser or
the Controlling Purchaser Party, the
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failure of successor management to comply with the provisions of Subsection 8.2
of this Agreement; or (vii) the Purchaser, or any successor, makes an
affirmative decision to discontinue and abandon the Multiplicity Product line.
(Such discontinuance and abandonment shall require either a statement by the
Purchaser or the Controlling Purchaser Party to such effect, or a substantially
complete cessation of marketing and sales activity with respect to the entire
Multiplicity Product line.)
(e) Upon the happening of any Extraordinary Event, as defined
in Section 8.2(d) hereof, the Company shall be entitled to the remedies pursuant
to Section 8.2(c) hereof. Any such remedies shall be in addition to any other
remedies it may have for actual damages suffered as a consequence of any breach
of this Agreement by Purchaser resulting in any lost Earn-Out payments for the
time periods prior to such Extraordinary Event.
9. CONDITIONS/PRECEDENT TO THE COMPANY'S OBLIGATION TO CLOSE. The
Company's obligation to consummate the transactions contemplated by this
Agreement shall be conditioned on the satisfaction of the following conditions
(each a "Purchaser Condition") on or before the Closing.
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Purchaser contained in this Agreement will be true and correct at and as
of the Closing as though then made.
9.2 LEGAL PROCEEDINGS. There shall be no Action commenced or, to the
knowledge of the Purchaser, threatened, and no judgment, order or injunction
shall have been rendered by any such tribunal or organization for the purpose of
restraining or prohibiting the transactions contemplated hereby, or which has or
may have a materially adverse effect on the business of the Purchaser.
9.3 COMPLIANCE WITH AGREEMENT. The Purchaser shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to the Closing.
9.4 DELIVERIES. The Purchaser shall have delivered or caused delivery
to the Company the Purchase Price and any other items to be delivered by it
hereunder.
10. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATION TO CLOSE. The
Purchaser's obligation to consummate the transactions contemplated by this
Agreement shall be conditional on the satisfaction of the following conditions
(each, a "Company Condition") on or before the Closing:
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10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained in this Agreement will be true and correct at and as of
the Closing as though then made.
10.2 LEGAL PROCEEDINGS. There shall be no Action commenced or, to the
knowledge of the Company threatened, and no judgment, order or injunction shall
have been rendered by any such tribunal or organization for the purpose of
restraining or prohibiting the transactions contemplated hereby, or which has or
may have a materially adverse effect on the Assets or the business of the
Company.
10.3 COMPLIANCE WITH AGREEMENT. The Company shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to the Closing.
10.4 DELIVERIES. The Company shall have delivered or caused delivery to
the Purchaser the Bill of Sale and other instruments of conveyance required to
be delivered hereunder.
10.5 NO MATERIAL CHANGE. There shall not have occurred since the date
of this Agreement any material adverse change in the business, or condition
(financial or otherwise) of the Company.
10.6 APPROVALS AND CONSENTS. All approvals, authorizations and
consents, or orders or actions of or filing by the Company or the Purchaser with
any court, administrative agency or other governmental authority, required for
the consummation of the transactions contemplated hereby shall have been
obtained.
10.7 KEY EMPLOYEES. The Purchaser shall be reasonably assured that
substantially all of the management personnel and key software engineers
specified in Schedule 10.7 attached hereof will be retained as employees of the
Purchaser following the Closing.
10.8 UNSATISFIED CONDITIONS. If at the Closing any of the conditions
specified in this Section 10 shall not have been fulfilled to the reasonable
satisfaction of the Purchaser, the Purchaser, at its election, may adjourn the
closing for a reasonable period of time in order to permit the Company to
satisfy such conditions.
11. CLOSING DOCUMENTS.
11.1 At the Closing, the Company will have delivered to the Purchaser
all of the following documents:
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(i) a Closing Certificate, executed by an officer of the
Company, dated the Closing Date, stating that the conditions specified in
Sections 10 have been fully satisfied;
(ii) a certificate executed by the Secretary of the Company as
to the (i) due existence of the Operating Agreement, (ii) incumbency of
officers, and (iii) the resolutions adopted by the Company's Members authorizing
the execution, delivery and performance of this Agreement, and the consummation
of all other transactions contemplated by this Agreement;
(iii) a copy of the Articles of Organization certified by the
Secretary of State of Indiana;
(iv) a copy of the Operating Agreement;
(v) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder;
(vi) a certificate of good standing issued by the Secretary of
State of Indiana and each other jurisdiction in which the Company is authorized
to transact business;
(vii) an opinion from counsel for the Company, to the effect
set forth in Schedule 11.1 (vii) attached hereto, which will be addressed to the
Purchaser, dated the date of the Closing and in form and substance reasonably
satisfactory to the Purchaser.
(viii) the Instruments of Conveyance;
(ix) the Assignment and Assumption; and
(x) such other documents relating to the transactions
contemplated by this Agreement as the Purchaser or its counsel may reasonably
request.
11.2 At the Closing, the Purchaser will have delivered to the Company
all of the following documents:
(i) the Base Price as provided in Section 4.2 hereof;
(ii) a Closing Certificate, executed by an officer of the
Purchaser, dated the Closing Date, stating that the conditions specified in
Sections 9 inclusive, have been fully satisfied.
(iii) a certificate executed by an officer of the Purchaser as
to the (A) incumbency of officers, and (B) the
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resolutions adopted by the Purchaser's board of directors authorizing the
execution, delivery and performance of this Agreement or that such Board action
is not required in connection with the transactions contemplated by this
Agreement;
(iv) the Assignment and Assumption;
(v) an offer of employment in the form attached hereto as
Schedule 11.1 (x) to Steve McNear (the "McNear Employment Letter"); and
(vi) such other documents relating to the transactions
contemplated by this Agreement as the Company or its counsel may reasonably
request.
12. INDEMNIFICATION.
12.1 COMPANY'S OBLIGATIONS.
The Company agrees to defend, indemnify and hold harmless the
Purchaser from, against and in respect of any and all demands, claims, actions
or causes of action, losses, liabilities, damages, assessments, taxes, costs and
expenses, including without limitation, interest, penalties and reasonable
attorneys' fees and expenses, asserted against, imposed upon or paid, incurred
or suffered by the Purchaser: (i) as a result of, arising from, in connection
with or incident to any breach or inaccuracy of any representation or warranty
of the Company in this Agreement, in any Instrument of Conveyance or the
Assignment and Assumption or in any other agreement or instrument executed and
delivered by the Company pursuant hereto, or any breach of any covenant or
agreement of the Company contained in this Agreement, in any Instrument of
Conveyance or the Assignment and Assumption or in any other agreement or
instrument executed and delivered by the Company pursuant hereto; (ii) as a
result of, or with respect to, any and all obligations or liabilities of the
Company, whether known or unknown, asserted or unasserted, contingent or
otherwise.
12.2 PURCHASER'S OBLIGATIONS.
The Purchaser agrees to defend, indemnify and hold harmless
the Company from, against and in respect of any and all demands, claims, actions
or causes of action, losses, liabilities, damages, assessments, taxes, costs and
expenses, including without limitation, interest, penalties and reasonable
attorneys' fees and expenses, asserted against, imposed upon or paid, incurred
or suffered by the Company as a result of, arising from, in connection with or
incident to any breach or inaccuracy of any representation
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<PAGE>
or warranty of the Purchaser in this Agreement or in the Assignment and
Assumption or in any other agreement or instrument executed and delivered by the
Purchaser pursuant hereto, or the breach of any covenant or agreement of the
Purchaser made herein or in the Assignment and Assumption or in any other
agreement or instrument executed and delivered by the Purchaser pursuant hereto;
or (ii) as a result of, or with respect to, the Purchaser's failure to satisfy
and discharge the Assumed Obligations as the same shall become due.
12.3 INDEMNITY PROCEDURES. A party or parties hereto agreeing to be
responsible for or to indemnify against any matter pursuant to this Agreement is
referred to herein as the "Indemnifying Party" and the other party or parties
claiming indemnity is referred to as the "Indemnified Party." An Indemnified
Party under this Agreement shall give prompt written notice to the Indemnifying
Party of any liability which might give rise to a claim for indemnity under this
Agreement. As to any claim, action, suit or proceeding by a third party, the
Indemnifying Party shall have the primary control of the defense, compromise or
settlement of any such matter through the Indemnifying Party's own attorneys and
at its own expense; provided, however, that in the event the Indemnifying Party
does not desire to control such defense, compromise or settlement, the
Indemnified Party may, in its discretion, exercise such control. The Indemnified
Party shall provide such cooperation and such access to its books, records and
properties as the Indemnifying Party shall reasonably request with respect to
any matter over which the Indemnifying Party is exercising control; and the
parties hereto agree to cooperate with each other in order to ensure the proper
and adequate defense thereof.
In a case where responsibility for a matter giving rise to a claim for
indemnification is being shared by the parties, either party may elect to
relieve the other of its obligations of indemnification with respect to such
matter and, subject to the provisions of this section, such electing party may
thereupon assume full control of the resolution of such matter. If such election
is not made, control shall also be shared.
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Unless otherwise
expressly provided, all representations and warranties hereunder shall survive
for twelve (12) months following the Closing. All statements contained in any
certificate or other instrument delivered pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement shall constitute
representations and warranties under this Agreement.
14. SUCCESSORS AND ASSIGNS; PARTIES IN INTEREST. This Agreement shall
bind and inure to the benefit of (a) the Company
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and the Purchaser and (b) their respective successors and assigns. Neither party
may assign his rights and responsibilities hereunder, except that Purchaser may
assign all of its rights and obligations hereunder to a wholly-owned subsidiary
thereof, provided that Purchaser shall remain liable for the Purchase Price
(including the Earn-Out) in the event of any such assignment.
15. CONFIDENTIALITY.
15.1 NONDISCLOSURE. Except to the extent expressly authorized by this
Agreement or unless otherwise agreed in writing by the parties, each party
agrees that, from the date of this Agreement and for five (5) years following
the Closing, it shall keep confidential and shall not publish or otherwise
disclose and shall not use for any purpose other than as provided for in this
Agreement any Confidential Information furnished to it by the other party
pursuant to this Agreement. Confidential Information means information not
generally available to the public or otherwise part of the public domain at the
time of its disclosure to the receiving party.
15.2 AUTHORIZED DISCLOSURE. Each party may disclose Confidential
Information belonging to the other party to the extent such disclosure is
reasonably necessary as required for its public representing or similar
obligations.
16. MISCELLANEOUS.
16.1 ENTIRE AGREEMENT. This Agreement (as amended from time to time)
and the other writings referred to herein or delivered pursuant hereto which
form a part hereof contain the entire Agreement among the parties with respect
to the subject matter hereof and supersede all prior and contemporaneous
arrangements or understandings with respect thereto.
16.2 NOTICES. All notices, requests, consents, payments, statements,
reports and other communications given to or made upon any party hereto in
connection with this Agreement shall be in writing and made by any means by
which delivery may be verified, addressed to the Purchaser or the Company, as
applicable, at the address set forth below or such other address as may
hereafter be designated in writing by the addressee to the addressor listing all
parties. All notices and other communications shall be effective upon delivery.
(i) If to the Purchaser, to:
Network Computing Devices, Inc.
350 N. Bernardo Ave.
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<PAGE>
Mountain View, CA 94043
Attn: Greg Wood, VP Finance
Fax No: (650) 691-2754
with copies to:
Network Computing Devices, Inc.
350 North Bernardo Avenue
Mountain View, CA 94043
Attn: General Counsel; and
D. David Cohen, Esq.
Attorney at Law
Jericho Atrium
Suite 133
500 North Broadway
Jericho, New York 11753
Fax No.: (516) 933-8454
(ii) If to the Company, to:
Multiplicity, L.L.C.
9000 Keystone Crossing
Suite 900
Indianapolis, IN 46240
Attn: Steve McNear
with a copy to:
John Sharpe, Esq.
McNamar, Fearnow & McSharar
111 Monument Circle, Ste. 4500
Indianapolis, IN 46204-5145
Fax No.: (317) 630-4501
16.3 CHANGES. The terms and provisions of this Agreement may not be
modified or amended, or any of the provisions hereof waived, temporarily or
permanently, except pursuant to the written consent of the affected party.
16.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
16.5 HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
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<PAGE>
16.6 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to
conflict of laws.
16.7 SEVERABILITY. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
16.8 JURISDICTION/VENUE/ATTORNEYS FEES. The parties hereto agree that
any suit, action or proceeding instituted against one or more of them with
respect to this Agreement (including any schedules hereto) shall be brought in
the federal court in and for the Northern District of California. The parties
hereto, by the execution and delivery of this Agreement, irrevocably waive any
obligation or any right of immunity on the ground of venue, the convenience of
the forum or the jurisdiction of such courts, or from the execution of judgments
resulting therefrom, and the parties hereto irrevocably accept and submit to the
jurisdiction of the aforesaid courts in any suit, action or proceeding and
consent to the service of process by certified mail at the address set forth
herein. In the event that any action is instituted in connection with any
controversy arising out of this Agreement, then the prevailing party shall be
entitled to recover, in addition to costs, such sum as the court may adjudge
reasonable as attorneys' fees in such action and on any appeal from any judgment
or decree entered therein.
16.9 FURTHER ASSURANCES. The parties hereto shall, subsequent to the
date hereof, execute and deliver such further documentation, and take such
further action, in each case without cost to the other party, as shall be
reasonably requested by such other party hereto to further evidence and perfect
the completion of the transactions contemplated hereby.
16.10 PRESERVATION OF RECORDS. To the extent received by the Purchaser,
the Purchaser shall preserve for a period of at least three (3) years after the
Closing Date all original documents evidencing any contracts and commitments
transferred to it by the Company, and all other original books, records, files,
papers, records and other data received by the Purchaser from the Company, in a
usual, regular and ordinary manner consistent with the past practices of the
Purchaser. The Purchaser shall, subject to such reasonable limitations as may be
necessary to protect the Purchaser's proprietary information, at the Company's
sole expense
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<PAGE>
and on reasonable prior notice to the Purchaser, (i) afford to the Company and
its counsel, accountants, consultants and other representatives reasonable
access during normal business hours to examine, inspect, and copy any books,
records and original documents of the Company to the extent necessary for the
Seller to comply with or to respond to any audit, investigation, or other
governmental investigation or inquiry; and (ii) cooperate with the reasonable
requests of the Company with respect to the use of such documents transferred
hereunder for such purposes.
17. LOAN. The Loan will immediately become due and payable upon the
sooner of (i) the closing of the transactions contemplated under this Purchase
Agreement, or (ii) March 31, 2000; but upon Closing of this Purchase Agreement
the Loan amount shall be forgiven as part of the Base Price.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their behalf as of the date first set forth above.
MULTIPLICITY, L.L.C.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
NETWORK COMPUTING DEVICES, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
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<PAGE>
EXHIBIT 10.50
HITACHI GLOBAL PROCUREMENT AGREEMENT
This Hitachi Global Procurement Agreement ("Agreement") made and entered into as
of January 28th, 2000 by and between Network Computing Devices, Inc., a Delaware
corporation, having its principal place of business at 350 North Bernardo Avenue
Mountain View, California 94043 U.S.A. ("NCD"), and Hitachi, Ltd, a corporation
of Japan, through its PC Division, having a principal place of business at 6,
Kanda-Surugadai 4-chome, Chiyoda-ku, Tokyo, 101 Japan ("Hitachi").
WITNESSETH:
WHEREAS, Hitachi is a global computer company which develops, manufactures, and
markets certain computer products and other products related thereto;
WHEREAS, NCD is a manufacturer and distributor of thin client terminals and
related software products, which includes but is not limited to NCD's ThinSTAR
Windows-based Terminal; and
WHEREAS, Hitachi wishes to procure from NCD and NCD wishes to sell a Hitachi
logo version of its ThinSTAR Windows-based Terminals and related software
products to Hitachi .
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
1 DEFINITIONS
1.1 "Desktop Software" shall mean ThinSTAR Management System (TMS)
software developed by NCD for the management of the Products.
1.2 "Documentation" shall mean all information necessary to install,
diagnose and repair, and maintain the Product, such as user,
operator, service and systems administrator manuals; technical
bulletins, engineering change orders, software Updates, and
bulletin board access, web site access; and other relevant
materials.
1.3 "Fixes" shall mean bug fixes, critical patches, modified
documentation or other changes intended to correct
feature/function deficiencies in the Software. NCD hereby grants
to Hitachi a non-exclusive, royalty free worldwide license to
distribute new Fixes to its customers, including distribution
through the World Wide Web if available.
<PAGE>
1.4 "Hitachi" shall mean Hitachi, Ltd., and include its subsidiaries
and affiliates in which 50% or more of the stock is directly or
indirectly controlled by Hitachi, Ltd.
1.5 "Product(s)" shall mean the Hitachi logo version of NCD's ThinSTAR
Windows-based Terminals ("Hardware") and related Software.
Product(s) as more fully set forth in Exhibit A attached hereto.
Exhibit A may be revised from time to time by mutual agreement of
the parties to include and add new Products to the list of Exhibit
A
1.6 "Purchase Specifications" shall mean the specifications set forth
on Exhibit A attached hereto. Exhibit A may be revised from time
to time by mutual agreement of the parties to modify the
specifications.
1.7 "ROM Software" shall mean the operating system software for
ThinSTAR Windows-based Terminals in object code form residing in
the hardware's flash memory. In addition, NCD will deliver the
operating system software on a CD to be used by Hitachi for
recovery purposes only.
1.8 "Software" shall refer to the Desktop Software and the ROM
Software collectively.
1.9 "Update" shall mean a release made generally available from NCD
that provides a fix to the Software and typically does not contain
new functionality. Hitachi will not knowingly provide the new
Updates to its Customers who have not licensed the corresponding
Product. Such Updates will be identified through a change in the
number to the right of the second decimal (e.g. X.YZ), where Z is
the Update number.
1.10 "Upgrade" shall mean a change to the Software that provides minor
functionality enhancements or improvements that may also address
customer identified problems. Hitachi will not knowingly provide
the new Upgrade to its Customers who have not licensed the
corresponding Product. Such Upgrades will be identified through a
change in the number to the right of the first decimal (e.g. X.YZ)
where Y is the Software Upgrade.
1.11 "Version Release" shall mean a release that changes Software
functionality. Such releases will be reflected through a change in
the digit to the left of the decimal point (e.g. X.YZ) where X is
the Version Release number. Hitachi will not knowingly provide the
new version to its Customers who have not licensed the
corresponding Product.
2 PURCHASE AND SALE
During the term of this Agreement, NCD shall manufacture and supply the
Products for Hitachi and Hitachi agrees to purchase such Products from NCD
in accordance
<PAGE>
with the terms and conditions of this Agreement. Hitachi is entitled to
distribute and market the Products worldwide subject to the terms of this
Agreement.
<PAGE>
3 ORDERING PROCEDURE
3.1 Hitachi shall place orders by written purchase order ("Order"),
subject to NCD's acceptance by fax. Orders must be in minimum
quantities as specified in Exhibit A hereto. Orders may be placed
by fax or mail addressed to NCD at the following address:
Network Computing Devices, Inc.
350 N. Bernardo Avenue
Mountain View, California 94043
USA
Attn: Sales Order Administration
Fax No. 650-694-4541
Orders are pursuant to the terms and conditions stated in this
SECTION 3 and SECTION 5 below, using Hitachi 's standard purchase
order form which shall indicate:
(i) Order Numbers;
(ii) Description (including product specification number)
and Quantity of Products to be ordered; Requested
delivery dates;
(iii) Destination; and
(iv) Unit Prices and Total Price of the Products to be
ordered.
3.2 NCD shall accept or reject the Order placed by Hitachi by signing
and faxing to Hitachi a copy of the Order within FIVE (5) BUSINESS
DAYS after its receipt of the Order. If NCD fails to deliver the
written notice of rejection of the Order to Hitachi within THE
SAID FIVE (5) BUSINESS DAY period, such Order shall be deemed as
accepted by NCD on the last day of SUCH FIVE (5) BUSINESS DAY
PERIOD.
3.3 NCD shall use its best effort to accept Orders placed by Hitachi.
However, if NCD has reason not to accept an Order, the parties
shall, in good faith, discuss and seek a solution.
3.4 Lead Time: Average lead time for Orders shall be four (4) weeks,
however the lead time for the first Order shall be six (6) weeks.
Lead Time starts when an order is accepted by NCD and runs until
the delivery of the Products so ordered according to the delivery
terms in section 6 of this Agreement.
3.5 Orders will be governed solely by the terms and conditions of this
Agreement, and any term or condition set forth in an Order,
preprinted or otherwise, which is not expressly allowed by this
Agreement or which is in addition to or conflicts with the terms
and conditions of this Agreement, shall have no force and effect.
4 CANCELLATION
4.1 Unless expressly provided in this Agreement or otherwise agreed
upon by the parties, the Orders placed by Hitachi and accepted by
NCD may not be
<PAGE>
canceled by NCD.
4.2 Notwithstanding the above, if NCD fails to deliver the Products
within thirty (30) days after the delivery date specified in the
relevant Order, Hitachi shall be entitled to cancel the Order.
4.3 Hitachi shall have the right, without any liability or penalty, to
notify NCD to delay the ship date of any shipment for a period not
to exceed NINETY (90) DAYS from the ship date set forth in Orders
provided that written notice is given to NCD not later than
FIFTEEN (15) DAYS prior to the delivery date set forth in Orders.
4.4 Hitachi shall have the right, without liability or penalty, to
cancel any Order or any part thereof provided that notice of
cancellation is given to NCD not less than TWENTY FIVE (25) DAYS
prior to the delivery date set forth in Orders.
5 FORECAST AND ORDERING FLEXIBILITY
On or about the 10th business day of each month, Hitachi shall provide
NCD with a rolling SIX (6) MONTH forecast for Products to be delivered by
NCD to Hitachi each month covering the SIX (6) MONTH period following the
month on which SUCH forecast is provided. SUCH MONTHLY FORECAST SHALL BE
NON-BINDING AND SHALL NOT BE DEEMED AS A FIRM ORDER UNLESS THE RELEVANT
ORDERS HAVE BEEN PLACED BY HITACHI AND ACCEPTED BY NCD IN ACCORDANCE WITH
SECTION 3 OF THIS AGREEMENT. Hitachi, however, will use its best efforts
to forecast accurately.
6 SHIPPING, DELIVERY AND PAYMENT
6.1 All Products shall be delivered by NCD to Hitachi on or before,
but not more than FIVE (5) DAYS prior to, the delivery date set
forth in the relevant Order.
6.2 All shipments of the Products shall be FOB point of origin in
accordance with INCOTERMS 1990, unless otherwise agreed upon
between the parties, and title and risk of loss shall pass from
NCD to Hitachi simultaneously with the passing of risk of loss
pursuant to INCOTERMS 1990: INCOTERMS FOB Air Shipment FCA
6.3 Unless otherwise agreed to by the parties, NCD shall ship
quantities as specified on the relevant Order. All Products shall
be shipped in accordance with instructions made from time to time
by Hitachi and in a manner which follows good international
commercial practice and is adequate to insure safe arrival.
6.4 NCD shall attach to all shipments a packaging list clearly
stating:
(i) Hitachi 's Order Number;
(ii) Quantity shipped;
(iii) Airway Bill and other documents needed by Hitachi to
substantiate payment due to NCD or freight carrier;
and
<PAGE>
(iv) Any other information as designated by Hitachi from
time to time; provided that any additional cost to
provide such information shall be borne by Hitachi.
6.5 All marking required by applicable law shall be applied to the
Products by NCD.
7 ACCEPTANCE PROCEDURE
7.1 Within ten (10) business days from the date of the receipt of the
Products, Hitachi shall perform an Appearance Inspection and
Diagnostic Program and Functionality Test of the Products in
accordance with the Purchase Specifications, and shall notify NCD
of the results of such test. In the event that no notification is
made within the above mentioned period, the Products delivered by
NCD shall be deemed to be accepted by Hitachi on the last day of
such period.
7.2 In case Hitachi finds any quantitative discrepancies of the
Products during the acceptance test period mentioned above,
Hitachi shall notify NCD of such finding in writing. In case of
quantity shortage, NCD shall, at its expense, deliver the Products
to fill the shortage to Hitachi within TEN (10) BUSINESS DAYS
after Hitachi 's notification. In case of quantity surplus,
Hitachi shall, at NCD's expense, promptly return the surplus
Products to NCD if so requested by NCD.
7.3 In case Hitachi notifies NCD that qualitative failures or defects
of the delivered Products are found, NCD shall take all necessary
countermeasures and deliver new and non-defective Products to
Hitachi as required in Section 13 herein.
7.4 Hitachi shall have sixty (60) days from the date on which NCD
delivers Software, to examine and test the Software to determine
that such version of the Software, when loaded, will execute as
part of the Product in accordance with the Purchase Specifications
8 LICENSE
8.1 All rights not specifically granted to Hitachi under this
Agreement are reserved by NCD. Except as specifically set forth
herein, Hitachi has no rights to any Software source code. The
Software is the proprietary, trade secret and copyrighted property
of NCD or its suppliers, including Citrix Systems, Inc. and
Microsoft Corporation.
Subject to the conditions in this Agreement, NCD grants to Hitachi
a non-exclusive, non-transferable license to copy the Desktop
Software and the backup ROM Software pursuant to the terms herein
and distribute with each unit of Hardware (i) one (1) copy of the
pre-flashed ROM Software; (ii) one (1) copy of the Desktop
Software in object code form, including without limitation a copy
of the localized Hitachi version, on external CD-ROM media; and
(iii) one (1) copy of the Products' end user Documentation. All
ownership and title to the
<PAGE>
Software is retained by NCD or its licensors. Hitachi agrees
that (i) it will use the Software only as authorized in this
Agreement by NCD; and (ii) it will not copy or modify the
Software, except as otherwise provided herein; and (iii) that
it will not decompile, disassemble, translate or reverse
engineer the Software; and (iv) Hitachi will retain all
proprietary and copyright notices of NCD and its suppliers in
and on the Software and related documents. This license will
automatically terminate upon Hitachi 's material breach of any
of the provisions of this Section 8.1 with or without notice
from NCD; provided, that the end-user's right to use the
Software shall not be affected by such termination. Upon
termination, Hitachi must immediately return all Software
retained by Hitachi, in whatever form, to NCD. In the event of
a breach of this SECTION 8, NCD or its licensors shall be
entitled to injunctive relief, in addition to any other
remedies available, it being acknowledged that legal remedies
are inadequate. Hitachi's obligations concerning the Software
will survive any termination of this license.
8.2 Hitachi shall only distribute the Products pursuant to the
then-current, applicable, NCD end user license. If a Software
product is sublicensed by or on behalf of a unit or agency of the
United States Government, it must be provided to the U.S.
Government with a RESTRICTED RIGHTS legend as to its use,
duplication or disclosure under applicable government regulations
pertaining to trade secrets and commercial computer software
developed at private expense. Hitachi agrees that it will not
export or re-export any Software product to any country, person,
entity or end-user contrary to USA export restrictions.
8.3 Hitachi acknowledges that NCD's suppliers, including Microsoft
Corporation, are intended beneficiaries of this Agreement and all
end user agreements and, as such, are entitled to enforce the
provisions of this Agreement and end user agreements insofar as
they concern supplier's respective rights.
8.4 NCD further grants Hitachi a non-exclusive, non-transferable
license to distribute Updates, Upgrades, Fixes or Version Releases
to the ROM Software and the Desktop Software (or modified Desktop
software) as received from NCD on external media (e.g., CD-ROM) or
electronically as a replacement to the ROM Software and Desktop
Software originally distributed with the Hardware, respectively
(collectively "Replacement or Upgrade Software").
8.5 The cost of Microsoft or other third party owned Replacement or
Upgrade Software for ROM Software shall be in accordance with
Microsoft's or the third party's standard licensing practices. If
Microsoft or the third party licenses the Replacement or Upgrade
Software to NCD at no charge, NCD agrees to relicense the
Replacement or Upgrade Software to Hitachi at no charge. If
Microsoft or the third party provides NCD with an upgrade or new
version of the Replacement or Upgrade Software which is royalty
bearing, NCD will offer Hitachi such upgrade or new version of the
Replacement or Upgrade Software. If Hitachi elects to license the
upgrade or new version of the Replacement or Upgrade Software,
Hitachi agrees to pay NCD any additional royalties associated with
the cost of such Replacement or Upgrade Software.
<PAGE>
8.6 The cost of an NCD owned Replacement or Upgrade Software shall be
in accordance with NCD's standard licensing practices. If NCD
licenses the Replacement or Upgrade Software to distributors,
resellers and end users at no charge, NCD agrees to relicense the
Replacement or Upgrade Software to Hitachi at no charge. If NCD
provides an upgrade or new version of the Replacement or Upgrade
Software which is royalty bearing, NCD will offer Hitachi such
upgrade or new version of the Replacement or Upgrade Software. If
Hitachi elects to license the upgrade or new version of the
Replacement or Upgrade Software, Hitachi agrees to pay NCD any
additional royalties associated with the cost of such Replacement
or Upgrade Software.
9 LOCALIZATION
9.1 Hitachi agrees to localize portions of the initial version of the
Desktop Software (TMS) into Japanese in exchange for a
non-exclusive, non-transferable, royalty free license to
distribute the localized version of the Desktop Software with the
Product. Localization and pricing of any Version Release, Updates,
Upgrades or Bug Fix of the Desktop Software shall be as discussed
and agreed upon by the parties at the appropriate time.
9.2 NCD grants to Hitachi a non-exclusive, non-transferable license to
such portions of the source code of the Desktop Software necessary
to modify such software for the purpose of localization into the
Japanese language. All ownership and title to the Desktop Software
and all modification made by Hitachi shall reside with NCD.
Hitachi agrees that (i) it will use the source code only as
authorized in this Agreement; and (ii) that it will not decompile,
disassemble, translate or reverse engineer the Desktop Software,
except as specifically authorized in this Agreement; and (iii)
that it will faithfully reproduce all proprietary and copyright
notices of NCD in and on the Desktop Software and related
documents. In the event of a breach of this SECTION 9, NCD shall
be entitled to immediately terminate this Agreement (provided,
that the end-user's right to use the Software shall not be
affected by such termination) and seek injunctive relief, in
addition to any other remedies available, it being acknowledged
that legal remedies are inadequate. Hitachi's obligations
concerning the Desktop Software will survive any termination of
this license.
9.3 Hitachi will produce two (2) localized versions of the Desktop
Software, one (1) for the Hitachi logo product and one (1) to be
used for distribution with NCD's standard ThinSTAR product.
Hitachi may modify the Desktop Software to be distributed with the
Hitachi logo Product by turning off certain features, however it
may not add or remove features without the prior written consent
of NCD.
9.4 Hitachi shall submit the localized Desktop Software to NCD for
review and approval prior to its first distribution of the
localized Desktop Software. NCD's approval will not be
unreasonably delayed nor withheld.
9.5 Hitachi warrants to NCD that the localization will be performed in
a diligent,
<PAGE>
workmanlike manner and any items delivered to NCD and/or the
customer will generally conform to the technical specifications
for such deliverable.
10 INSPECTION OF NCD'S FACILITY
In addition to Hitachi 's right to perform acceptance test in accordance
with SECTION 7 above, Hitachi is entitled to inspect NCD's facility
and/or perform acceptance tests at any time if Hitachi deems necessary.
11 PRICING
11.1 The prices of the Products, spare parts, and repair parts shall be
set forth in Exhibit A attached hereto. Such prices set forth in
Exhibit A shall be quoted in the United States Dollars on an FOB
point of origin basis. (The term of FOB used herein shall be
interpreted in accordance with the provisions of INCOTERMS 1990,
as amended. Hitachi may, from time to time, request changes in the
price of the Products, spare parts and repair parts. Upon such
request both parties shall discuss in good faith to determine new
price. Exhibit A shall be amended to reflect the agreed new price.
11.2 It is understood that the prices set forth in Exhibit A are based
on a general expectation of market conditions for the Products. On
a quarterly basis or at any time during the term of this
Agreement, if Hitachi believes that the market conditions are such
that the prices as provided herein have become inconsistent with
this expectation, then Hitachi may provide written notice to NCD
to this effect, whereupon Hitachi and NCD will negotiate in good
faith with respect to a possible reduction in the prices.
12 PAYMENT
12.1 Hitachi will make all payments due NCD in U.S. dollars. The
Procurement and Technical Service Division of Hitachi America,
Ltd. (HAL) shall act as a disbursement agent of Hitachi in
accordance with the terms and conditions of this Agreement. NCD
shall issue its invoices to HAL, and HAL shall make payments to
NCD in accordance with this Agreement. Invoices shall be delivered
or addressed to:
Hitachi America, Ltd.
Procurement and Technical Service Division
2000 Sierra Point Parkway, MS:670
Brisbane, CA 94005-1819
Telephone: 415-244-7400
Facsimile: 415-244-7935
12.2 All Products will be invoiced upon shipment. Payment is due in
United States Dollars, on or before the last business day of the
month following shipment.
<PAGE>
12.3 Payments made by Hitachi to NCD shall be remitted by check to
NCD's address above or wire transfer into NCD's bank account
designated below.
Bank Name : Union Bank Of California
Bank Address: 400 University Avenue Palo Alto, CA, 94310
Account:Number: #64889-3649
Account Name: Network Computing Devices, Inc.
Phone Number:
Hitachi shall bear all taxes imposed on Hitachi in Japan with
respect to the payment under this Agreement, except for income tax
imposed on NCD under applicable Japanese Laws. If so required by
applicable law Hitachi shall deduct the amount of income taxes
levied by the Government of Japan from payments to be made by
Hitachi to NCD pursuant to this Agreement, and shall promptly make
payment of the such taxed amount to the appropriate tax
authorities of the Government of Japan and shall transmit to NCD
official tax receipts or other evidence issued by said appropriate
tax authorities in respect to such taxes deducted and paid by
Hitachi.
13 WARRANTY
13.1 NCD represents and warrants to Hitachi, and/or its customers that
it has all rights or has obtained all rights to manufacture and
distribute the Product and to make this Agreement, and that the
Product as manufactured by NCD, to the best of its knowledge does
not infringe any patent, trademark, copyright, trade secret, or
any other proprietary rights of any third party or parties.
13.2 NCD shall warrant and guarantee that the Hardware shall conform to
the relevant Purchase Specifications and that such Hardware shall
be free from defects in design, material and workmanship in
ordinary care, use and maintenance for the period of ninety (90)
days after the date of shipment. Hitachi may purchase extended
warranties offered by NCD as set forth in Exhibit A hereto.
In the event of a Hardware warranty claim Hitachi will contact
NCD. Once NCD determines that the Hardware is defective and under
warranty pursuant to the above-mentioned warranty, NCD shall issue
a return material authorization number ("RMA") to Hitachi. Hitachi
shall then return the defective Hardware to NCD's Mountain View,
California facility, and request that NCD perform, at its option,
any of the following remedial works therefor, at NCD's cost.
Within TEN (10) BUSINESS DAYS after NCD's receipt of the Hardware,
NCD will:
i) repair the defective portion of the Product;
ii) replace the defective portion of the Product;
iii).replace the defective Product with a new one; or
iv) subject to Hitachi 's prior consent, reimburse costs of
repair works incurred by Hitachi in case NCD requests Hitachi
to perform such
<PAGE>
remedial works by itself.
Shipping costs from Hitachi to NCD shall be borne by Hitachi for
Product returned to NCD under this warranty and shipping costs
from NCD to Hitachi shall be borne by NCD for Product repaired or
replaced under this warranty by NCD. For all such returned Product
NCD shall be the importer of record. Hitachi may select its
carrier of choice, however NCD will require that product be
cleared through customs using an NCD specified agent
13.3 NCD will pass through to Hitachi and its resellers the warranties
accompanying all Software as embodied in the shrink-wrap agreement
for all Products purchased under this Agreement. The term of such
warranty shall be the greater of ninety (90) days after delivery
to the end user or the date specified in the shrink-wrap agreement
and subject to the terms of this Agreement.
NCD warrants that the Desktop Software and NCD manufactured
software will function in accordance with its published
specifications. Hitachi's exclusive remedy and NCD's sole
obligation with respect to any Software failing to meet the
limited warranty as described herein shall be as follows:
If Hitachi has a Software warranty claim, Hitachi will contact
NCD. Once NCD determines that the Software is under warranty and
the Software is not complying to its published specifications and
documentation, and NCD can duplicate the error, NCD will use all
reasonable commercial efforts to fix, circumvent or replace the
Software in a manner to be reasonably determined by NCD.
In the event of defective media Hitachi will contact NCD. Once NCD
determines that the Software media is defective and under warranty
pursuant to the above-mentioned warranty, NCD shall issue a return
material authorization number ("RMA") to Hitachi. Hitachi shall
then return the defective Software media to NCD's Mountain View,
California facility. NCD shall replace the defective Software
media and return the new Software media to Hitachi, at NCD's
costs, including transportation costs.
NCD does not warrant that any item of Software is error-free or
that its use will be uninterrupted. NCD shall not be obligated to
remedy any Software defect, which cannot be adequately repeated.
13.4 Hitachi may make any representations or warranties in addition to
the representations and warranties found in this Agreement;
provided that Hitachi shall bear sole responsibility for
fulfillment of such representations or warranties.
NCD shall further warrant that the Software media will be free
from defects
<PAGE>
in materials for a period of ninety (90) days after the date of
shipment of the relevant Software .
13.5 Any out of box failures or DOA Products found to be defective
within THIRTY (30) DAYS after the date of shipment, or identified
as failing on initial power up should be replaced via expedited
delivery by NCD. For any Products returned and replaced under this
Section 13.5 NCD shall bear all shipping and handling expenses.
13.6 These warranties shall not apply to defects which have been caused
by accident, disaster, electrical power or failure, or other
causes, or to Products which have been tampered with or defaced or
which have been subjected to unintended or abnormal conditions of
operation, improper application or installation.
14 REPAIR SERVICE AFTER WARRANTY PERIOD
14.1 If the Products are found to be defective after the above-
mentioned warranty period, Hitachi may request NCD to repair the
defective Product at NCD's then current standard price for repair
service.
14.2 Transportation costs incurred by NCD in connection with repair
service to be performed pursuant to this SECTION 14 shall be
reimbursed by Hitachi to NCD.
14.3 Repair costs subsequent to the warranty period are listed in
Exhibit A attached hereto.
14.4 NCD shall retain sufficient quantity of any spare parts or
materials necessary for the repair of the Products as provided
herein, at least for five (5) years after the discontinuance of
the relevant Products.
15 DISCONTINUANCE OF PRODUCT
In case NCD intends to discontinue the supply of certain Products during
the term of this Agreement, NCD shall endeavor to give Hitachi 180 days
prior written notice, in any case NCD shall give written notice of at
least NINETY (90) DAYS ("Last Buy Notice") prior to the intended date of
discontinuance. Hitachi may, at least THIRTY (30) DAYS prior to the
intended date of discontinuance informed by Last Buy Notice, place a
non-cancelable Order ("Last Buy Order") to cover its future requirements,
and NCD shall accept such Last Buy Order. The quantity and delivery
schedule of the Products ordered by such Last Buy Order shall be mutually
agreed between the parties. In no event will the quantity of the Last Buy
Order exceed the total of Hitachi 's last twelve (12) months of purchases
of Product.
<PAGE>
16 ENGINEERING CHANGE
Engineering changes involving form, fit or function of the Products may
be made only by revising the Purchase Specifications of the relevant
Products by mutual consents of the parties in writing. Changes made in
the course of normal maintenance shall not be subject to this Section 16.
17 LIMITATION OF LIABILITY
17.1 THE WARRANTIES AND REMEDIES EXPRESSLY PROVIDED IN THIS AGREEMENT,
INCLUDING BUT NOT LIMITED TO SECTION 13, ARE NCD'S ONLY WARRANTIES
AND REMEDIES AND ARE IN LIEU OF ALL OTHER EXPRESS OR IMPLIED
WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, WHICH WARRANTIES ARE
SPECIFICALLY DISCLAIMED AND EXCLUDED.
17.2 NCD AND ITS SUPPLIERS SHALL, IN NO EVENT, BE LIABLE FOR ANY
INCIDENTAL, CONSEQUENTIAL, INDIRECT, PUNITIVE OR SPECIAL DAMAGES
(INCLUDING BUT NOT LIMITED TO LOST PROFITS, REVENUE, GOODWILL OR
LOSS OF USE OR DATA) OR ANY COSTS OF SUBSTITUTE PRODUCT ARISING
OUT OF, OR RELATED TO THE PRODUCTS, EVEN IF NCD HAD BEEN ADVISED,
KNOWN OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES OR
COSTS.
17.3 EXCEPT FOR NCD'S INDEMNITY OBLIGATION HEREUNDER AND BREACH OF
CONFIDENTIALITY OBLIGATION, IN NO EVENT SHALL EITHER PARTY BE
LIABLE FOR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL, PUNITIVE OR
INDIRECT DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT.
18 INDEMNITY
18.1 NCD shall at its expense, indemnify, hold harmless, and defend,
Hitachi, Hitachi 's subsidiaries and their respective customers,
from and against any action, claim, liability or damage arising
out of, in connection with or relating to any claim that the
Products provided hereunder infringe or misappropriate any patent,
copyright, trade secret, trademark or other intellectual property
rights. NCD shall pay all damages, costs and expenses (including
reasonable attorneys' fees) incurred by Hitachi, Hitachi 's
subsidiaries and their respective customers, provided that Hitachi
(i) notifies NCD promptly in writing of the claim, (ii) provides
NCD with reasonable information and assistance at NCD's expense
for the defense or settlement of the claim, and (iii) grants NCD
reasonable control of the defense or settlement of the claim;
provided that such defense or settlement shall be made through
attorneys reasonably acceptable to Hitachi.
<PAGE>
18.2 In the event that Products, are held to constitute an infringement
or their use is enjoined, NCD shall at its own expense, either (i)
procure for Hitachi , Hitachi 's subsidiaries and their respective
customers the royalty-free right to continue distributing or using
such Products, (ii) replace such Products to Hitachi 's reasonable
satisfaction with non-infringing products of equivalent quality
and performance, (iii) modify such Products so that they become
non-infringing and of equivalent quality and performance.
18.3 Notwithstanding the foregoing, NCD shall have no liability to
Hitachi to the extent an infringement or other claim to the extent
it is based on (i) the use of Products in combination with
equipment, devices or software other than those intended to be
used with the Products, (ii) the modification of Products by other
than NCD or its agents, or by Hitachi in accordance with the
instruction by NCD, (iii) NCD's compliance with Hitachi 's
specific suggestion or instruction; provided in each case such
infringement would not have occurred but for the occurrence of the
events in (i) to (iii) respectively.
19 CONFIDENTIALITY
19.1 All confidential information, disclosed by a party ("Disclosing
Party"), which shall be clearly marked as "Confidential" at the
time of disclosure, will be safeguarded and kept confidential by
the other party ("Receiving Party") during the term of this
Agreement and for three (3) years thereafter. The Disclosing
Party's confidential information shall be safeguarded by the
Receiving Party to the same extent that it safeguards its
confidential materials of similar importance; provided, however,
that the Receiving Party uses at least reasonable care.
19.2 Notwithstanding the foregoing, Hitachi may disclose NCD's
confidential information to Hitachi 's subcontractors and/or
Hitachi subsidiaries to the extent necessary for their activities
contemplated under this Agreement; provided, however, that Hitachi
shall impose the confidentiality obligations substantially similar
to those provided for in this SECTION 19 on such subcontractors
and Hitachi subsidiaries.
19.3 The foregoing confidentiality obligations mentioned above shall
not apply to:
i) information which now or hereafter, through no act or
failure to act on the part of the Receiving Party, is or
becomes generally known or available;
ii) information which is furnished to a third party by the
Disclosing Party without confidentiality obligations;
iii) information which is furnished to the Receiving Party by a
third party without confidentiality obligations,
iv) information which is independently developed by the
Receiving Party, or
v) disclosure as required by law or requested by any
governmental agency.
<PAGE>
20 TERM AND TERMINATION
20.1 This Agreement shall become effective as of the date first above
written and continue in full force and effect FOR FIVE (5) YEARS.
Such term shall be automatically renewed for each one (1) year
period unless either party delivers a written notice to the other
party WITHIN ONE HUNDRED-TWENTY (120) DAYS prior to the expiration
of the applicable term indicating such party's intention not to
renew this Agreement.
20.2 Either party may terminate this Agreement immediately upon written
notice to the other party, if at any time any one of the following
events occurs:
i) the other party files voluntary petition in bankruptcy
(other than solely for reconstruction;
ii) the other party is adjudicated as bankrupt;
iii) the other party makes an assignment for the benefit of its
creditors; iv) a competent court assumes jurisdiction of
the assets of the other party under a bankruptcy or
reorganization act;
v) a trustee or receiver is appointed by a court for all or
substantially all the assets of the other party;
vi) transfer to, or acquisition by, a third party of a
substantial portion of the business or assets of the other
party, if after careful consideration such transfer or
acquisition is deemed to be detrimental to such party; or
vii) any substantial change in the ownership or majority control
of the other party including merger which is, after careful
consideration, deemed to be detrimental to such party,
unless such other party or such other party's shareholders,
has a majority control of the resulting entity or such
change in control is the result of a venture capital
financing or a public offering of such other party's stock.
20.3 Either party may terminate this Agreement upon material breach of
the other party if such material breach is not cured within thirty
(30) days after the notice by terminating party. Such notice shall
describe the breach.
20.4 Upon termination or expiration of this Agreement, Hitachi shall at
NCD's direction either (i) destroy all units of Software in its
possession; or (ii) promptly return to NCD all copies of Software,
all copies of confidential or proprietary information relating to
the Products, all advertising materials and all other items
furnished by NCD, other than Products purchased or then-currently
licensed for authorized use by Hitachi . Upon NCD's request,
Hitachi agrees to provide written notice to NCD and/or its
supplier Microsoft Corporation certifying that it has fulfilled
the requirement of SECTION 22 below. Such certification shall be
signed by an officer or director of Hitachi.
<PAGE>
21. PRODUCT CHANGES
NCD shall not change, modify, improve or enhance the Product unless such
change, modification, improvement or enhancement is agreed by Hitachi and
reflected to the Purchase Specification of the relevant Products.
22. SUPPORT AND MAINTENANCE
22.1 To the extent available now, and during the life of this
Agreement, at the request of Hitachi, NCD shall provide the
following, collectively referred to as "Technical Information," at
no charge to Hitachi:
Problem history database -- A regularly updated problem history
database that includes a description of all changes, enhancements,
or problem fixes provided by NCD. NCD will provide this database
in a format agreed to by both parties.
Documentation will be in an electronic format suitable for both
reproduction and for publishing on Hitachi's Corporate Intranet,
and will be updated by new documentation from time-to-time as it
becomes available at no cost to Hitachi, to the extent such
Documentation is not subject to any third party encumbrances.
Documentation currently available will be provided to Hitachi as
soon as practicable, but not more than thirty (30) days following
the signing of this Agreement. New documentation will be provided
to Hitachi within thirty (30) days following its general release
by NCD.
22.2 To the extent such Documentation is not subject to any third party
encumbrances, Hitachi shall have the right to copy, modify and use
the Documentation provided by NCD for the purpose of providing
desired manuals, training or support materials, or the like
concerning the Product, provided that any NCD copyrights therein
are appropriately safeguarded. Such manuals, training or support
materials shall be used solely to support the Products.
22.3 Hitachi shall attempt to resolve Customer problems independently
using the information provided by NCD. If a greater level of
technical expertise is required, Hitachi will engage NCD in
resolving the Customer's problem. Hitachi will remain the
interface to the customer throughout the problem resolution
process. Hitachi will assign the problem a unique reference
number. NCD will use the same reference number when communicating
with Hitachi. Hitachi will provide NCD with all information
relevant to the problem, including, if applicable, the method used
by Hitachi to duplicate the problem on its own systems. Hitachi
will convey such information to supplier by whatever means both
parties agree are most expedient. NCD shall make available via
telephone, individuals sufficiently skilled to assist Hitachi in
problem resolution. If mutually determined as necessary by both
parties, NCD's technical
<PAGE>
representative will be available to provide on-site support at
Customer's location.
22.4 Hitachi will provide Levels 1 and 2 support. NCD will provide
Level 3 support on an as-required basis.
Level 1 -- Call acceptance and ownership until resolution. Gather
problem information and determine criticality. Search knowledge
base and deliver known solutions to customer. Dispatch Hitachi
Customer Engineer as appropriate. Escalate to Level 2 as required.
Level 2 -- Respond to Level 1 escalations with a higher level of
expertise in a specific technology area. Develop and gain customer
agreement for problem isolation, solution creation and solution
implementation plan. Provide an existing fix, work-around
solution, or escalate to NCD for assistance. Co-ordinate NCD's
performance.
Level 3 -- Assign resources as reasonably required to resolve
problem. Work with Hitachi Level 2 support to co-ordinate the
development and delivery of problem solutions. NCD shall not be
liable for any Software error caused by any of the following
events: (i) defects or errors resulting from any attachments,
modifications, enhancements of the Software made by any person
other than NCD, unless otherwise approved in writing by NCD; (ii)
incorrect use of the Software or operator error; (iii) any
modification of the Software if such modification would result in
a departure from the Specifications.
22.5 NCD's point(s) of contact for Technical Support will be provided
to Hitachi as soon as practicable, but not more than thirty (30)
days following the signing of this Agreement.
22.6 NCD's Technical Support as described in this Section 3 shall be
available to Hitachi (i) for all current Version Releases,
Upgrades and Updates and (ii) for the immediately two previous
Version Releases, including all respective Upgrades and Updates.
22.7 If requested, NCD will provide Hitachi with a report which details
NCD's performance relative to the response and resolution
guidelines specified in this Section 22. As a minimum, the report
will include a complete list of problems escalated to Level 3, the
time and date each call was received, a brief description of each
problem, problem status, and if resolved, the date and time of
closure.
23 NOTICE
Any notice or report pursuant to this Agreement shall be in writing and
in English and shall be deemed given if delivered personally, or five (5)
business days after mailing if sent by registered air mail (or
internationally recognized express mail such
<PAGE>
as DHL), postage paid, addressed to the other party at the address set
forth below or at such other address as designated by the party by
written notice, or upon receipt if sent by confirmed telex or facsimile.
For NCD:
Network Computing Devices, Inc.
350 N. Bernardo Avenue
Mountain View, CA 94043
Attn.: General Counsel
For Hitachi :
Hitachi, Ltd. PC Division
810 Shimoimaizumi
Ebina-shi, Kanagawa-ken, 243-0435
Attn.: Purchasing Manager
Either party may change its address for the purpose of this Agreement by
giving the other party written notice of its new address.
24 NO WAIVER
The failure of either party to enforce at any time any provision of this
Agreement will not be construed to be a waiver of any such provision and
will not affect the validity of this Agreement or any part thereof or the
right of either party to enforce such provision. No waiver of any breach
hereof will be construed to be a waiver of any other breach.
25 PUBLICATION
Neither party shall issue any press release or other announcement of this
Agreement without the other party's prior written consent, which shall
not be unreasonably withheld. The parties agree to cooperate on the
preparation and issuance of appropriate announcements.
26 SURVIVAL
No termination or expiration of this Agreement shall release any party
from any liability which at such time has already accrued to the other
party, or in any way affect the survival of any right, duty or obligation
of any party originated during the term of this Agreement which is
contemplated to be performed as of the date of or after such termination
or expiration including but not limited to Sections 8, 13, 17, 18, 19, 20
AND 32 of this Agreement .
<PAGE>
27 INDEPENDENT CONTRACTOR
NCD and Hitachi are independent contractors in the performance of this
Agreement, each acting for its own account and at its own risk. Neither
party is an agent or representative of the other party, and neither party
hereto has the authority, nor shall represent itself as having the
authority, to make commitments or incur obligations on behalf of the
other party.
28 FORCE MAJEURE
In any event that any force majeure, including but not limited to
disasters, fire, war, civil commotion, strikes, governmental regulations
or other occurrences beyond the reasonable control of either party, shall
occur and make it impracticable for either party to perform its
obligations set forth in this Agreement, the provisions of this Agreement
related thereto shall be suspended, but only as long as and so far as the
impediment exists. In the case of such suspension, the parties hereto
shall use their best efforts to overcome the cause and effect of such
suspension.
29 NON-ASSIGNMENT
Neither this Agreement nor any of the rights and obligations created
herein may be assigned, delegated, pledged or otherwise encumbered or
disposed of, in whole or in part, by either party to a third party
without prior written consent of the other party. Any attempt to do so
without the other's consent shall be null and void.
30 ENTIRE AGREEMENT
This Agreement, including Exhibits attached hereto, shall constitute the
entire agreement between the parties with respect to the subject matter
hereof and supersede all prior proposals, negotiations, agreements,
representations and other communications, written or oral, expressed or
implied, between the parties with respect to the subject matter hereof.
No modification, renewal, extension or waiver of this Agreement or any of
its provisions shall be binding unless made in writing by duly authorized
representatives of both parties.
31 SEVERABILITY
If any term, provision, covenant or condition of this Agreement or the
application thereof is held by a court of competent jurisdiction to be
invalid, void, unenforceable, or contrary to law, then the validity of
the remaining provisions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired, or invalidated. In such
instance, the parties shall use their best efforts to replace the
invalid, void or unenforceable provision(s), or provisions being contrary
to law, with legally valid or enforceable provisions approximating to the
extent possible the original intent of the parties hereto.
<PAGE>
32 GOVERNING LAW
This Agreement shall be, in all respects, governed by and construed in
accordance with the laws of California, U.S.A. , excluding its conflict
of law rules. The parties agree that the United Nations Convention on
Contracts for the International Sale of Goods shall be applicable to the
transactions contemplated by this Agreement. Each party agrees to resolve
any dispute, controversy or claim arising out of or related to this
Agreement, or the interpretation, breach, termination or validity of this
Agreement through an arbitration proceeding. Any arbitration shall be
conducted in English, and if the defending party is NCD, in San
Francisco, in accordance with the then current UNCITRAL Arbitration
Rules, and if the defending party is Hitachi , in Tokyo, in accordance
with the then current Commercial Arbitration Rule of the Japan Commercial
Arbitration Association. The award rendered by the arbitrator(s) shall
include costs of the arbitration, reasonable attorneys' fees and
reasonable costs for experts and other witnesses. Judgment on the award
may be entered in any court having jurisdiction. In no event shall the
arbitrator(s) be empowered to grant an award for consequential, special,
incidental, punitive or indirect damages arising out of or in connection
with this Agreement pursuant to Section 17 above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first above written by their duly
authorized representatives.
HITACHI , LTD. NETWORK COMPUTING DEVICES, INC.
/s/ /s/
- ---------------------------------- ---------------------------------------
Signature Signature
Hiroshi Hirosawa / Dept. Manager John DeSantis, Sr. V.P. Sales & Marketing
- --------------------------------- -------------------------------------------
Typed Name and Title Typed Name and Title
Date: Jan 28 `00 Date: Jan 30, 2000
---------------------------- -----------------
<PAGE>
EXHIBIT 10.51
NETWORK COMPUTING DEVICES, INC.
INCENTIVE STOCK OPTION AGREEMENT
Network Computing Devices, Inc. has granted to the individual (the
"OPTIONEE") named in the NOTICE OF GRANT OF STOCK OPTIONS (the "NOTICE") to
which this Incentive Stock Option Agreement is attached an option to purchase
certain shares of Stock upon the terms and conditions set forth in this Option
Agreement (the "OPTION") and the Notice. The Option has been granted pursuant to
the Network Computing Devices, Inc. 1999 Stock Option Plan (the "PLAN"). By
signing the Notice, the Optionee represents that the Optionee is familiar with
the terms and provisions of this Option Agreement and accepts the Option subject
to all of the terms and provisions hereof. The Optionee agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement or the Plan.
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "BOARD" shall also mean such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or
other committee of the Board duly appointed to administer the Plan and having
such powers as shall be specified by the Board. Unless the powers of the
Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted in the Plan, including, without limitation, the
power to amend or terminate the Plan at any time, subject to the terms of the
Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Network Computing Devices, Inc., a
Delaware corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an
advisor, engaged by a Participating Company to render services other than as
an Employee or a Director.
1
<PAGE>
(f) "DATE OF OPTION GRANT" means the effective date of
grant as set forth in the Notice.
(g) "DIRECTOR" means a member of the Board.
(h) "DISABILITY" means the permanent and total
disability of the Optionee within the meaning of Section 22(e)(3) of the Code.
(i) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in
the records of a Participating Company and who is an employee for purposes of
Section 422 of the Code; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for this purpose.
(j) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
(k) "EXERCISE PRICE" means the purchase price per
share of Stock as set forth in the Notice and as adjusted from time to time
pursuant to Section 9.
(l) "FAIR MARKET VALUE" means, as of any date, the
value of a share of Stock or other property as determined by the Board, in
its discretion, or by the Company, in its discretion, if such determination
is expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on
a national or regional securities exchange or market system, the Fair Market
Value of a share of Stock shall be the closing price of a share of Stock (or
the mean of the closing bid and asked prices of a share of Stock if the Stock
is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq
SmallCap Market or such other national or regional securities exchange or
market system constituting the primary market for the Stock, as reported in
the WALL STREET JOURNAL or such other source as the Company deems reliable.
If the relevant date does not fall on a day on which the Stock has traded on
such securities exchange or market system, the date on which the Fair Market
Value shall be established shall be the last day on which the Stock was so
traded prior to the relevant date, or such other appropriate day as shall be
determined by the Board, in its discretion.
(ii) If, on such date, there is no public
market for the Stock, the Fair Market Value of a share of Stock shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(m) "NUMBER OF OPTION SHARES" means the total number
of shares of Stock subject to the Option as set forth in the Notice and as
adjusted from time to time pursuant to Section 9.
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(n) "OPTION EXPIRATION DATE" means the date five (5)
years after the Date of Option Grant.
(o) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(p) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(q) "PARTICIPATING COMPANY GROUP" means, at any point
in time, all corporations collectively which are then Participating Companies.
(r) "SECURITIES ACT" means the Securities Act of 1933,
as amended.
(s) "SERVICE" means the Optionee's employment or
service with the Participating Company Group, whether in the capacity of an
Employee, a Director or a Consultant. The Optionee's Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionee renders Service to the Participating Company Group or a change
in the Participating Company for which the Optionee renders such Service,
provided that there is no interruption or termination of the Optionee's
Service. Furthermore, the Optionee's Service with the Participating Company
Group shall not be deemed to have terminated if the Optionee takes any
military leave, sick leave, or other bona fide leave of absence approved by
the Company; provided, however, that if any such leave exceeds ninety (90)
days, on the one hundred eighty-first (181st) day following the commencement
of such leave any Incentive Stock Option held by the Optionee shall cease to
be treated as an Incentive Stock Option and instead shall be treated
thereafter as a Nonstatutory Stock Option unless the Optionee's right to
return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise
designated by the Company or required by law, a leave of absence shall not be
treated as Service for purposes of determining the Optionee's Vested Shares.
The Optionee's Service shall be deemed to have terminated either upon an
actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
(t) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 9.
(u) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f)
of the Code.
(v) "VESTED SHARES" means that portion of the Number
of Option Shares which have vested in accordance with vesting schedule set
forth in the Notice. Provided that the Optionee's Service has not terminated
prior to the relevant date, an initial installment of shares will become
Vested Shares on the initial "Full Vest" date set forth in the Notice, and
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thereafter the remaining shares will become Vested Shares in substantially
equal installments at the periodic rate set forth in the Notice, with the
last such installment vesting on the last "Full Vest" date set forth in the
Notice.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include
the singular. Use of the term "or" is not intended to be exclusive, unless
the context clearly requires otherwise.
2. TAX STATUS OF OPTION.
2.1 TAX STATUS OF OPTION. This Option is intended to be an
incentive stock option within the meaning of Section 422(b) of the Code, but
the Company does not represent or warrant that this Option qualifies as such.
The Optionee should consult with the Optionee's own tax advisor regarding the
tax effects of this Option and the requirements necessary to obtain favorable
income tax treatment under Section 422 of the Code, including, but not
limited to, holding period requirements. (NOTE TO OPTIONEE: If the Option is
exercised more than three (3) months after the date on which you cease to be
an Employee (other than by reason of your death or permanent and total
disability as defined in Section 22(e)(3) of the Code), the Option will be
treated as a nonstatutory stock option and not as an incentive stock option
to the extent required by Section 422 of the Code.)
2.2 FAIR MARKET VALUE LIMITATION. To the extent that the Option
(together with all incentive stock options granted to the Optionee under all
stock option plans of the Participating Company Group, including the Plan)
becomes exercisable for the first time during any calendar year for shares
having a Fair Market Value greater than One Hundred Thousand Dollars
($100,000), the portion of such options which exceeds such amount will be
treated as nonstatutory stock options. For purposes of this Section 2.2,
options designated as incentive stock options are taken into account in the
order in which they were granted, and the Fair Market Value of stock is
determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set
forth in this Section 2.2, such different limitation shall be deemed
incorporated herein effective as of the date required or permitted by such
amendment to the Code. If the Option is treated as an incentive stock option
in part and as a nonstatutory stock option in part by reason of the
limitation set forth in this Section 2.2, the Optionee may designate which
portion of such Option the Optionee is exercising. In the absence of such
designation, the Optionee shall be deemed to have exercised the incentive
stock option portion of the Option first. Separate certificates representing
each such portion shall be issued upon the exercise of the Option. (NOTE TO
OPTIONEE: If the aggregate Exercise Price of the Option (that is, the
Exercise Price multiplied by the Number of Option Shares) plus the aggregate
exercise price of any other incentive stock options you hold (whether granted
pursuant to the Plan or any other stock option plan of the Participating
Company Group) is greater than $100,000, you should contact the Chief
Financial Officer of the Company to ascertain whether the entire Option
qualifies as an incentive stock option.)
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3. ADMINISTRATION.
All questions of interpretation concerning this Option
Agreement shall be determined by the Board. All determinations by the Board
shall be final and binding upon all persons having an interest in the Option.
Any officer of a Participating Company shall have the authority to act on
behalf of the Company with respect to any matter, right, obligation, or
election which is the responsibility of or which is allocated to the Company
herein, provided the officer has apparent authority with respect to such
matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable prior to the termination of the Option (as
provided in Section 6) in an amount not to exceed that portion of the Number
of Option Shares which have become Vested Shares less the number of shares
previously acquired upon exercise of the Option. Notwithstanding the
foregoing, the Option may not be exercised as to less than ten (10) shares at
any one time or, if less, the number of shares then remaining exercisable
pursuant to the Option. In no event shall the Option be exercisable for more
shares than the Number of Option Shares.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by
written notice to the Company which must state the election to exercise the
Option, the number of whole shares of Stock for which the Option is being
exercised and such other representations and agreements as to the Optionee's
investment intent with respect to such shares as may be required pursuant to
the provisions of this Option Agreement. The written notice must be signed by
the Optionee and must be delivered to the Chief Financial Officer of the
Company, or other authorized representative of the Participating Company
Group, prior to the termination of the Option as set forth in Section 6,
accompanied by full payment of the aggregate Exercise Price for the number of
shares of Stock being purchased and the tax withholding obligations, if any,
as provided in Section 4.4. The Option shall be deemed to be exercised upon
receipt by the Company of such written notice, the aggregate Exercise Price,
and tax withholding obligations, if any.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the aggregate Exercise Price for the
number of shares of Stock for which the Option is being exercised shall be
made (i) in cash or cash equivalent, (ii) by tender to the Company of whole
shares of Stock owned by the Optionee having a Fair Market Value (as
determined by the Company without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company) not less
than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as
defined in Section 4.3(b)(ii), or (iv) by any combination of the foregoing.
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(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the
foregoing, the Option may not be exercised by tender to the Company of shares
of Stock to the extent such tender of Stock would constitute a violation of
the provisions of any law, regulation or agreement restricting the redemption
of the Company's stock. The Option may not be exercised by tender to the
Company of shares of Stock unless such shares either have been owned by the
Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(ii) CASHLESS EXERCISE. A "CASHLESS
EXERCISE" means the assignment in a form acceptable to the Company of the
proceeds of a sale or loan with respect to some or all of the shares of Stock
acquired upon the exercise of the Option pursuant to a program or procedure
approved by the Company (including, without limitation, through an exercise
complying with the provisions of Regulation T as promulgated from time to
time by the Board of Governors of the Federal Reserve System). The Company
reserves, at any and all times, the right, in the Company's sole and absolute
discretion, to decline to approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in
whole or in part, or at any time thereafter as requested by the Company, the
Optionee hereby authorizes withholding from payroll and any other amounts
payable to the Optionee, and otherwise agrees to make adequate provision for
(including by means of a Cashless Exercise to the extent permitted by the
Company), any sums required to satisfy the federal, state, local and foreign
tax withholding obligations of the Participating Company Group, if any, which
arise in connection with the Option, including, without limitation,
obligations arising upon (i) the exercise, in whole or in part, of the
Option, (ii) the transfer, in whole or in part, of any shares acquired upon
exercise of the Option, (iii) the operation of any law or regulation
providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option.
The Optionee is cautioned that the Option is not exercisable unless the tax
withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Optionee may not be able to exercise the Option when desired
even though the Option is vested, and the Company shall have no obligation to
issue a certificate for such shares.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares
as to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.
The grant of the Option and the issuance of shares of Stock upon exercise of
the Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the
Option may not be exercised unless (i) a registration
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statement under the Securities Act shall at the time of exercise of the
Option be in effect with respect to the shares issuable upon exercise of the
Option or (ii) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Option may be issued in accordance with the
terms of an applicable exemption from the registration requirements of the
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE
EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. Questions concerning this restriction should be directed to
the Chief Financial Officer of the Company. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance
and sale of any shares subject to the Option shall relieve the Company of any
liability in respect of the failure to issue or sell such shares as to which
such requisite authority shall not have been obtained. As a condition to the
exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance
with any applicable law or regulation and to make any representation or
warranty with respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to
issue fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
The Option may be exercised during the lifetime of the Optionee
only by the Optionee or the Optionee's guardian or legal representative and
may not be assigned or transferred in any manner except by will or by the
laws of descent and distribution. Following the death of the Optionee, the
Option, to the extent provided in Section 7, may be exercised by the
Optionee's legal representative or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION.
The Option shall terminate and may no longer be exercised on
the first to occur of (a) the Option Expiration Date, (b) the last date for
exercising the Option following termination of the Optionee's Service as
described in Section 7, or (c) a Change in Control to the extent provided in
Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the Optionee
(or the Optionee's guardian or legal representative) at any time prior to
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the expiration of three (3) months after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the
Participating Company Group is terminated because of the death of the
Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the
Optionee's legal representative or other person who acquired the right to
exercise the Option by reason of the Optionee's death at any time prior to
the expiration of six (6) months after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration
Date. The Optionee's Service shall be deemed to have terminated on account of
death if the Optionee dies within three (3) months after the Optionee's
termination of Service.
(c) TERMINATION AFTER A CHANGE IN CONTROL. If the
Optionee's Service with the Participating Company Group ceases as a result of
Termination After a Change in Control (as defined below), the (i) the Option,
to the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's
guardian or legal representative) at any time prior to the expiration of six
(6) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date, and (ii) the Option shall
become immediately exercisable and vested in full as of the date on which the
Optionee's Service terminated. Notwithstanding the foregoing, if it is
determined that the provisions or operation of this Section 7.1(c) would
preclude treatment of a Change in Control as a "pooling-of-interests" for
accounting purposes and provided further that in the absence of the preceding
sentence such Change in Control would be treated as a "pooling-of-interests"
for accounting purposes, then this Section 7.1(c) shall be void AB INITIO,
and the vesting and exercisability of the Option shall be determined under
any other applicable provision of the Option Agreement.
(d) OTHER TERMINATION OF SERVICE. If the Optionee's
Service with the Participating Company Group terminates for any reason,
except Disability, death or Termination After a Change in Control, the
Option, to the extent unexercised and exercisable by the Optionee on the date
on which the Optionee's Service terminated, may be exercised by the Optionee
within thirty (30) days (or such other longer period of time as determined by
the Board, in its discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods
set forth in Section 7.1 is prevented by the provisions of Section 4.6, the
Option shall remain exercisable until thirty (30) days after the date the
Optionee is notified by the Company that the Option is exercisable, but in
any event no later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods
set forth in Section 7.1 of shares acquired upon the exercise of the Option
would subject the Optionee to suit under Section 16(b) of the Exchange Act,
the Option shall remain exercisable until the earliest to occur of (i) the
tenth
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(10th) day following the date on which a sale of such shares by the Optionee
would no longer be subject to such suit, (ii) the one hundred and ninetieth
(190th) day after the Optionee's termination of Service, or (iii) the Option
Expiration Date.
7.4 CERTAIN DEFINITIONS.
(a) "TERMINATION AFTER A CHANGE IN CONTROL" shall mean
either of the following events occurring within twelve (12) months after a
Change in Control:
(i) termination by the Participating Company
Group of the Optionee's Service with the Participating Company Group for any
reason other than for Cause (as defined below); or
(ii) the Optionee's resignation for Good
Reason (as defined below) from all capacities in which the Optionee is then
rendering Service to the Participating Company Group within a reasonable
period of time following the event constituting Good Reason.
Notwithstanding any provision herein to the contrary, Termination After a Change
in Control shall not include any termination of the Optionee's Service with the
Participating Company Group which (1) is for Cause (as defined below); (2) is a
result of the Optionee's death or disability; (3) is a result of the Optionee's
voluntary termination of Service other than for Good Reason; or (4) occurs prior
to the effectiveness of a Change in Control.
(b) "CAUSE" shall mean any of the following: (i) the
Optionee's theft, dishonesty, or falsification of any Participating Company
documents or records; (ii) the Optionee's improper use or disclosure of a
Participating Company's confidential or proprietary information; (iii) any
action by the Optionee which has a detrimental effect on a Participating
Company's reputation or business; (iv) the Optionee's failure or inability to
perform any reasonable assigned duties after written notice from the
Participating Company Group of, and a reasonable opportunity to cure, such
failure or inability; (v) any material breach by the Optionee of any
employment agreement between the Optionee and the Participating Company
Group, which breach is not cured pursuant to the terms of such agreement; or
(vi) the Optionee's conviction (including any plea of guilty or nolo
contendere) of any criminal act which impairs the Optionee's ability to
perform his or her duties with the Participating Company Group.
(c) "GOOD REASON" shall mean any one or more of the
following:
(i) without the Optionee's express written
consent, the assignment to the Optionee of any duties, or any limitation of
the Optionee's responsibilities, substantially inconsistent with the
Optionee's positions, duties, responsibilities and status with a
Participating Company immediately prior to the date of the Change in Control;
(ii) without the Optionee's express written
consent, the relocation of the principal place of the Optionee's Service to a
location that is more than fifty
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(50) miles from the Optionee's principal place of Service immediately prior
to the date of the Change in Control, or the imposition of travel
requirements substantially more demanding of the Optionee than such travel
requirements existing immediately prior to the date of the Change in Control;
(iii) any failure by a Participating Company
to pay, or any material reduction by Participating Company of, (1) the
Optionee's base salary in effect immediately prior to the date of the Change
in Control (unless reductions comparable in amount and duration are
concurrently made for all other employees of the Participating Company Group
with responsibilities, organizational level and title comparable to the
Optionee's), or (2) the Optionee's bonus compensation, if any, in effect
immediately prior to the date of the Change in Control (subject to applicable
performance requirements with respect to the actual amount of bonus
compensation earned by the Optionee); or
(iv) any failure by a Participating Company
to (1) continue to provide the Optionee with the opportunity to participate,
on terms no less favorable than those in effect for the benefit of any
employee group which customarily includes a person holding the employment
position or a comparable position with the Participating Company then held by
the Optionee, in any benefit or compensation plans and programs, including,
but not limited to, the Participating Company's life, disability, health,
dental, medical, savings, profit sharing, stock purchase and retirement
plans, if any, in which the Optionee was participating immediately prior to
the date of the Change in Control, or their equivalent, or (2) provide the
Optionee with all other fringe benefits (or their equivalent) from time to
time in effect for the benefit of any employee group which customarily
includes a person holding the employment position or a comparable position
with the Participating Company then held by the Optionee.
8. CHANGE IN CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to
have occurred if any of the following occurs with respect to the Company: (i)
the direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively,
the "TRANSACTION") wherein the stockholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were
transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For
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purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the
Transaction, own the Company or the Transferee Corporation(s), as the case
may be, either directly or through one or more subsidiary corporations. The
Board shall have the right to determine whether multiple sales or exchanges
of the voting stock of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), shall either assume the Company's rights and obligations under
the Option or substitute for the Option a substantially equivalent option for
the Acquiring Corporation's stock. In the event the Acquiring Corporation
elects not to assume the Company's rights and obligations under the Option or
substitute for the Option in connection with the Change in Control, and
provided that the Optionee's Service has not terminated prior to such date,
any unexercised portion of the Option shall be immediately exercisable and
vested in full as of the date ten (10) days prior to the date of the Change
in Control. Any exercise of the Option that was permissible solely by reason
of this Section 8.2 shall be conditioned upon the consummation of the Change
in Control. The Option shall terminate and cease to be outstanding effective
as of the date of the Change in Control to the extent that the Option is
neither assumed or substituted for by the Acquiring Corporation in connection
with the Change in Control nor exercised as of the date of the Change in
Control. Notwithstanding the foregoing, if the corporation the stock of which
is subject to the Option immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Change in Control is the
surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power
of its voting stock is held by another corporation or by other corporations
that are members of an affiliated group within the meaning of Section 1504(a)
of the Code without regard to the provisions of Section 1504(b) of the Code,
the Option shall not terminate unless the Board otherwise provides in its
sole discretion.
8.3 FAIR MARKET VALUE LIMITATION. Should the exercisability of
this Option be accelerated in connection with a Change in Control in
accordance with Section 7.1(c) or 8.2, then to the extent that the aggregate
Fair Market Value of the shares of Stock with respect to which the Optionee
may exercise the Option for the first time during the calendar year of such
acceleration, when added to the aggregate Fair Market Value of the shares
subject to any other options designated as incentive stock options granted to
the Optionee under all stock option plans of the Participating Company Group
prior to the Date of Option Grant with respect to which such options are
exercisable for the first time during the same calendar year, exceeds One
Hundred Thousand Dollars ($100,000) (or such other limit, if any, imposed by
Section 422 of the Code), the portion of the Option which exceeds such amount
shall be treated as a nonstatutory stock option. For purposes of the
preceding sentence, options designated as incentive stock options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of shares of stock shall be determined as of the time the option
with respect to such shares is granted.
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9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
In the event of any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in
the capital structure of the Company, appropriate adjustments shall be made
in the number, Exercise Price and class of shares of stock subject to the
Option. If a majority of the shares which are of the same class as the shares
that are subject to the Option are exchanged for, converted into, or
otherwise become (whether or not pursuant to an Ownership Change Event)
shares of another corporation (the "NEW SHARES"), the Board may unilaterally
amend the Option to provide that the Option is exercisable for New Shares. In
the event of any such amendment, the Number of Option Shares and the Exercise
Price shall be adjusted in a fair and equitable manner, as determined by the
Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 9 shall be
rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than
the par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding
and conclusive.
10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT.
The Optionee shall have no rights as a stockholder with respect
to any shares covered by the Option until the date of the issuance of a
certificate for the shares for which the Option has been exercised (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company). No adjustment shall be made for
dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9. If
the Optionee is an Employee, the Optionee understands and acknowledges that,
except as otherwise provided in a separate, written employment agreement
between a Participating Company and the Optionee, the Optionee's employment
is "at will" and is for no specified term. Nothing in this Option Agreement
shall confer upon the Optionee, whether an Employee or Consultant, any right
to continue in the Service of a Participating Company or interfere in any way
with any right of the Participating Company Group to terminate the Optionee's
Service as an Employee or Consultant, as the case may be, at any time.
11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION.
The Optionee shall dispose of the shares acquired pursuant to
the Option only in accordance with the provisions of this Option Agreement.
In addition, the Optionee shall promptly notify the Chief Financial Officer
of the Company if the Optionee disposes of any of the shares acquired
pursuant to the Option within one (1) year after the date of the Optionee
exercises all or part of the Option or within two (2) years after the Date of
Option Grant. Until such time as the Optionee disposes of such shares in a
manner consistent with the provisions of this Option Agreement, unless
otherwise expressly authorized by the Company, the Optionee shall hold all
shares acquired pursuant to the Option in the Optionee's name (and not in the
name of any nominee) for the one-year period immediately after the exercise
of the Option and the
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two-year period immediately after Date of Option Grant. At any time during
the one-year or two-year periods set forth above, the Company may place a
legend on any certificate representing shares acquired pursuant to the Option
requesting the transfer agent for the Company's stock to notify the Company
of any such transfers. The obligation of the Optionee to notify the Company
of any such transfer shall continue notwithstanding that a legend has been
placed on the certificate pursuant to the preceding sentence.
12. LEGENDS.
The Company may at any time place legends referencing any
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry
out the provisions of this Section.
13. MISCELLANEOUS PROVISIONS.
13.1 BINDING EFFECT. Subject to the restrictions on transfer
set forth herein, this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
13.2 TERMINATION OR AMENDMENT. The Board may terminate or amend
the Plan or the Option at any time; provided, however, that except as
provided in Section 8.2 in connection with a Change in Control, no such
termination or amendment may adversely affect the Option or any unexercised
portion hereof without the consent of the Optionee unless such termination or
amendment is necessary to comply with any applicable law or government
regulation or is required to enable the Option to qualify as an incentive
stock option. No amendment or addition to this Option Agreement shall be
effective unless in writing.
13.3 NOTICES. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given (except to the
extent that this Option Agreement provides for effectiveness only upon actual
receipt of such notice) upon personal delivery or upon deposit in the United
States Post Office, by registered or certified mail, with postage and fees
prepaid, addressed to the other party at the address of such party as set
forth in the Notice or at such other address as such party may designate in
writing from time to time to the other party.
13.4 INTEGRATED AGREEMENT. This Option Agreement and the Notice
constitute the entire understanding and agreement of the Optionee and the
Participating Company Group with respect to the subject matter contained
herein and therein, and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the
Participating Company Group with respect to such subject matter other than
those as set forth or provided for herein or therein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive
any exercise of the Option and shall remain in full force and effect.
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13.5 APPLICABLE LAW. This Option Agreement shall be governed by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
the State of California.
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EXHIBIT 10.52
NETWORK COMPUTING DEVICES, INC.
1999 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Network Computing Devices, Inc. 1999
Stock Option Plan (the "Plan") is hereby established effective as of March
31, 1999 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by
providing an incentive to attract, retain and reward persons performing
services for the Participating Company Group and by motivating such persons
to contribute to the growth and profitability of the Participating Company
Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the
shares of Stock available for issuance under the Plan have been issued and
all restrictions on such shares under the terms of the Plan and the
agreements evidencing Options granted under the Plan have lapsed. However,
all Incentive Stock Options shall be granted, if at all, within ten (10)
years from the earlier of the date the Plan is adopted by the Board or the
date the Plan is duly approved by the stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or
other committee of the Board duly appointed to administer the Plan and having
such powers as shall be specified by the Board. Unless the powers of the
Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted herein, including, without
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limitation, the power to amend or terminate the Plan at any time, subject to
the terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Network Computing Devices, Inc., a
Delaware corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an
advisor, engaged by a Participating Company to render services other than as
an Employee or a Director.
(f) "DIRECTOR" means a member of the Board.
(g) "DISABILITY" means the permanent and total
disability of the Optionee within the meaning of Section 22(e)(3) of the Code.
(h) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in
the records of a Participating Company and, with respect to an Incentive
Stock Option granted to such person, who is an employee for purposes of
Section 422 of the Code; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the
value of a share of Stock or other property as determined by the Board, in
its discretion, or by the Company, in its discretion, if such determination
is expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on
a national or regional securities exchange or market system, the Fair Market
Value of a share of Stock shall be the closing price of a share of Stock (or
the mean of the closing bid and asked prices of a share of Stock if the Stock
is so quoted instead) as quoted on the Nasdaq National Market, The Nasdaq
SmallCap Market or such other national or regional securities exchange or
market system constituting the primary market for the Stock, as reported in
the WALL STREET JOURNAL or such other source as the Company deems reliable.
If the relevant date does not fall on a day on which the Stock has traded on
such securities exchange or market system, the date on which the Fair Market
Value shall be established shall be the last day on which the Stock was so
traded prior to the relevant date, or such other appropriate day as shall be
determined by the Board, in its discretion.
(ii) If, on such date, there is no public
market for the Stock, the Fair Market Value of a share of Stock shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse.
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(k) "INCENTIVE STOCK OPTION" means an Option intended
to be (as set forth in the Option Agreement) and which qualifies as an
incentive stock option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to
Section 16 of the Exchange Act.
(m) "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement ) or which does not
qualify as an Incentive Stock Option.
(n) "OPTION" means a right to purchase Stock (subject
to adjustment as provided in Section 4.2) pursuant to the terms and
conditions of the Plan. An Option may be either an Incentive Stock Option or
a Nonstatutory Stock Option.
(o) "OPTION AGREEMENT" means a written agreement
between the Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee and any shares acquired
upon the exercise thereof.
(p) "OPTIONEE" means a person who has been granted one
or more Options.
(q) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point
in time, all corporations collectively which are then Participating Companies.
(t) "PREDECESSOR PLAN" means the Network Computing
Devices, Inc. 1989 Stock Option Plan as in effect immediately prior to the
Predecessor Plan Termination Date.
(u) "PREDECESSOR PLAN TERMINATION DATE" means the
earlier of April 28, 1999 or the date on which the Predecessor Plan is
terminated in accordance with its terms.
(v) "RULE 16b-3" means Rule 16b-3 under the Exchange
Act, as amended from time to time, or any successor rule or regulation.
(w) "SECTION 162(m)" means Section 162(m) of the Code.
(x) "SECURITIES ACT" means the Securities Act of 1933,
as amended.
(y) "SERVICE" means an Optionee's employment or
service with the Participating Company Group, whether in the capacity of an
Employee, a Director or a
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Consultant. An Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders
Service to the Participating Company Group or a change in the Participating
Company for which the Optionee renders such Service, provided that there is
no interruption or termination of the Optionee's Service. Furthermore, an
Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the one hundred
eighty-first (181st) day following the commencement of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and instead shall be treated thereafter as a
Nonstatutory Stock Option unless the Optionee's right to return to Service
with the Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or
required by law, a leave of absence shall not be treated as Service for
purposes of determining vesting under the Optionee's Option Agreement. An
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether an
Optionee's Service has terminated and the effective date of such termination.
(z) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(aa) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f)
of the Code.
(bb) "TEN PERCENT OWNER OPTIONEE" means an Optionee
who, at the time an Option is granted to the Optionee, owns stock possessing
more than ten percent (10%) of the total combined voting power of all classes
of stock of a Participating Company within the meaning of Section 422(b)(6)
of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context
clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan or of any Option
shall be determined by the Board, and such determinations shall be final and
binding upon all persons having an interest in the Plan or such Option.
3.2 AUTHORITY OF OFFICERS. Any officer of a Participating
Company shall have the authority to act on behalf of the Company with respect
to any matter, right, obligation,
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determination or election which is the responsibility of or which is
allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, determination or election.
3.3 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any Class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if
any, of Rule 16b-3.
3.4 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or
times at which, Options shall be granted and the number of shares of Stock to
be subject to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of
Stock or other property;
(d) to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction
of any tax withholding obligation arising in connection with the Option or
such shares, including by the withholding or delivery of shares of stock,
(iv) the timing, terms and conditions of the exercisability of the Option or
the vesting of any shares acquired upon the exercise thereof, (v) the time of
the expiration of the Option, (vi) the effect of the Optionee's termination
of Service with the Participating Company Group on any of the foregoing, and
(vii) all other terms, conditions and restrictions applicable to the Option
or such shares not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel, renew, or grant
a new Option in substitution for any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an
Optionee's termination of Service with the Participating Company Group;
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(h) to prescribe, amend or rescind rules, guidelines
and policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make
all other determinations and take such other actions with respect to the Plan
or any Option as the Board may deem advisable to the extent consistent with
the Plan and applicable law.
3.5 COMMITTEE COMPLYING WITH SECTION 162(m). If a Participating
Company is a "publicly held corporation" within the meaning of Section
162(m), the Board may establish a Committee of "outside directors" within the
meaning of Section 162(m) to approve the grant of any Option which might
reasonably be anticipated to result in the payment of employee remuneration
that would otherwise exceed the limit on employee remuneration deductible for
income tax purposes pursuant to Section 162(m).
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be the sum of (a) the number of shares
that remain available for grant pursuant to the Predecessor Plan immediately
prior to the Predecessor Plan Termination Date (not to exceed 481,000
shares)(1) and (b) the number of unissued shares subject to each option
outstanding under the Predecessor Plan immediately prior to the Predecessor
Plan Termination Date which for any reason subsequently expires or is
terminated or canceled (not to exceed 67,000 shares).(2) Such shares shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled, or if shares of Stock acquired upon exercise of an
Option subject to a Company repurchase option and are repurchased by the
Company at the Optionee's exercise price, the shares of Stock allocable to
the unexercised portion of such Option or such repurchased shares of Stock
shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of
the Company, appropriate adjustments shall be made in the number and class of
shares subject to the Plan and to any outstanding Options, in the
- --------
(1) On the Predecessor Plan Termination Date, the number of shares available for
grant under the Predecessor Plan was 529,501. Therefore, the applicable number
of shares under clause (a) is 481,000.
(2) Additional shares made available under this Plan under clause (b) must be
registered on Form S-8 under this Plan. (Filing fees paid for unissued shares
registered under Form S-8 for the Predecessor Plan may be transferred to Form
S-8 for this Plan.)
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Section 162(m) Grant Limit set forth in Section 5.4, and in the exercise price
per share of any outstanding Options. If a majority of the shares which are of
the same class as the shares that are subject to outstanding Options are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event, as defined in Section 8.1) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Options to provide that such Options are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the exercise
price per share of, the outstanding Options shall be adjusted in a fair and
equitable manner as determined by the Board, in its discretion. Notwithstanding
the foregoing, any fractional share resulting from an adjustment pursuant to
this Section 4.2 shall be rounded down to the nearest whole number, and in no
event may the exercise price of any Option be decreased to an amount less than
the par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 4.2 shall be final, binding and
conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only
to Employees, Consultants and Directors. For purposes of the foregoing
sentence, "Employees," "Consultants" and "Directors" shall include
prospective Employees, prospective Consultants, and prospective Directors to
whom Options are granted in connection with written offers of employment or
other service relationship with a Participating Company. Eligible persons may
be granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an
Employee on the effective date of the grant of an Option to such person may
be granted only a Nonstatutory Stock Option. An Incentive Stock Option
granted to a prospective Employee upon the condition that such person become
an Employee shall be deemed granted effective on the date such person
commences Service with a Participating Company, with an exercise price
determined as of such date in accordance with Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans
of the Participating Company Group, including the Plan) become exercisable by
an Optionee for the first time during any calendar year for stock having a
Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the
portions of such options which exceed such amount shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5.3, options
designated as Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set
forth in this Section 5.3, such different limitation shall be deemed
incorporated herein effective as of the date and with respect to such Options
as required or permitted by such amendment to the Code. If an Option is
treated as an Incentive Stock Option in part and as a Nonstatutory Stock
Option in part by reason of the limitation set forth in this Section 5.3, the
Optionee may designate which portion of such Option the Optionee is
exercising. In the absence of such designation, the Optionee shall be deemed
to have exercised the Incentive Stock Option portion of the Option
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first. Separate certificates representing each such portion shall be issued
upon the exercise of the Option.
5.4 SECTION 162(m) GRANT LIMIT. Subject to adjustment as
provided in Section 4.2, no Employee shall be granted one or more Options
within any fiscal year of the Company which in the aggregate are for the
purchase of more than Two Hundred Fifty Thousand (250,000) shares; provided,
however, that such limit shall be Five Hundred Thousand (500,000) shares in
the case of any Employee who serves as the Chairman of the Board, President,
Chief Executive Officer or Chief Operating Officer at any time during such
fiscal year (the "SECTION 162(m) GRANT LIMIT"). An Option which is canceled
in the same fiscal year of the Company in which it was granted shall continue
to be counted against the Section 162(m) Grant Limit for such period.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall
from time to time establish. No Option or purported Option shall be a valid
and binding obligation of the Company unless evidenced by a fully executed
Option Agreement. Option Agreements may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the
following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of
the Option, (b) the exercise price per share for a Nonstatutory Stock Option
shall be not less than eighty-five percent (85%) of the Fair Market Value of
a share of Stock on the effective date of grant of the Option, and (c) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall have an
exercise price per share less than one hundred ten percent (110%) of the Fair
Market Value of a share of Stock on the effective date of grant of the
Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a Nonstatutory Stock Option) may be granted with an exercise price
lower than the minimum exercise price set forth above if such Option is
granted pursuant to an assumption or substitution for another option in a
manner qualifying under the provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time
or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by
the Board and set forth in the Option Agreement evidencing such Option;
provided, however, that (a) no Option shall be exercisable after the
expiration of ten (10) years after the effective date of grant of such
Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee
shall be exercisable after the expiration of five (5) years after the
effective date of grant of such Option, and (c) no Option granted to a
prospective Employee, prospective Consultant or prospective Director may
become exercisable prior to the date on which such person commences Service
with a Participating Company. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an Option, any
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Option granted hereunder shall have a term of five (5) years from the
effective date of grant of the Option.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of
shares of Stock being purchased pursuant to any Option shall be made (i) in
cash, by check or cash equivalent, (ii) by tender to the Company, or
attestation to the ownership, of shares of Stock owned by the Optionee having
a Fair Market Value (as determined by the Company without regard to any
restrictions on transferability applicable to such stock by reason of federal
or state securities laws or agreements with an underwriter for the Company)
not less than the exercise price, (iii) by the assignment of the proceeds of
a sale or loan with respect to some or all of the shares being acquired upon
the exercise of the Option (including, without limitation, through an
exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) if the Optionee is an Employee and in the
Company's sole discretion at the time the Option is exercised, by the
Optionee's promissory note in a form approved by the Company, (v) by such
other consideration as may be approved by the Board from time to time to the
extent permitted by applicable law, or (vi) by any combination thereof. The
Board may at any time or from time to time, by adoption of or by amendment to
the standard forms of Option Agreement described in Section 7, or by other
means, grant Options which do not permit all of the foregoing forms of
consideration to be used in payment of the exercise price or which otherwise
restrict one or more forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock to the extent such tender or
attestation would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by
tender to the Company, or attestation to the ownership, of shares of Stock
unless such shares either have been owned by the Optionee for more than six
(6) months or were not acquired, directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company
reserves, at any and all times, the right, in the Company's sole and absolute
discretion, to establish, decline to approve or terminate any program or
procedures for the exercise of Options by means of a Cashless Exercise.
(iii) PAYMENT BY PROMISSORY NOTE. No
promissory note shall be permitted if the exercise of an Option using a
promissory note would be a violation of any law. Any permitted promissory
note shall be on such terms as the Board shall determine at the time the
Option is granted. The Board shall have the authority to permit or require
the Optionee to
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secure any promissory note used to exercise an Option with the shares of
Stock acquired upon the exercise of the Option or with other collateral
acceptable to the Company. Unless otherwise provided by the Board, if the
Company at any time is subject to the regulations promulgated by the Board of
Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's
securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable upon the exercise
of an Option, or to accept from the Optionee the tender of, a number of whole
shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the federal, state, local and foreign taxes, if
any, required by law to be withheld by the Participating Company Group with
respect to such Option or the shares acquired upon the exercise thereof.
Alternatively or in addition, in its sole discretion, the Company shall have
the right to require the Optionee, through payroll withholding, cash payment
or otherwise, including by means of a Cashless Exercise, to make adequate
provision for any such tax withholding obligations of the Participating
Company Group arising in connection with the Option or the shares acquired
upon the exercise thereof. The Company shall have no obligation to deliver
shares of Stock until the Participating Company Group's tax withholding
obligations have been satisfied by the Optionee.
6.5 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier
termination of the Option as otherwise provided herein and unless otherwise
provided by the Board in the grant of an Option and set forth in the Option
Agreement, an Option shall be exercisable after an Optionee's termination of
Service as follows:
(i) DISABILITY. If the Optionee's Service
with the Participating Company Group is terminated because of the Disability
of the Optionee, the Option, to the extent unexercised and exercisable on the
date on which the Optionee's Service terminated, may be exercised by the
Optionee (or the Optionee's guardian or legal representative) at any time
prior to the expiration of three (3) months (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement
evidencing such Option (the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Optionee's Service with
the Participating Company Group is terminated because of the death of the
Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the
Optionee's legal representative or other person who acquired the right to
exercise the Option by reason of the Optionee's death at any time prior to
the expiration of six (6) months (or such longer period of time as determined
by the Board, in its discretion) after the date on which the Optionee's
Service terminated, but in any event no later than the Option
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Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months after the
Optionee's termination of Service.
(iii) TERMINATION AFTER CHANGE IN CONTROL.
The Board may, in its discretion, provide in any Option Agreement that if the
Optionee's Service with the Participating Company Group ceases as a result of
"Termination After a Change in Control" (as defined in such Option
Agreement), then (1) the Option, to the extent unexercised and exercisable on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee (or the Optionee's guardian or legal representative) at any time
prior to the expiration of six months (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date, and (2) the exercisability and vesting of the Option shall
be accelerated effective as of the date on which the Optionee's Service
terminated to such extent, if any, as shall have been determined by the
Board, in its discretion, and set forth in the Option Agreement.
Notwithstanding the foregoing, if it is determined that the provisions or
operation of this Section 6.5(a)(iii) would preclude treatment of a Change in
Control as a "pooling-of-interests" for accounting purposes and provided
further that in the absence of the preceding sentence such Change in Control
would be treated as a "pooling-of-interests" for accounting purposes, then
this Section 6.5(a)(iii) shall be void AB INITIO, and the vesting and
exercisability of the Option shall be determined under any other applicable
provision of the Plan or the Option Agreement evidencing such Option.
(iv) OTHER TERMINATION OF SERVICE. If the
Optionee's Service with the Participating Company Group terminates for any
reason, except Disability, death or Termination After a Change in Control,
the Option, to the extent unexercised and exercisable by the Optionee on the
date on which the Optionee's Service terminated, may be exercised by the
Optionee within thirty days (30) days (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of an Option within the
applicable time periods set forth in Section 6.5(a) is prevented by the
provisions of Section 11 below, the Option shall remain exercisable until
thirty (30) days (or such longer period of time as is determined by the
Board, in its discretion) after the date the Optionee is notified by the
Company that the Option is exercisable, but in any event no later than the
Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods
set forth in Section 6.5(a) of shares acquired upon the exercise of the
Option would subject the Optionee to suit under Section 16(b) of the Exchange
Act, the Option shall remain exercisable until the earliest to occur of (i)
the tenth (10th) day following the date on which a sale of such shares by the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of Service, or (iii)
the Option Expiration Date.
11
<PAGE>
7. STANDARD FORM OF OPTION AGREEMENT.
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an
"Incentive Stock Option" shall comply with and be subject to the terms and
conditions set forth in the form of Incentive Stock Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from
time to time.
7.2 NONSTATUTORY STOCK OPTION AGREEMENT. Unless otherwise
provided by the Board at the time the Option is granted, an Option designated
as a "Nonstatutory Stock Option" shall comply with and be subject to the
terms and conditions set forth in the form of Nonstatutory Stock Option
Agreement adopted by the Board concurrently with its adoption of the Plan and
as amended from time to time.
7.3 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any of the standard forms of Option
Agreement described in this Section 7 either in connection with the grant or
amendment of an individual Option or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and
conditions of any such new, revised or amended standard form or forms of
Option Agreement are not inconsistent with the terms of the Plan.
8. CHANGE IN CONTROL.
8.1 DEFINITIONS. Except as otherwise determined by the Board
and set forth in an Option Agreement, the following terms shall have their
respective meanings set forth below:
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to
have occurred if any of the following occurs with respect to the Company: (i)
the direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively,
the "TRANSACTION") wherein the stockholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were
transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For
purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the
Transaction, own the Company or the Transferee Corporation(s), as the
12
<PAGE>
case may be, either directly or through one or more subsidiary corporations.
The Board shall have the right to determine whether multiple sales or
exchanges of the voting stock of the Company or multiple Ownership Change
Events are related, and its determination shall be final, binding and
conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), shall either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. The Board may, in
its discretion, provide in any Option Agreement that, in the event of a
Change in Control, the exercisability and vesting of the outstanding Option
shall accelerate upon such circumstances and to such extent as specified in
such Option Agreement. The exercise or vesting of any Option that was
permissible solely by reason of this Section 8.2 and the provisions of such
Option Agreement shall be conditioned upon the consummation of the Change in
Control. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Change in Control nor exercised
as of the date of the Change in Control shall terminate and cease to be
outstanding effective as of the date of the Change in Control.
Notwithstanding the foregoing, if the corporation the stock of which is
subject to the outstanding Options immediately prior to an Ownership Change
Event described in Section 8.1(a)(i) constituting a Change in Control is the
surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power
of its voting stock is held by another corporation or by other corporations
that are members of an affiliated group within the meaning of Section 1504(a)
of the Code without regard to the provisions of Section 1504(b) of the Code,
the outstanding Options shall not terminate unless the Board otherwise
provides in its sole discretion.
9. PROVISION OF INFORMATION.
Each Optionee shall be given access to information concerning
the Company equivalent to that information generally made available to the
Company's common stockholders.
10. NONTRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, an Option shall be
exercisable only by the Optionee or the Optionee's guardian or legal
representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. COMPLIANCE WITH SECURITIES LAW.
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state or foreign law with respect to such
securities. Options may not be exercised if the issuance of shares of Stock
upon exercise would constitute a violation of any applicable federal, state
or foreign securities laws or other law or regulations or the requirements of
any stock exchange or market system
13
<PAGE>
upon which the Stock may then be listed. In addition, no Option may be
exercised unless (a) a registration statement under the Securities Act shall
at the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (b) in the opinion of legal counsel
to the Company, the shares issuable upon exercise of the Option may be issued
in accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. The inability of the Company to obtain
from any regulatory body having jurisdiction the authority, if any, deemed by
the Company's legal counsel to be necessary to the lawful issuance and sale
of any shares hereunder shall relieve the Company of any liability in respect
of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of any
Option, the Company may require the Optionee to satisfy any qualifications
that may be necessary or appropriate, to evidence compliance with any
applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
12. INDEMNIFICATION.
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, or any right granted hereunder, and against all amounts paid
by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60)
days after the institution of such action, suit or proceeding, such person
shall offer to the Company, in writing, the opportunity at its own expense to
handle and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's stockholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may
be issued under the Plan (except by operation of the provisions of Section
4.2), (b) no change in the class of persons eligible to receive Incentive
Stock Options, and (c) no other amendment of the Plan that would require
approval of the Company's stockholders under any applicable law, regulation
or rule. No termination or amendment of the Plan shall affect any then
outstanding Option unless expressly provided by the Board. In any event, no
termination or amendment of the Plan may adversely affect any then
outstanding Option without the consent of the Optionee, unless such
termination or amendment is required to
14
<PAGE>
enable an Option designated as an Incentive Stock Option to qualify as an
Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing Network Computing Devices, Inc. 1999 Stock
Option Plan was duly adopted by the Board on March 31, 1999.
------------------------------------
15
<PAGE>
PLAN HISTORY
March 31, 1999 Board adopts Plan, with an initial share reserve
equal to the sum of (a) the number of shares
available for grant under the Predecessor Plan on the
Predecessor Plan Termination Date (not to exceed
481,000 shares) and (b) the number of shares subject
to options outstanding under the Predecessor Plan on
the Predecessor Plan Termination Date which
subsequently expire or are terminated or canceled
(not to exceed 67,000 shares).
[May 26, 1999 Stockholders approve Plan, with an initial reserve
as described above.]
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
ORGANIZATION JURISDICTION NAME
------------ -----------------
<S> <C> <C>
NCD Graphic Software Corporation California
Network Computing Devices Australia
Australia Pty. Ltd.
Network Computing Devices Canada
(Canada), Inc.
Network Computing Devices England
(UK) Limited
Network Computing Devices France
(France) S.A.R.L.
Network Computing Devices Germany
GmbH
Network Computing Devices Sweden
(Scandinavia) AB
Network Computing Devices The Netherlands
(Benelux) B.V.
Network Computing Devices (FSC), Inc. Guam
NCD Acquisition Corp. Indiana
</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 of Network Computing Devices, Inc. of our reports dated February 10,
except as to Note 11, which is as of March 30, 2000, relating to the
consolidated balance sheets of Network Computing Devices, Inc. and subsidiaries
as of December 31, 1999 and 1998, 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, 1999, and the related schedule, which
reports appear in the December 31, 1999, annual report on Form 10-K of Network
Computing Devices, Inc.
KPMG LLP
Mountain View, California
April 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,781
<SECURITIES> 3,558
<RECEIVABLES> 27,288
<ALLOWANCES> 5,301
<INVENTORY> 15,082
<CURRENT-ASSETS> 49,940
<PP&E> 22,074
<DEPRECIATION> 18,423
<TOTAL-ASSETS> 56,764
<CURRENT-LIABILITIES> 18,888
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 37,860
<TOTAL-LIABILITY-AND-EQUITY> 56,764
<SALES> 109,030<F1>
<TOTAL-REVENUES> 109,030
<CGS> 66,028<F2>
<TOTAL-COSTS> 66,028
<OTHER-EXPENSES> 52,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,143)
<INCOME-TAX> 7,116
<INCOME-CONTINUING> (16,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,259)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
<FN>
<F1>INCLUDES REVENUES FROM LICENSING OF SOFTWARE AND SUPPORT
<F2>INCLUDES COSTS FROM LICENSING OF SOFTWARE AND SUPPORT
</FN>
</TABLE>
