<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
REALNETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 7371 91-1628146
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1111 THIRD AVENUE, SUITE 2900
SEATTLE, WASHINGTON 98101
(206) 674-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT GLASER, CHIEF EXECUTIVE OFFICER
1111 THIRD AVENUE, SUITE 2900
SEATTLE, WASHINGTON 98101
(206) 674-2700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
LAURA T. PUCKETT CHARLES J. KATZ, JR.
JOHN M. STEEL SCOTT L. GELBAND
ALAN KOSLOW PERKINS COIE
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. 1201 THIRD AVENUE, 40TH FLOOR
1001 FOURTH AVENUE PLAZA, SUITE 4500 SEATTLE, WASHINGTON 98101-3099
SEATTLE, WASHINGTON 98154
</TABLE>
------------------------
Approximate date of commencement of proposed sale to public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] __________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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==================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OFFERING PRICE AGGREGATE
OF SECURITIES AMOUNT TO BE PER OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Common Stock, par value $.001
per share................... shares $ $34,500,000 $10,455
==================================================================================================
</TABLE>
(1) Includes shares that may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1997
SHARES
[REALNETWORKS LOGO] REALNETWORKS, INC.
(FORMERLY "PROGRESSIVE NETWORKS, INC.")
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
------------------------
All of the shares of Common Stock offered hereby are being sold
by RealNetworks, Inc. Prior to the offering, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $ and $ per share. For factors
considered in determining the initial public offering price, see "Underwriting".
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "RNWK".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
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<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------- ------------- -----------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(3)........................... $ $ $
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- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional shares at the initial public offering price
per share, less the underwriting discount, solely to cover over-allotments.
If such option is exercised in full, the total initial public offering
price, underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
------------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[SCREEN-SHOTS OF
WEB PAGES SUPERIMPOSED
OVER COMPANY LOGO]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
2
<PAGE> 4
CD-ROM INSERTED HERE
THE CD-ROM CONTAINS THE REALPLAYER, WHICH IS AVAILABLE FOR DOWNLOAD FREE
OF CHARGE FROM THE COMPANY'S WEB SITE. THE CD-ROM IS CONTAINED IN AN ENVELOPE
BOUND INTO THE PROSPECTUS, WITH A CLEAR CIRCULAR WINDOW THAT ALLOWS THE TOP OF
THE CD-ROM TO BE SEEN. THE CD-ROM IS LAMINATED WITH THE COMPANY'S LOGO AND THE
REALPLAYER LOGO, AS WELL AS THE FOLLOWING LANGUAGE: "FOR WINDOWS 95, WINDOWS NT
AND MACINTOSH."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including the information under "Risk Factors."
Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters' over-allotment option will not be exercised; (ii)
reflects an amendment to the Company's Amended and Restated Articles of
Incorporation (the "Articles") to change the Company's authorized capital stock
to Common Stock, Special Common Stock and preferred stock effective on the
closing of the offering; (iii) reflects the conversion of each outstanding share
of the Company's Series A Common Stock, Series B Common Stock, Series C Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock into one share of Common Stock effective on
closing of the offering; (iv) reflects the conversion of each outstanding share
of the Company's Series E Preferred Stock, at the election of the holder, into
one share of Common Stock, rather than Special Common Stock, on closing of the
offering; and (v) assumes the issuance of shares of Common Stock
reflecting exercise of outstanding warrants on closing of the offering, except
as noted hereinafter. See "Description of Capital Stock."
THE COMPANY
RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. Streaming technology enables the transmission and playback of
continuous "streams" of multimedia content, such as audio and video, over the
Internet and intranets and represents a significant advancement over earlier
technologies. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of
advertising-supported content aggregation Web sites.
The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium. These enhanced multimedia
capabilities, combined with the unique interactive properties of the Internet,
are attracting a large and expanding audience, a growing number of advertisers
and an increasing breadth and depth of content and online commercial
applications. As the Web continues to evolve as a mass communications medium,
the Company believes that an increasing amount of the types of content currently
delivered through traditional media, such as radio and television, will be
delivered over the Internet. The Company believes that streaming media
technology is essential to this evolution because it provides a more compelling
user experience, allowing the Internet to compete more effectively with
traditional media for audience share.
From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 18 million copies of its
RealPlayer software have been downloaded and that over 200,000 copies of its
premium client product, RealPlayer Plus, have been sold electronically in the
product's first year of distribution. In addition, the Company believes that
more than 55,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. As a result of these activities
and the Company's aggressive promotional programs, the Company believes that its
"Real" brand has become one of the most widely recognized brands on the
Internet. The Company's customers, including ABC Radio Net, Bloomberg Online,
The Boeing Company, Dow Jones & Company, Inc., NBC Desktop, News Corporation,
Starwave Corporation and 3Com Corporation, use its software products and
services to deliver a broad range of streaming audio and video news, sports,
entertainment and corporate information over the Internet and intranets.
3
<PAGE> 6
The Company's objective is to be the leading streaming media company,
providing software and services that enable the delivery of a broad range of
multimedia content over the Internet and intranets, thereby facilitating the
evolution of the Internet into a mass communications and commerce medium. The
key elements of this strategy include the extension of the Company's technology
leadership, a continued focus on product ubiquity and brand leadership, the
continued development of its electronic commerce and content aggregation
businesses, a focus on providing cross-platform product solutions that operate
in a wide variety of bandwidth environments, and the strengthening and expansion
of strategic relationships.
The Company was incorporated in Washington in February 1994. Unless the
context otherwise requires, the term "Company" or "RealNetworks" refers to
RealNetworks, Inc. and its subsidiaries: RealNetworks, SARL, RealNetworks,
Limited and Progressive Networks Kabushiki Kaisha. Prior to September 26, 1997,
the Company's name was "Progressive Networks, Inc." The Company's principal
executive offices are located at 1111 Third Avenue, Suite 2900, Seattle,
Washington 98101, and its telephone number is (206) 674-2700. Information
contained on the Company's Web sites will not be deemed to be part of this
Prospectus.
RealAudio(R), RealVideo(R), RealPlayer(TM), RealPlayer Plus(TM),
EasyStart(TM), RealNetworks(TM), Real(TM), the Real logo, RealStore(TM),
Film.com(TM), Daily Briefing(TM) and Timecast(TM) are registered and
unregistered trademarks, service marks and trade names of the Company. This
Prospectus also includes trademarks, service marks and trade names other than
those identified in this paragraph, all of which are the property of their
respective holders.
THE OFFERING
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<S> <C>
Common Stock offered by the Company........... shares
Common Stock to be outstanding after the
offering:
Common Stock................................ shares(1)
Special Common Stock........................ 0 shares(1)
Use of proceeds............................... Working capital requirements and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol........ "RNWK"
</TABLE>
- ---------------
(1) Excludes 13,400,000 shares of Common Stock reserved for issuance under the
Company's 1995 Stock Option Plan, Amended and Restated 1996 Stock Option
Plan and 1998 Employee Stock Purchase Plan. See "Management -- Benefit
Plans." Also excludes up to 3,709,305 shares of Common Stock or Special
Common Stock issuable on exercise of a warrant to purchase Series E
Preferred Stock at an exercise price of $13.48 per share (the "Series E
Warrant") that terminates on the closing of the offering. The holder of the
Series E Preferred Stock may elect to receive Common Stock or Special Common
Stock, or a combination thereof, upon conversion of the Series E Preferred
Stock. The Special Common Stock may only be converted into Common Stock upon
the prior written consent of the Company's Board of Directors. Assumes
3,338,374 shares of Series E Preferred Stock convert into an equal number of
shares of Common Stock. See "Risk Factors -- Control by Mr. Glaser;
Antitakeover Provisions," "-- Impact of Exercise of the Series E Warrant;
Election by Microsoft to Receive Common Stock Or Special Common Stock" and
"Description of Capital Stock -- Common Stock."
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The summary
consolidated financial data for the period from February 9, 1994 (inception) to
December 31, 1994, for the years ended December 31, 1995 and 1996, and as of
December 31, 1996, are derived from the Consolidated Financial Statements of the
Company audited by KPMG Peat Marwick LLP, independent accountants. The summary
consolidated financial data as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements prepared by the Company on a basis consistent with the Company's
audited Consolidated Financial Statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results for such periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for any other interim period or for the year ending
December 31, 1997.
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<CAPTION>
PERIOD FROM
FEBRUARY 9, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------- -------------------
1994 1995 1996 1996 1997
---------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues................... $ -- $ 1,812 $14,012 $ 4,244 $13,366
Total cost of revenues............... -- 62 2,185 395 3,054
Gross profit......................... -- 1,750 11,827 3,849 10,312
Operating loss....................... (545) (1,595) (4,016) (1,566) (6,808)
Net loss............................. (545) (1,501) (3,789) (1,449) (6,372)
Pro forma net loss per share......... $ ( ) $ ( )
Shares used to compute pro forma net
loss per share(1)..................
</TABLE>
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<CAPTION>
JUNE 30, 1997
DECEMBER 31, --------------------------
1996 ACTUAL AS ADJUSTED(2)
------------ ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 19,595 $11,496 $
Working capital....................................... 16,893 8,879
Total assets.......................................... 26,468 22,148
Redeemable, convertible preferred stock............... 23,153 23,264
Shareholders' equity (deficit)........................ (3,320) (9,764)
</TABLE>
- ---------------
(1) For an explanation of the number of shares used to compute pro forma net
loss per share, see Note 1 of Notes to Consolidated Financial Statements.
(2) As adjusted to give effect to the (i) issuance in July 1997 of 3,338,374
shares of Series E Preferred Stock at $8.99 per share; (ii) conversion of
all outstanding shares of Series A Common Stock, Series B Common Stock,
Series C Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock into Common Stock on closing of the offering; (iii) sale by the
Company of the shares of Common Stock offered hereby at an assumed
initial public offering price of $ per share (after deducting the
underwriting discount and estimated expenses of the offering); and (iv)
application of the estimated net proceeds of the offering. Excludes up to
3,709,305 shares of Common Stock or Special Common Stock (representing
additional cash and shareholders' equity of up to $50,001,431) issuable on
exercise of the Series E Warrant. See "Use of Proceeds," "Capitalization"
and "Description of Capital Stock."
5
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should consider carefully the following risk factors before making an
investment decision concerning the Common Stock. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES
The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. Accordingly, the Company has a limited
operating history on which an evaluation of the Company and its prospects can be
based. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in early stages of
development, particularly companies in rapidly evolving markets such as media
delivery and electronic commerce over the Internet and intranets. The Company
has incurred significant losses since its inception and expects to continue to
incur substantial operating losses for the foreseeable future. As of June 30,
1997, the Company had an accumulated deficit of $12.4 million. To achieve and
sustain profitability, the Company must, among other things, establish
widespread market acceptance of its existing products, successfully develop new
products and services, respond quickly and effectively to competitive, market
and technological developments, expand sales and marketing operations, broaden
customer support capabilities, control expenses and continue to attract and
retain qualified personnel. In addition, market prices for the Company's
products must attain a level at which the Company can generate revenues in
excess of its anticipated operating and other expenses. There can be no
assurance that the Company will achieve or sustain profitability. See
"-- Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results," "-- Competition; Relationship With Microsoft" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATION IN QUARTERLY
OPERATING RESULTS
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
accurately its revenues. The Company expects to experience significant
fluctuations in its future quarterly operating results due to a variety of
factors, many of which are outside the Company's control, including (i) demand
for the Company's products and services, (ii) introduction or enhancement of
products and services by the Company and its competitors, (iii) market
acceptance of new products and services of the Company and its competitors, (iv)
price reductions by the Company or its competitors or changes in how products
and services are priced (such as the Company's recent decision to distribute
free of charge a version of its basic EasyStart Server, which previously sold
for $295 to $995), (v) the mix of products and services sold by the Company and
its competitors, (vi) the mix of distribution channels through which the
Company's products are licensed and sold, (vii) the mix of international and
North American revenues, (viii) costs of litigation and intellectual property
protection, (ix) the growth in the use of the Internet, (x) the Company's
ability to attract and retain qualified personnel, (xi) the amount and timing of
operating costs and capital expenditures related to expansion of the Company's
business, operations and infrastructure, (xii) technical difficulties with
respect to the use of the Company's products, (xiii) governmental regulations
and (xiv) general economic conditions and economic conditions specifically
related to the Internet. It is often difficult to forecast what the effect of
such factors would be, or the effect that any such factors or any combination
thereof would have, on the Company's results of operations for any given fiscal
quarter. There can be no assurance that the Company will be able to achieve
historical revenue levels or maintain its historical growth rate. The Company
has used, and expects to continue to use, price promotions to increase trial,
purchase and use of its products, as well as to increase the overall recognition
of its brands. The effect of such promotions on revenues in a particular period
may be significant and extremely difficult to forecast. Based on the foregoing,
the Company believes that its
6
<PAGE> 9
quarterly revenues, expenses and operating results could vary significantly in
the future, and that period-to-period comparisons should not be relied upon as
indications of future performance.
Historically, the Company has received a significant portion of its
revenues from a limited number of sales and license agreements. The Company
believes that a customer's decision to purchase its server products or license
its technology is relatively discretionary and, for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any downturn
in the economy or in the business of potential customers could have a material
adverse effect on the Company's revenues and quarterly results.
The Company generally makes available its software products in "beta" form
to the public prior to finalizing product features, functionality and
operability. This may cause certain customers to delay purchasing decisions
until final versions of the products are available, which could have a material
adverse effect on the Company's revenues and quarterly results.
The Company derives a significant portion of its revenues from the sale of
technical support services and software upgrades to its installed customer base.
There can be no assurance that a sufficient number of the Company's customers
will continue to enter into support and upgrade contracts or will renew existing
support and upgrade contracts, or that revenues therefrom will continue to be
significant. The loss of a material portion of such revenues would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management has observed that revenues from advertising sales have tended to
be higher in the second and fourth quarters, and retail sales have tended to be
highest in the fourth quarter. The Company typically operates with little or no
backlog. As a result, quarterly sales and operating results depend primarily on
the volume and timing of orders received in the quarter, both of which are
difficult to forecast. The Company typically recognizes a substantial portion of
its revenues in the last month of each quarter.
As a result of the Company's limited operating history, the Company does
not have relevant historical financial data for a significant number of periods
on which to base planned operating expenses. The Company's expense levels are
based in part on its expectations with regard to future revenues. The Company
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. As a result, any significant shortfall in demand
for the Company's products and services relative to the Company's expectations
would have an immediate material adverse effect on the Company's business,
financial condition and results of operations. Due to the foregoing factors, it
is likely that in some future quarters the Company's operating results will fall
below the expectations of securities analysts and investors, which would likely
have a material adverse effect on the trading price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION; RELATIONSHIP WITH MICROSOFT
The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company.
The Company engages primarily in the sale and licensing of audio and video
streaming products and services, electronic commerce and Internet advertising.
The Company's principal competitors in the development and distribution of audio
and video streaming solutions include Microsoft Corporation ("Microsoft"),
VXtreme, Inc. ("VXtreme"), VDOnet Corporation ("VDOnet"), Xing Technology
Corporation ("Xing"), Precept Software, Inc. ("Precept"), Cubic VideoComm, Inc.
("Cubic"), Motorola, Inc. ("Motorola"), VivoActive Software, Inc. ("Vivo"),
Vosaic LLC ("Vosaic") and Oracle Corporation ("Oracle"). The Company's RealAudio
and RealVideo system also competes to a lesser degree with non-streaming audio
and video delivery technologies such as AVI and Quicktime, and indirectly with
7
<PAGE> 10
delivery systems for multimedia content other than audio and video, such as
Flash by Macromedia Inc. ("Macromedia") and Enliven by Narrative Communications
Corp. ("Narrative"). Competitive factors in this market include the quality and
reliability of software; features for creating, editing and adapting content;
ease of use and interactive user features; scaleability and cost per user; and
compatibility with the user's existing network components and software systems.
To expand its user base and further enhance the user experience, the Company
must continue to innovate and improve the performance of its RealAudio and
RealVideo system. The Company is committed to the continued market penetration
of its brand, products and services. The Company may, as a strategic response to
changes in the competitive environment, implement pricing, licensing, service or
marketing changes designed to extend its current brand and technology franchise.
For example, the Company recently made a version of its EasyStart Server, which
had previously sold for $295 to $995, available for download free of charge.
Continued price concessions or the emergence of other pricing or distribution
strategies by competitors may have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company derives significant revenues from sales of RealPlayer Plus, an
enhanced version of its free player product. The Company's ability to continue
to generate revenues from sales of RealPlayer Plus is in large part dependent on
its ability to differentiate the features and functionality of RealPlayer Plus
from its own and competitors' free and for sale player products. In addition,
the demand for RealPlayer Plus is in part contingent on the demand for and the
volume of free player products in the market. The Company's failure to continue
to differentiate RealPlayer Plus, or to stimulate demand for its free player or
RealPlayer Plus, may have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company anticipates that consolidation will continue in the streaming
media industry and related industries such as computer software, media and
communications. Competitors may be acquired by, receive investments from or
enter into other commercial relationships with, larger, well-established and
well-financed companies. For instance, Microsoft recently acquired VXtreme, a
direct competitor of the Company in the market for streaming media software.
Microsoft also owns a minority interest in VDOnet, a direct competitor of the
Company in the market for streaming video software. In addition, in June 1997
the Company and Microsoft entered into a strategic agreement pursuant to which
Microsoft purchased a minority interest in the Company. See "-- Department of
Justice Subpoena," "Business -- Microsoft Relationship" and "Certain
Transactions."
In connection with the Microsoft agreement, the Company granted Microsoft a
nonexclusive license to certain substantial elements of the source code of the
Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio/RealVideo Version 4.0 technology to third parties under
certain circumstances. The agreement also provides for substantial refunds to
Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote the Active Streaming Format ("ASF") as a
standard file format for streaming media. The agreement also requires the
Company to provide Microsoft with engineering consultation services, certain
error corrections, and certain technical support over a defined term. As a
result of Microsoft's agreement with the Company, its acquisition of VXtreme and
its investment in VDOnet, Microsoft will be able to augment substantially the
functionality of NetShow, its own streaming media product, which could have a
material adverse effect on the competitiveness of the Company's products. See
"-- Impact of Evolving Standards," "-- Uncertain Protection of Intellectual
Property; Risks Associated With Licensed Third-Party Technology" and
"Business -- Microsoft Relationship."
Microsoft currently competes with the Company in the market for streaming
media server and player software. The Company believes that Microsoft will
compete more directly with the Company in the
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future. The Company also believes that Microsoft's commitment to and presence in
the streaming media industry will dramatically increase competitive pressure in
the overall market for streaming media software, leading to, among other things,
increased pricing pressure and longer sales cycles. Such pressures may result in
further price reductions in the Company's products and may also materially
reduce the Company's market share. The Company believes that Microsoft will
incorporate streaming media technology in its Web browser software and certain
of its server software offerings, possibly at no additional cost to the user. In
addition, notwithstanding the Company's cooperation with Microsoft regarding
ASF, Microsoft may promote technologies and standards not compatible with the
Company's technology. Microsoft has a longer operating history, a larger
installed base of customers and dramatically greater financial, distribution,
marketing and technical resources than the Company. As a result, there can be no
assurance that the Company will be able to compete effectively with Microsoft
now or in the future, or that the Company's business, financial condition and
results of operations will not be materially adversely affected. In addition, if
considerable industry consolidation occurs, there can be no assurance that the
Company will be able to continue to compete effectively. See "Business -- Sales,
Marketing and Distribution" and "-- Microsoft Relationship."
The Company currently derives significant revenues from the electronic
distribution of certain of its products. The Company recently opened its
RealStore Web site, an online store for the sale of the Company's products,
third-party streaming media tools and utilities, and intranet-based training
products. The Company competes with a variety of Web sites, such as
Buydirect.Com and Software.Net, which also offer software products for download.
To compete successfully in the electronic commerce market, the Company must
attract sufficient commercial traffic to its RealStore Web site by offering
high-quality merchandise in a compelling, easy-to-purchase format. There can be
no assurance that the Company will be able to compete successfully in this
market, and any failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Products and Services" and "-- Competition."
In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue is also growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the Company or that
revenues derived from such advertising will be material. In addition, if the
Company loses advertising customers, fails to attract new customers, is forced
to reduce advertising rates or otherwise modify its rate structure to retain or
attract customers, or loses Web site traffic, the Company's business, financial
condition and results of operations may be materially adversely affected. See
"Business -- Products and Services" and "-- Competition."
DEPARTMENT OF JUSTICE SUBPOENA
Shortly after the Company entered into its strategic agreement with
Microsoft, Microsoft acquired VXtreme and announced that it would incorporate
the VXtreme technology, which competes with the Company's technology licensed to
Microsoft, into its NetShow product. In addition, Microsoft owns a minority
interest in VDOnet, a direct competitor of the Company, and has selected VDOnet
as a Microsoft Solution Provider for NetShow-based products. Microsoft's
acquisitions, investments and agreements in the streaming media industry
prompted a U.S. Department of Justice investigation into horizontal merger
activities within the industry. In August 1997, the Department of Justice served
several companies, including the Company and Microsoft, with subpoenas to
produce certain documents. The investigation, including interviews of Company
officers by Department of Justice personnel and document production requests, is
ongoing. The Company is cooperating fully with the Department of Justice's
investigation. See "-- Competition; Relationship With Microsoft" and
"Business -- Microsoft Relationship."
As a result of the investigation, it is possible that the Department of
Justice will require certain actions by the Company, Microsoft or other
companies in the streaming media industry that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The
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Department of Justice could decide to take action that could materially and
adversely affect the Company's current relationship with Microsoft or other
companies, that affect Microsoft's obligations with respect to the distribution
of the Company's products, result in certain penalties, require the Company to
refund all or a portion of the license fee paid by Microsoft to the Company,
require Microsoft to limit or divest certain of its acquisitions or investments
in the streaming media industry, including its investment in the Company, and,
if Microsoft were forced to rescind its agreement with the Company, place the
Company at a significant competitive disadvantage within the industry. There can
be no assurance that any such outcome would not have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEVELOPING MARKET; DEPENDENCE ON THE INTERNET AND INTRANETS AS MEDIUMS OF
COMMERCE AND COMMUNICATIONS
The market for the Company's streaming media products and services,
especially the market for the Company's intranet products and services, has
begun only recently to develop and is evolving rapidly, with continuing new
developments in technology, product distribution methods, and marketing and
licensing relationships. The development of a market for the Company's streaming
media products also depends on increased use of the Internet and intranets for
information, publication, distribution and commerce. Continued growth in the use
of the Internet may depend on potential increases in available bandwidth or
transmission speeds or on other technological improvements. In particular, the
Company believes that continued growth in the market acceptance of streaming
media, especially streaming video, depends on such developments. Changes in
network infrastructure, transmission and content delivery methods and underlying
software platforms, and the emergence of new Internet access devices such as TV
set-top boxes could dramatically change the structure and competitive dynamic of
the market for streaming media solutions. In particular, technological
developments or strategic partnerships that accelerate the adoption of "high
bandwidth" access technologies such as cable modems may have a material adverse
impact on the Company's business. Critical issues concerning use of the Internet
and intranets (including security, reliability, cost, ease of use and quality of
service) remain unresolved and may affect the growth of and the degree to which
business is conducted over the Internet and intranets. If the market for the
Company's products and services fails to grow, develops more slowly than
expected or becomes saturated with competing products or services, the Company's
business, financial condition and results of operations will be materially
adversely affected. See "-- Availability and Quality of Content" and "-- Online
Commerce Security Risks."
Because electronic commerce on the Internet is relatively new and evolving,
it is difficult to predict whether the Internet will be a viable commercial
marketplace or whether the Internet or intranets will be viable mediums of
communication. Although some sales of the Company's products and services will
depend on growth of intranets, sales of the Company's products will continue to
depend in large part on the emergence of the Internet as a viable commercial
marketplace with a strong and reliable infrastructure. The Internet has
experienced substantial growth in the number of users and amount of traffic, and
there can be no assurance that its technological infrastructure will be able to
support the demands placed on it by continued growth. Delays in the development
or adoption of new technological standards and protocols, or increased
governmental regulation, could also affect the degree of use of the Internet. In
addition, developments in Internet infrastructure such as broadband Internet
access may significantly affect the market for streaming media products. There
can be no assurance that the infrastructure or complementary services necessary
to make the Internet a viable commercial medium will be developed or, if
developed, that the Internet will become a viable commercial medium for products
and services such as those offered by the Company. See "Business -- Industry
Background."
EVOLVING BUSINESS MODEL; DEVELOPMENT OF NEW PRODUCTS AND OTHER REVENUE SOURCES
The Company's success depends in part on its ability to develop new
products in a timely manner and provide new services that achieve rapid and
broad market acceptance. There can be no assurance
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that the Company successfully can identify new product and service opportunities
and develop and bring to market new products and services in a timely manner or
that any such product innovations will achieve the market penetration or price
stability necessary for profitability.
As the online medium continues to evolve, the Company plans to leverage its
technology by developing complementary products and services as additional
sources of revenue. Accordingly, the Company may change its business model to
take advantage of new business opportunities, including business areas in which
the Company does not have extensive experience. For example, the Company
recently focused on, and will continue to devote significant resources to, the
development of its electronic commerce business, as well as its
advertising-supported content aggregation business, as extensions of its
business model. There can be no assurance that the Company will develop
successfully these or other business models.
In addition, the Company must continue to innovate and develop new versions
of its software to remain competitive in the market for streaming media
solutions. The Company's product and software development efforts inherently are
difficult to manage and keep on schedule. The Company on occasion has
experienced development delays and related cost overruns and there can be no
assurance that it will not encounter such problems in the future. In addition,
products as complex as those offered by the Company may contain undetected
errors when first introduced or when new versions are released. There can be no
assurance that errors will not occur in current or new products, the result of
which may be adverse publicity, loss of or delay in market acceptance, or claims
by customers against the Company, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Expansion of the Company's operations to take advantage of new
opportunities and to sustain a leadership position in the market for streaming
media software may require significant additional expenditures and may strain
the Company's management, financial and operational resources. The lack of
market acceptance of new products or services or the Company's inability to
generate satisfactory revenues from such new products and services to offset
their cost could have a material adverse effect on the Company's business,
financial condition and results of operations. "Business -- Strategy."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's performance depends substantially on the continued services
of its executive officers and key employees, in particular Mr. Glaser, the
Company's Chairman of the Board and Chief Executive Officer. The loss of the
services of Mr. Glaser or any of its other executive officers or key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. None of the Company's executive officers
has a contract that guarantees employment. Other than a $2,000,000 life
insurance policy on the life of Mr. Glaser, the Company does not maintain "key
person" life insurance policies. Given the Company's early stage of development,
the Company depends on its ability to attract, train and retain qualified
personnel, specifically those with management, technical and product development
skills. Competition for such personnel is intense, particularly in geographic
areas recognized as high technology centers such as the Pacific Northwest. There
can be no assurance that the Company will be able to attract, train or retain
additional highly qualified technical and managerial personnel in the future,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
CONTROL BY MR. GLASER; ANTITAKEOVER PROVISIONS
Immediately after the closing of the offering, Mr. Glaser, the Company's
founder, will own 14,089,919 shares of the outstanding Common Stock, which will
represent % of the outstanding Common Stock (approximately % if the
Underwriters' over-allotment option is exercised in full) and % of the
outstanding Common Stock if the Series E Warrant is exercised in full,
(approximately % if the Underwriters' over-allotment option is also
exercised in full). If the holder of the Series E Preferred Stock should instead
elect to receive shares of Special Common Stock on conversion of the Series E
Preferred
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Stock, and assuming the Series E Warrant is exercised in full for shares of
Special Common Stock, Mr. Glaser will hold % of the outstanding voting rights
(approximately % if the Underwriters' over-allotment option is exercised in
full). Accordingly, Mr. Glaser will have significant influence over the election
of directors and matters submitted to a vote of the Company's shareholders.
Control by Mr. Glaser may discourage certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of Common Stock might receive a premium for their shares over
prevailing market prices. See "-- Impact of Exercise of the Series E Warrant;
Election by Microsoft to Receive Common Stock or Special Common Stock" and
"Principal Shareholders."
The Company's Articles provide that on closing of the offering, a Strategic
Transactions Committee of the Board of Directors shall be created, which
committee shall be comprised of three directors. Without the prior approval of
such committee, and subject to certain limited exceptions, the Board of
Directors shall not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the voluntary dissolution of
the Company or (iv) take any action that has the effect of clauses (i) through
(iii). The provisions with respect to the authority of the Strategic
Transactions Committee may be amended only with the approval of 90% of the
shares entitled to vote on an amendment to the Articles. In connection
therewith, the Company entered into an agreement with Mr. Glaser (the "Glaser
Agreement") providing him with a direct contractual right to require the Company
to abide by and perform all terms of the Articles with respect to the Strategic
Transactions Committee. The Glaser Agreement also provides that so long as Mr.
Glaser owns a specified number of shares, the Company shall use its best efforts
to cause Mr. Glaser to be nominated to, not removed from, and elected to, the
Board of Directors. The Glaser Agreement could inhibit or deter a third party
from attempting to acquire the Company. See "Description of Capital Stock" and
"Management."
In addition, the Articles provide that on closing of the offering, Mr.
Glaser shall serve, or shall appoint another officer of the Corporation who
shall serve, as the Company's Policy Ombudsman, with the exclusive authority to
adopt or change the editorial policies of the Company as reflected on the
Company's Web sites or other communications or media where the Company has a
significant editorial or media voice. See "Management -- Policy Ombudsman."
These provisions, as well as those relating to a classified Board of Directors,
the availability of "blank check" preferred stock and certain provisions of
Washington corporate law and of the shareholder rights plan that the Company
intends to adopt prior to closing of the offering, could have the effect of
making it more difficult or more expensive for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
See "Description of Capital Stock."
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY; RISKS ASSOCIATED WITH LICENSED
THIRD-PARTY TECHNOLOGY
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreement in every case. Despite such protections, a third
party could copy or otherwise obtain and use the Company's products or
technology, or develop similar technology independently. There can be no
assurance that the Company's agreements with employees, consultants and others
who participate in product development activities will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or independently developed by
competitors.
The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
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applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need to either obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. A significant portion of the Company's
marks begin with the word "Real" (such as RealAudio and RealVideo). The Company
is aware of other companies that use "Real" in their marks alone or in
combination with other words, and the Company does not expect to be able to
prevent all third-party uses of the word "Real" for all goods and services. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S., and effective
patent, copyright, trademark and trade secret protection may not be available in
jurisdictions. The Company licenses certain of its proprietary rights to third
parties, and there can be no assurance that such licensees will not fail to
abide by compliance and quality control guidelines with respect to such
proprietary rights or take actions that would materially adversely affect the
Company's business, financial condition and results of operations.
To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, there can be no assurance that the Company's efforts to protect its
intellectual property rights through patent, copyright, trademark and trade
secret laws will be effective to prevent misappropriation of its technology, or
to prevent the development and design by others of products or technologies
similar to or competitive with those developed by the Company, and the Company's
failure or inability to protect its proprietary rights could materially
adversely affect the Company's business, financial condition and results of
operations.
The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce and protect the Company's
intellectual property or to defend against a claim of infringement or
invalidity. The Company has been and expects to continue to be subject to legal
proceedings and claims from time to time in the ordinary course of its business,
including claims of alleged infringement of third-party proprietary rights by
the Company and its licensees. The Company attempts to avoid infringing known
proprietary rights of third parties in its product development efforts. However,
the Company has not conducted and does not conduct comprehensive patent searches
to determine whether the technology used in its products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation could be avoided or settled without
substantial expense and damage awards. Any claims relating to the infringement
of third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could result
in injunctions preventing the Company from distributing certain products. Such
claims could materially adversely affect the Company's business, financial
condition and results of operations.
The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products, to perform key functions. There can
be no assurance that such third-party technology licenses will continue to be
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available to the Company on commercially reasonable terms. The loss of any of
these technologies could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, although the
Company is generally indemnified against claims that such third-party technology
infringes the proprietary rights of others, such indemnification is not always
available for all types of intellectual property rights (for example, patents
may be excluded) and in some cases the scope of such indemnification is limited.
Even if the Company receives broad indemnification, third-party indemnitors are
not always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company. There
can be no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology, and claims for indemnification from the
Company's customers resulting from such claims, will not be asserted or
prosecuted against the Company. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays, all of which could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Intellectual Property."
AVAILABILITY AND QUALITY OF CONTENT
The availability of compelling content for the Internet and intranets is
critical to the continued and increasing use and sales of the Company's
RealAudio and RealVideo system. The willingness of content providers to offer
and license content that appeals to end users and attracts advertisers is an
important factor in promoting the continued and increasing use of the Company's
products and services. There can be no assurance that such content will continue
to be available on acceptable terms, if at all. Historically, the Company has
recognized increased revenues from sales of RealPlayer Plus in months in which
the Company bundled compelling content. If the Company were unable to bundle
compelling content, license desirable content on favorable terms, or otherwise
offer content that is widely accepted by a broad market audience, the Company's
business, financial condition and results of operations would likely be
adversely affected. It is possible that associations that represent collectives
of content owners may seek to and may successfully establish minimum royalties
or other conditions that apply to the licensing or distribution of content over
the Internet and that may limit the availability of such content or increase the
cost to the Company to use such content. The imposition of any such mandatory
royalty payments may increase the Company's cost of revenues significantly,
which would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business -- Products and
Services -- Media Publishing Products and Services."
MANAGEMENT OF GROWTH; ACQUISITION RISKS
The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, technical, operational
and financial resources. None of the Company's executive officers has had senior
management experience in a public company in the position he or she currently
holds. From August 31, 1996 to August 31, 1997, the Company grew from 149
employees to 276 employees, and the Company expects this rapid growth to
continue. To manage its growth, the Company must implement and improve its
operational and financial systems and expand, train and manage its workforce.
The Company will also need to manage an increasing number of complex
relationships with customers, marketing partners and other third parties. In
addition, the Company may pursue the acquisition of new or complementary
businesses, products or technologies, although it has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments. Any such future acquisitions would be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to incorporate successfully acquired technology and
rights into the Company's products, services and media offerings, additional
expense associated with amortization of acquired intangible assets, the
maintenance of uniform standards, controls, procedures and policies, and the
potential impairment of relationships with employees, customers and strategic
partners.
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There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's current or future operations
or that the Company's management will be able to manage effectively the
expansion and still achieve the rapid execution necessary to exploit fully the
market for the Company's products and services. The Company's future operating
results will also depend on its ability to expand its sales and marketing
organizations, implement and manage new distribution channels to penetrate
different and broader markets, including the market for intranet software
products, and expand its support organization accordingly. If the Company were
to fail to manage its growth effectively, its business, financial condition and
results of operations would be materially adversely affected. See "-- Dependence
on Key Personnel; Need for Additional Personnel" and "-- Risk of Capacity
Constraints; Reliance or Internally Developed Systems; System Development
Risks."
IMPACT OF EVOLVING STANDARDS
The Company's current streaming media products are based on protocols
designed around certain standards, and the Company's business, financial
condition and results of operations would be materially adversely affected if
any of the Company's competitors were to establish a competing technology as the
de facto industry standard for streaming audio and video transmission. The
Company and Netscape Communications Corporation ("Netscape") co-authored the
Real Time Streaming Protocol ("RTSP"), a proposed protocol for standardizing the
control and delivery of streaming media over the Internet. RTSP can be used with
a broad range of data types and is intended to promote a greater level of
interoperability among various streaming media solutions by providing a standard
way for clients and servers from multiple vendors to stream multimedia content.
RTSP is built on top of a number of other Internet standard protocols and is
complementary with ASF, a file format for streaming media that does not specify
a method of client-server interaction. RTSP provides the client-server
specification necessary to stream ASF files (and many other file types) on the
Internet. There can be no assurance that RTSP will be established as the de
facto industry standard or, if so accepted, that existing competitors and new
entrants would not be able to compete more effectively with the Company's
products. See "-- Competition; Relationship With Microsoft" and
"Business -- Technology."
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
The satisfactory performance, reliability and availability of the Company's
Web sites, transaction-processing systems and network infrastructure are
critical to the Company's reputation and ability to attract and retain customers
and maintain adequate customer service. Any system interruptions that result in
the unavailability of the Company's Web sites would adversely affect the
Company's ability to conduct business. The Company's Web sites are complex and
require considerable technical expertise to maintain. Personnel with
technological expertise in this area are in great demand, and there can be no
assurance that the Company can attract, train or retain such personnel. Many of
the software systems used to support the Company's Web sites, including its
electronic commerce operations, were developed internally. These systems will
need to be enhanced over time or replaced with equivalent commercial products,
either of which could entail considerable effort and expense.
The Company's ability to provide a consistent level of high-quality
customer service depends in part on the efficient and uninterrupted operation of
its computer and communications hardware systems. Substantially all of the
Company's computer and communications hardware is located at a single leased
facility in Seattle, Washington. The Company's systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Because
the Company does not presently have fully redundant systems or a formal disaster
recovery plan, there can be no assurance that a system failure would not have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. The occurrence
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of any of the foregoing risks could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Technology."
ONLINE COMMERCE SECURITY RISKS
Online commerce and communications depend to a significant extent on the
ability to conduct secure transmission of confidential information over public
networks. The Company relies on encryption and authentication technology
licensed from third parties to provide the security and authentication intended
to effect secure transmission of confidential information, such as customer
credit card numbers. There can be no assurance that the Company's efforts in
this area or advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect customer transaction
data. Any compromise of the Company's security could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. In addition, there can be no assurance that credit card
companies will not restrict online credit card transactions in the future for
reasons such as fraudulent credit card transactions or other risks associated
with online commerce transactions, which restrictions could have a material
adverse effect on the Company's business, financial condition and results of
operations. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
security breaches could damage the Company's reputation and expose the Company
to a risk of litigation and possible liability. There can be no assurance that
the Company's security measures will prevent security breaches or that the
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
For the year ended December 31, 1996 and the six months ended June 30,
1997, approximately 19% and 27%, respectively, of the Company's total net
revenues were generated from sources outside the U.S. and Canada. As a result,
the Company is subject to the risks of doing business abroad, including
unexpected changes in regulatory requirements, export and import restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
potential adverse tax consequences, exchange rate fluctuations, increased risks
of piracy, limits on the Company's ability to enforce its intellectual property
rights, discontinuity of network infrastructures, limits on repatriation of
funds and political risks that may limit or disrupt international sales. Such
limitations and interruptions could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
operations of the Company's foreign subsidiaries are translated from local
currency into U.S. dollars based on average monthly exchange rates. The Company
currently does not hedge its foreign currency transactions and is therefore
subject to the risk of changes in exchange rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales, Marketing and Distribution."
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses, although certain U.S. export controls and import controls of other
countries, including controls on the use of encryption technologies, may apply
to the Company's products. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted in
the U.S. and abroad with particular applicability to the Internet. It is
possible that governments will enact legislation that may be applicable to the
Company to regulate areas such as content, network security, encryption and the
use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges
16
<PAGE> 19
and retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain. The majority of such laws were
adopted before the widespread use and commercialization of the Internet and, as
a result, do not contemplate or address the unique issues of the Internet and
related technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business or
increase the Company's legal exposure, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although those sections of the Communications Decency Act
of 1996 (the "CDA") that, among other things, proposed to impose criminal
penalties on anyone distributing "indecent" material to minors over the
Internet, were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. While the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined and,
therefore, legislation similar to the CDA could subject the Company to potential
liability, which in turn could have an adverse effect on the Company's business,
financial condition and results of operations. Such laws could also damage the
growth of the Internet generally and decrease the demand for the Company's
products and services, which could adversely affect the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulation" and "-- Intellectual Property."
VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
related to the Company's business, announcements of technological innovations,
or new products or enhancements by the Company or its competitors, sales by
competitors (including sales to the Company's customers), sales of the Common
Stock into the public market (including sales by members of management),
developments in the Company's relationships with its customers, partners,
distributors and suppliers, shortfalls or changes in revenues, gross margins,
earnings or losses or other financial results from analysts' expectations,
regulatory developments, fluctuations in results of operations and conditions in
the Company's market or the markets served by the Company's customers or the
economy could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
market for shares of small capitalization and technology stocks in particular,
has experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. There can be no assurance that
the market price of the Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance. Such fluctuations could materially adversely affect the
market price of the Common Stock.
SALES AND OTHER TAXES
The Company currently does not collect sales or similar taxes with respect
to the sale of products, license of technology, or provision of services into
states and countries other than states in which the Company has offices.
However, one or more states or foreign countries may seek to impose sales or
other tax obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or any foreign
country that the Company should collect sales or other taxes on the sale of
products, license of technology or provision of services, or remit payment of
sales or
17
<PAGE> 20
other taxes for prior periods, could have a material adverse effect on the
Company's business, financial condition and results of operations.
IMPACT OF EXERCISE OF THE SERIES E WARRANT; ELECTION BY MICROSOFT TO RECEIVE
COMMON STOCK OR SPECIAL COMMON STOCK
In connection with Microsoft's investment in the Company in July 1997, the
Company issued the Series E Warrant. If it is not exercised, the Series E
Warrant will terminate upon the earliest of (i) the closing of an initial public
offering, (ii) completion of a merger in which the Company is not the survivor,
or the sale of substantially all the assets of the Company, (iii) Microsoft's
breach of its agreement with the Company, which breach is not cured, or (iv)
January 21, 2002. Microsoft may elect to convert the shares of Series E
Preferred Stock issuable on exercise of the Series E Warrant into Common Stock
or Special Common Stock or in part into each of such classes. If Microsoft
elects to convert shares of Series E Preferred Stock into $15,000,000 or more of
Common Stock, it may be required to make a filing under the Hart-Scott-Rodino
Antitrust Improvements Act, and obtain approval from the U.S. Department of
Justice and Federal Trade Commission before completing the conversion into
Common Stock. If the Series E Warrant is exercised in full, Microsoft will own
% of the Company's outstanding capital stock immediately after the offering.
There can be no assurance that Microsoft will exercise any or all of the Series
E Warrant. In addition, there can be no assurance that if the Series E Warrant
is exercised for shares of Series E Preferred Stock, Microsoft will elect to
take any particular percentage of Common Stock or Special Common Stock.
Because the Microsoft Warrant may be exercised at any time until the
closing of the offering, it is impossible to predict with any certainty the
ultimate impact that the exercise thereof would have on the Company's resulting
capitalization, dilution per share to existing and new investors, liquidity and
capital resources, percentage of shares beneficially owned by the Company's
executive officers, directors and significant shareholders, and certain matters
involving corporate control. See "-- Competition; Relationship With Microsoft,"
"-- Department of Justice Subpoena," "-- Control by Mr. Glaser; Antitakeover
Provisions," "Capitalization," "Dilution," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business -- Microsoft
Relationship," "Principal Shareholders" and "Description of Capital Stock."
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale of the Common Stock offered hereby. The Company intends to use the net
proceeds primarily for general corporate purposes, including working capital to
fund anticipated operating losses and capital expenditures. Accordingly,
management will have significant flexibility in applying the net proceeds of the
offering. The failure of management to apply such funds effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds."
NO PRIOR MARKET FOR COMMON STOCK
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock in the future.
There can be no assurance that an active trading market will develop or be
sustained after the offering. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
POSSIBLE ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK OF SHARES ELIGIBLE FOR
FUTURE SALE AFTER THE OFFERING
On closing of the offering, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment
option is exercised in full), of which shares
18
<PAGE> 21
offered hereby ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely transferable in the public market without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except to the extent such shares are held by affiliates
of the Company. The remaining 26,935,621 shares of Common Stock (the "Restricted
Shares") outstanding on completion of the Offering (assuming no exercise of
options or warrants after September 24, 1997) were issued by the Company in
reliance upon exemptions from the registration requirements of the Securities
Act, and public sale thereof is restricted except to the extent they are
registered under the Securities Act or sold in accordance with an exemption from
such registration. The Company and the holders of 26,654,431 of these Restricted
Shares have entered into lock-up agreements (the "Lock-Up Agreements") with the
Underwriters not to sell, offer to sell or otherwise dispose of any shares of
Common Stock owned of record or beneficially as of the date of this Prospectus,
including securities convertible into or exercisable or exchangeable for shares
of Common Stock as of such date, as well as any shares of Common Stock later
acquired by reason of the conversion, exercise or exchange of such securities,
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Underwriters, except that persons other than officers,
directors and holders of 1% or more of the capital stock of the Company will be
free to sell or otherwise dispose of up to 5,000 shares of Common Stock to the
extent permissible under Rule 144 or Rule 701 under the Securities Act. Of the
remaining 281,190 Restricted Shares, 11,947 shares will be eligible for
immediate public sale under Rule 144 under the Securities Act as currently in
effect and the remaining 269,243 shares of Common Stock will be eligible for
public sale subject to compliance with Rule 144, unless earlier registered under
the Securities Act. At September 24, 1997, options for 6,374,214 shares of
Common Stock were outstanding, of which options for 1,708,455 shares may be
exercised during the 180 days following the date of this Prospectus, which
shares potentially will be eligible for public sale 90 days after the date of
this Prospectus pursuant to Rule 701 under the Securities Act; of these shares,
1,312,863 are subject to Lock-Up Agreements. Warrants to purchase an additional
4,707,363 shares of Common Stock, including the Series E Warrant to purchase
3,709,305 shares, which may be exercised in whole or in part for shares of
either Common Stock or Special Common Stock, will be exercisable prior to or on
closing of the offering, and the shares issued upon exercise will be potentially
eligible for public sale under Rule 144. All of these shares are subject to
Lock-Up Agreements. The holders of an aggregate of 16,390,753 shares of Common
Stock (including shares of Common Stock issuable upon exercise of outstanding
warrants and assuming that the Series E Preferred Stock converts into Common
Stock and the Series E Warrant is exercised in its entirety for shares of Common
Stock) have the right to require the Company to register their shares for sale
under the Securities Act beginning six months after the closing of the offering.
Sales of substantial numbers of shares of Common Stock in the public market
following the offering could have a material adverse effect on the market price
for the Common Stock. See "Shares Eligible for Future Sale."
DONATION OF NET INCOME TO CHARITY
The Company's philosophy includes a commitment to charitable
responsibility. If sustained profitability is achieved, the Company intends to
donate approximately 5% of its annual net income to charitable organizations. As
a result, the Company's net income will be reduced by the amount of these
charitable donations. See "Business -- Position on Charitable Responsibility"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charitable Donations."
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
DILUTION
Investors in Common Stock in the offering will experience immediate and
substantial dilution in the net tangible book value of their shares. Assuming an
initial public offering price of $ per share, dilution to new investors
would be $ per share. Additional dilution will occur upon exercise of
outstanding stock options and warrants. See "Dilution."
19
<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, after deducting the underwriting discount and estimated
offering expenses payable by the Company, are estimated to be $
($ if the Underwriters' over-allotment option is exercised in full).
The principal purposes of the offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to increase the
visibility of the Company in the marketplace and to facilitate future access by
the Company to public equity markets. The Company intends to use the net
proceeds primarily for general corporate purposes, including working capital to
fund anticipated operating losses and capital expenditures. The Company may,
when the opportunity arises, use an unspecified portion of the net proceeds to
acquire or invest in complementary businesses, products and technologies. The
Company has no present understandings, commitments or agreements with respect to
any material acquisition or investment. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operations of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 and as adjusted to give effect to the (i) issuance in July 1997 of
3,338,374 shares of Series E Preferred Stock at $8.99 per share; (ii) conversion
of all outstanding shares of Series A Common Stock, Series B Common Stock,
Series C Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
into Common Stock on closing of the offering; (iii) sale by the Company of the
shares of Common Stock offered hereby at an assumed initial public
offering price of $ per share (after deducting the underwriting
discount and estimated expenses of the offering); (iv) application of the
estimated net proceeds of the offering; and (v) issuance of 998,058 shares of
Common Stock reflecting exercise of outstanding warrants on the closing of the
offering, except as noted below. See "Use of Proceeds" and Note 8 of Notes to
Consolidated Financial Statements. The information set forth below is unaudited
and should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Note payable........................................................ $ 991 $
Redeemable, convertible preferred stock, par value $0.001 per share:
9,344,306 shares authorized; 8,345,016 shares issued and
outstanding, actual; no shares issued and outstanding, as
adjusted(1)....................................................... 23,264
Shareholders' equity (deficit):
Convertible preferred stock, par value $0.001 per share:
13,713,439 shares authorized; 13,713,439 issued and
outstanding, actual; no shares issued and outstanding, as
adjusted(1).................................................... 932
Preferred stock, undesignated, par value $0.001 per share:
6,942,255 shares authorized; no shares issued and
outstanding.................................................... --
Common stock, par value $0.001 per share: 50,000,000 shares
authorized; 749,520 shares issued and outstanding, actual;
shares issued and outstanding, as adjusted(2)........ 89
Additional paid-in capital........................................ 1,579
Foreign currency translation adjustment........................... 8
Accumulated deficit............................................... (12,372)
-------- --------
Total shareholders' equity (deficit)........................... (9,764)
-------- --------
Total capitalization...................................... $ 14,491 $
======== ========
</TABLE>
- ---------------
(1) At June 30, 1997, the Company had 30,000,000 shares of preferred stock
authorized, of which 13,713,439 shares were designated Series A Preferred
Stock, 3,059,701 shares were designated Series B Preferred Stock, 3,004,305
shares were designated Series C Preferred Stock and 3,280,300 shares were
designated Series D Preferred Stock. On July 21, 1997, 7,127,242 shares were
designated Series E Preferred Stock. On September 19, 1997, the numbers of
shares of the Company's authorized preferred stock and common stock were
increased to 60,000,000 and 300,000,000, respectively.
(2) Excludes (i) 6,336,486 shares of Common Stock issuable at a weighted average
exercise price of $0.67 per share upon exercise of stock options outstanding
at June 30, 1997, (ii) 4,896,723 shares of Common Stock reserved for future
issuance under the Company's stock option plans, (iii) 1,000,000 shares of
Common Stock reserved for issuance under the 1998 Employee Stock Purchase
Plan, and (iv) up to 3,709,305 shares of Common Stock or Special Common
Stock (representing additional cash and shareholders' equity of up to
$50,001,431) issuable on exercise of the Series E Warrant. See
"Management -- Benefit Plans," "Certain Transactions," "Description of
Capital Stock -- Warrants to Purchase Preferred Stock and Common Stock" and
Note 7 of Notes to Consolidated Financial Statements.
21
<PAGE> 24
DILUTION
The pro forma net tangible book value of the Company at June 30, 1997, as
adjusted to give effect to the (i) issuance in July 1997 of 3,338,374 shares of
Series E Preferred Stock at $8.99 per share; (ii) conversion of all outstanding
shares of Series A Common Stock, Series B Common Stock, Series C Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock into Common Stock upon
closing of the offering; (iii) sale by the Company of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, and the receipt by the Company of the estimated net
proceeds therefrom, was approximately $ , or $ per share of
Common Stock; and (iv) exclusion of up to 3,709,305 shares of Common Stock or
Special Common Stock (representing additional cash and shareholders' equity of
up to $50,001,431 and tangible book value per share of $ ) issuable on
exercise of the Series E Warrant. Pro forma net tangible book value per share
represents total tangible assets of the Company less total liabilities divided
by the aggregate number of shares of Common Stock and Special Common Stock
outstanding after closing of the offering. After giving effect to the net
proceeds from the sale of the shares of Common Stock offered hereby, the
adjusted pro forma net tangible book value of the Company at June 30, 1997 would
have been approximately $ , or $ per share of Common Stock and
Special Common Stock. This represents an immediate increase in the pro forma net
tangible book value of $ per share of Common Stock and Special Common
Stock to existing shareholders and an immediate dilution of $ per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $
Pro forma net tangible book value per share before the offering............ $
Increase per share attributable to new investors...........................
-------
Adjusted pro forma net tangible book value per share after the offering....
-------
Dilution per share to new investors........................................ $
=======
</TABLE>
The following table summarizes on a pro forma basis at June 30, 1997, after
giving effect to the offering, the difference between existing shareholders and
investors in the offering with respect to the number of shares of Common Stock
and Special Common Stock purchased from the Company, the total consideration
paid and the average price paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............. . % $ . % $
-----
New investors..................... . .
---------- ----- ---------- -----
Total.................... 100.0% $ 100.0%
========== ===== ========== =====
</TABLE>
- ---------------
(1) The table is based on ownership at June 30, 1997, giving effect to (i) the
issuance in July 1997 of 3,338,374 shares of Series E Preferred Stock and
(ii) the conversion of all outstanding shares of Series A Common Stock,
Series B Common Stock, Series C Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock into Common Stock, and assumes no exercise of
the Underwriters' over-allotment option. Exercise of the over-allotment
option in full would (i) reduce the proportion of shares held by existing
shareholders to . % of the total number of shares outstanding after the
offering and (ii) increase the number of shares held by investors in the
offering to shares, or . % of the total number of shares.
(2) Excludes (i) 6,336,486 shares of Common Stock issuable at a weighted average
exercise price of $0.67 per share upon exercise of stock options outstanding
at June 30, 1997, (ii) 4,896,723 shares of Common Stock reserved for future
issuance under the Company's stock option plans, (iii) 1,000,000 shares of
Common Stock reserved for issuance under the 1998 Employee Stock Purchase
Plan, and (iv) 998,058 shares of Common Stock issuable upon exercise of
outstanding warrants, and (v) up to 3,709,305 shares of Common Stock or
Special Common Stock (representing additional cash and shareholders' equity
of up to $50,001,431) issuable on exercise of the Series E Warrant. See
"Management -- Benefit Plans," "Certain Transactions," "Description of
Capital Stock -- Warrants to Purchase Preferred Stock and Common Stock" and
Note 7 of Notes to Consolidated Financial Statements.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this Prospectus. The selected
consolidated financial data as of December 31, 1994, and for the period from
February 9, 1994 (inception) to December 31, 1994, and as of and for the years
ended December 31, 1995 and 1996 are derived from the Consolidated Financial
Statements of the Company audited by KPMG Peat Marwick LLP, independent
accountants. The selected consolidated financial data as of June 30, 1997 and
for the six months ended June 30, 1996 and 1997 are derived from unaudited
consolidated financial statements prepared by the Company on a basis consistent
with the Company's audited Consolidated Financial Statements and, in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for such periods.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for any other interim period or
for the year ending December 31, 1997.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- -----------------------
1994 1995 1996 1996 1997
---------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Software license fees....................... $ -- $ 1,782 $11,876 $ 3,768 $10,070
Advertising................................. -- -- 1,016 170 1,107
Service revenues............................ -- 30 1,120 306 2,189
----- ------- ------- ------- -------
Total net revenues................... -- 1,812 14,012 4,244 13,366
Cost of revenues:
Software license fees....................... -- 29 1,343 143 1,134
Advertising................................. -- -- 288 105 308
Service revenues............................ -- 33 554 147 1,612
----- ------- ------- ------- -------
Total cost of revenues............... -- 62 2,185 395 3,054
----- ------- ------- ------- -------
Gross profit.............................. -- 1,750 11,827 3,849 10,312
Operating expenses:
Research and development.................... 202 1,380 4,812 1,739 5,463
Selling and marketing....................... 47 1,218 7,540 2,264 9,161
General and administrative.................. 296 747 3,491 1,412 2,496
----- ------- ------- ------- -------
Total operating expenses............. 545 3,345 15,843 5,415 17,120
----- ------- ------- ------- -------
Operating loss............................ (545) (1,595) (4,016) (1,566) (6,808)
Net other income.............................. -- 94 227 117 436
----- ------- ------- ------- -------
Net loss...................................... $ (545) $(1,501) $(3,789) $(1,449) $(6,372)
===== ======= ======= ======= =======
Pro forma net loss per share.................. $ ( ) $ ( )
Shares used to compute pro forma net loss per
share(1)....................................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- JUNE 30,
1994 1995 1996 1997
------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............... $ -- $ 6,116 $19,595 $11,496
Working capital (deficit)....................................... (49) 5,948 16,893 8,879
Total assets.................................................... 64 7,574 26,468 22,148
Redeemable, convertible preferred stock......................... -- 7,655 23,153 23,264
Shareholders' equity (deficit).................................. 15 (1,111) (3,320) (9,764)
</TABLE>
- ---------------
(1) For an explanation of the number of shares used to compute pro forma net
loss per share, see Note 1 of Notes to Consolidated Financial Statements.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of advertising-
supported content aggregation Web sites.
The Company was incorporated in February 1994 and did not recognize any
revenue until July 1995, when the Company began delivery of the commercial
version of RealAudio Version 1.0. From inception through December 31, 1995, the
Company's operating activities related primarily to recruiting personnel,
raising capital, purchasing operating assets, conducting research and
development, building the RealAudio brand and establishing the market for
streaming audio. During 1996, the Company continued to invest heavily in
research and development, marketing, building domestic and international sales
channels and general and administrative infrastructure. In August 1996, the
Company began selling RealPlayer Plus, a premium version of its RealPlayer
product. RealPlayer continues to be available for free download from the
Company's Web sites. In February 1997, the Company released a beta version of
its RealVideo product and since that time has worked to build the market for
streaming video.
The Company has a limited operating history on which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in rapidly evolving markets such as media delivery and electronic commerce over
the Internet and intranets. To achieve and sustain profitability, the Company
must, among other things, establish widespread market acceptance of its existing
products, successfully develop new products and services, respond quickly and
effectively to competitive, market and technological developments, expand sales
and marketing operations, broaden customer support capabilities, control
expenses and continue to attract and retain qualified personnel. There can be no
assurance that the Company will achieve or sustain profitability.
The Company has incurred significant losses since its inception, and as of
June 30, 1997 had an accumulated deficit of $12,372,000. The Company believes
that its success will depend largely on its ability to extend its technological
leadership and continue to build its brand position. Accordingly, the Company
intends to invest heavily in research and development and sales and marketing.
The Company expects to continue to incur substantial operating losses for the
foreseeable future. In view of the rapidly evolving nature of the Company's
business and its limited operating history, the Company believes that
period-to-period comparisons of its revenues and operating results, including
its gross profit margin and operating expenses as a percentage of total net
revenues, are not necessarily meaningful and should not be relied upon as
indications of future performance. Although the Company has experienced
significant percentage growth in total net revenues, it does not believe that
its historical growth rates are sustainable or indicative of future growth. The
Company has used, and expects to continue to use, price promotions to increase
trial, purchase and use of its products, as well as to increase overall
recognition of its brands. The effect of such promotions on revenues in a
particular period may be significant and extremely difficult to forecast.
24
<PAGE> 27
The following table sets forth certain financial data for the periods
indicated as a percentage of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues:
Software license fees............ 98.4% 84.8% 88.8% 75.3%
Advertising...................... -- 7.2 4.0 8.3
Service revenues................. 1.6 8.0 7.2 16.4
----- ----- ----- -----
Total net revenues....... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license fees............ 1.6 9.6 3.4 8.5
Advertising...................... -- 2.0 2.4 2.3
Service revenues................. 1.8 4.0 3.5 12.1
----- ----- ----- -----
Total cost of revenues... 3.4 15.6 9.3 22.9
----- ----- ----- -----
Gross profit.................. 96.6 84.4 90.7 77.1
Operating expenses:
Research and development......... 76.2 34.3 41.0 40.9
Selling and marketing............ 67.2 53.8 53.3 68.5
General and administrative....... 41.2 24.9 33.3 18.7
----- ----- ----- -----
Total operating
expenses............... 184.6 113.0 127.6 128.1
----- ----- ----- -----
Operating loss................ (88.0) (28.6) (36.9) (51.0)
Other income (expense):
Interest income, net............. 5.2 2.1 3.5 3.3
Other expense.................... -- (0.5) (0.7) 0.0
----- ----- ----- -----
Net other income................... 5.2 1.6 2.8 3.3
----- ----- ----- -----
Net loss........................... (82.8)% (27.0)% (34.1)% (47.7)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 1996 AND 1997
REVENUES
The Company generates revenues primarily from three sources: software
license fees, advertising and services. Software license fees are recognized
upon delivery, net of allowances for estimated future returns, provided that no
significant obligations of the Company remain and collection of the resulting
receivable is deemed probable. Revenues from software license agreements with
original equipment manufacturers ("OEM") are recognized when the OEM delivers
its product incorporating the Company's software to the end user. In the case of
prepayments from an OEM, the Company generally recognizes revenues based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue generally is recognized on the
straight-line method over the term of the contract. The Company recognizes
revenues from software license agreements with value-added resellers ("VAR")
upon delivery to the VAR, provided necessary conditions are met. If these
conditions are not met, revenue is recognized upon redistribution by the VAR to
the end user. Advertising revenues are recognized over the period in which the
advertisement is displayed on one of the Company's Web pages. To the extent
minimum guaranteed page impression deliveries are not met, the Company defers
recognition of the corresponding advertising revenues until guaranteed page
impression delivery levels are achieved. Service revenues include support and
upgrade contracts, commissions from electronic sales of third-party products,
consulting, content hosting and fees from user conferences. Support and upgrade
revenues are recognized ratably over the term of the contract, which typically
is 12 months. Payments for
25
<PAGE> 28
support and upgrade contracts are generally made in advance and are
nonrefundable. Other service revenues are recognized when the service is
performed.
Software License Fees. Software license fees were $3,768,000 and
$10,070,000 for the six months ended June 30, 1996 and 1997, respectively. The
increase was primarily due to growing market acceptance of the Company's server
and player products, including the introduction of RealPlayer Plus in August
1996 and RealVideo in February 1997, successful product promotions and
diversification of the Company's sales channels, including electronic
distribution. Server product sales were $3,616,000 and $5,484,000 for the six
months ended June 30, 1996 and 1997, respectively. Player product sales were
$152,000 and $4,586,000 over the same respective periods. The Company began
selling products electronically from its Web site in August 1996. Electronic
sales of both server and player products for the six months ended June 30, 1997
were $3,934,000, or 39% of software license fees in the period. The Company has
used price promotions to increase the trial, purchase and use of its software
products. In February 1997, the Company reduced the prices of its server
products. In July 1997, the Company made its EasyStart Server available to
customers to download free of charge.
Advertising Revenues. Advertising revenues were $170,000 and $1,107,000
for the six months ended June 30, 1996 and 1997, respectively. The Company began
selling advertising space on its Web sites in March 1996. Increased revenues in
1997 were due in large part to a full period of advertising sales and the
Company's success in attracting a greater number of advertisers.
Service Revenues. Service revenues were $306,000 and $2,189,000 for the
six months ended June 30, 1996 and 1997, respectively. Revenues from upgrade and
support contracts were $306,000 and $1,473,000 for the six months ended June 30,
1996 and 1997, respectively. This increase was primarily due to a greater
installed base of the Company's products. Service revenues for the six months
ended June 30, 1997 also included fees of $498,000 related to the Company's
first RealMedia conference.
International Revenues. International revenues were 19% and 27% of total
net revenues for the six months ended June 30, 1996 and 1997, respectively. The
increase in international revenues was due in part to the creation of the
Company's three foreign subsidiaries. The Company incorporated its French and
Japanese subsidiaries in November 1996 and its U.K. subsidiary in February 1997.
Substantially all international revenue was generated in Europe and Asia. The
functional currency of the Company's foreign subsidiaries is the local currency
in the country in which the subsidiary is incorporated. Operations of the
Company's foreign subsidiaries are translated from local currency into U.S.
dollars based on average monthly exchange rates. The Company currently does not
hedge its foreign currency transactions and is therefore subject to the risk of
changes in exchange rates.
COST OF REVENUES
Cost of Software License Fees. Cost of software license fees includes cost
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology and fees paid to third-party vendors for order fulfillment.
Cost of software license fees was $143,000 and $1,134,000 for the six months
ended June 30, 1996 and 1997, respectively, and 4% and 11%, respectively, of
software license fees. The increase in absolute dollars was primarily due to
higher sales volume. The increase in percentage terms was due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels, and the utilization of a third-party order
fulfillment agency.
Cost of Advertising Revenues. Cost of advertising revenues includes
personnel associated with content creation and bandwidth expenses related to the
Company's Web sites. Cost of advertising revenues was $105,000 and $308,000 for
the six months ended June 30, 1996 and 1997, respectively, and 62% and 28%,
respectively, of advertising revenues. The increase in absolute dollars was
primarily due to increased head count associated with content creation and
higher bandwidth expenses. The decrease in percentage terms was due to revenues
growing at a faster rate than expenses.
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<PAGE> 29
Cost of Service Revenues. Cost of service revenues includes in-house and
contract personnel providing services, bandwidth expenses for hosting services
and user conference expenses. Cost of service revenues was $147,000 and
$1,612,000 for the six months ended June 30, 1996 and 1997, respectively, and
48% and 74%, respectively, of service revenues. The increase in absolute dollars
was primarily due to increased staff and other costs associated with providing
these services to a greater number of customers, and, in March 1997, the Company
incurred $1,000,000 of costs associated with its RealMedia conference. No such
costs were incurred in the comparable period in 1996. Excluding the effects of
the RealMedia conference, cost of service revenues was 48% and 36% of service
revenues for the six months ended June 30, 1996 and 1997, respectively. This
decrease was primarily attributable to better utilization of service personnel
associated with an increased customer base.
Gross margins may be affected by the mix of distribution channels used by
the Company, the mix of products sold, the mix of product revenues versus
service revenues and the mix of international versus U.S. and Canada revenues.
The Company typically realizes higher gross margins on direct channel sales
relative to indirect channels and higher gross margins on software license fees
relative to service revenues. If sales through indirect channels increase as a
percentage of total net revenues, or if, as the Company anticipates, service
revenues increase as a percentage of total net revenues, the Company's gross
margins will be adversely affected.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
primarily of salaries and consulting fees paid to support product development.
To date, all research and development costs have been expensed as incurred
because technological feasibility of the Company's products is established upon
completion of a working model. To date, costs incurred between completion of a
working model and general release of products have been insignificant. The
Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development expenses to increase significantly. Research and
development expenses were $1,739,000 and $5,463,000 for the six months ended
June 30, 1996 and 1997, respectively, and 41% of total net revenues for both
periods. The increase in absolute dollars was due primarily to increases in
internal development personnel, travel, and consulting expenses. Research and
development expenses incurred for the six months ended June 30, 1997 were
related primarily to enhancements to existing products and development of new
technology and products.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions, consulting fees paid, trade show expenses, advertising
and cost of marketing collateral. The Company intends to continue its aggressive
branding and marketing campaign and therefore expects selling and marketing
expenses to increase significantly. Selling and marketing expenses were
$2,264,000 and $9,161,000 for the six months ended June 30, 1996 and 1997,
respectively, and 53% and 69%, respectively, of total net revenues. The
increases were due in large part to growth in sales personnel, commissions and
costs related to the continued development and implementation of the Company's
branding and marketing campaigns. During the six months ended June 30, 1997, the
Company also incurred approximately $694,000 in marketing expenses related to
the launch of RealVideo.
General and Administrative. General and administrative expenses consist
primarily of salaries and fees for professional services. The Company expects
general and administrative expenses to increase as the Company expands its
staff, incurs additional costs related to growth of its business, and becomes a
publicly traded company. General and administrative expenses were $1,412,000 and
$2,496,000 for the six months ended June 30, 1996 and 1997, respectively, and
33% and 19%, respectively, of total net revenues. The increase in absolute
dollars was primarily a result of increased personnel and facility expenses
necessary to support the Company's growth. The decrease in percentage terms was
a result of revenues growing at a faster rate than expenses.
27
<PAGE> 30
NET OTHER INCOME
Other income and expenses consist primarily of earnings on the Company's
cash and cash equivalents and short-term investments. Net other income was
$117,000 and $436,000 for the six months ended June 30, 1996 and 1997,
respectively. The increase was due primarily to interest income resulting from
additional invested cash and cash equivalents and short-term investments.
INCOME TAXES
The Company has had a net operating loss for each period since inception.
As of June 30, 1997, the Company had approximately $7,800,000 of net operating
loss carryforwards for federal income tax purposes that will expire in 2010
through 2012 if not utilized. See Note 4 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1996
REVENUES
Software License Fees. Software license fees were $1,782,000 and
$11,876,000 for 1995 and 1996, respectively. The Company first began recognizing
revenues from software license fees in July 1995. The increase in software
license fees in 1996 was primarily due to a full period of sales, growing market
acceptance of the Company's products, the introduction of RealPlayer Plus in
August 1996 and diversification of sales channels, including electronic
distribution. All of the Company's software license fees in 1995 were from the
sale of its server software. In 1996, server product sales were $8,188,000 and
player product sales were $3,688,000.
Advertising Revenues. Advertising revenues were $1,016,000 for 1996. The
Company began selling advertising space on its Web sites in March 1996, and, as
a result no advertising revenues were generated in 1995.
Service Revenues. Service revenues were $30,000 and $1,120,000 for 1995
and 1996, respectively. The increase in service revenues in 1996 was primarily
due to support and upgrade contracts associated with a larger installed base of
the Company's products. Consulting, content hosting and user conference revenues
were not significant in either period.
International Revenues. International revenues as a percentage of total
net revenues were 15% and 19% for 1995 and 1996, respectively. Substantially all
international revenues were generated in Europe and Asia.
COST OF REVENUES
Cost of Software License Fees. Cost of software license fees was $29,000
and $1,343,000 for 1995 and 1996, respectively, and 2% and 11%, respectively, of
software license fees. The increase in absolute dollars was primarily due to
higher sales volume. The increase in percentage terms was due to a shift in
product mix toward lower-margin player products, a greater percentage of sales
through indirect channels, and the utilization of a third-party order
fulfillment agency.
Cost of Advertising Revenues. Cost of advertising revenues was $288,000
for 1996, and was 28% of advertising revenues. Since the Company did not begin
selling advertising until 1996, all content creation costs in 1995 were charged
to research and development and selling and marketing expenses.
Cost of Service Revenues. Cost of service revenues was $33,000 and
$554,000 for 1995 and 1996, respectively, and was 110% and 49%, respectively, of
service revenues. The increase in absolute dollars was due primarily to
increased staff and other costs associated with providing these services to a
greater number of customers. The decrease in percentage terms was due to better
utilization of service personnel associated with an increased customer base.
28
<PAGE> 31
OPERATING EXPENSES
Research and Development. Research and development expenses were
$1,380,000 and $4,812,000 for 1995 and 1996, respectively, and 76% and 34%,
respectively, of total net revenues. The increase in absolute dollars was
attributable primarily to increased personnel and related costs associated with
enhancement of existing products and development of new products. The decrease
in percentage terms was a result of revenues growing at a faster rate than
research and development expenses.
Selling and Marketing. Selling and marketing expenses were $1,218,000 and
$7,540,000 for 1995 and 1996, respectively, and 67% and 54%, respectively, of
total net revenues. The increase in absolute dollars was due primarily to
increased salaries, direct sales personnel, commissions, costs associated with
international expansion and promotional expenses. The decrease in percentage
terms was a result of revenues growing at a faster rate than selling and
marketing expenses.
General and Administrative. General and administrative expenses were
$747,000 and $3,491,000 for 1995 and 1996, respectively, and 41% and 25%,
respectively of total net revenues. The increase in absolute dollars was
primarily a result of increased salaries and related expenses associated with
the hiring of additional personnel and increased facilities expenses. The
decrease in percentage terms was a result of revenues growing at a faster rate
than general and administrative expenses.
NET OTHER INCOME
Net other income was $94,000 and $227,000 for 1995 and 1996, respectively.
The increase was due primarily to interest income resulting from higher invested
cash and cash equivalents and short-term investments.
INCOME TAXES
The Company has had a net operating loss for each period since inception.
As of December 31, 1996, the Company had approximately $2,700,000 of net
operating loss carryforwards for federal income tax purposes that will expire in
2010 and 2011 if not utilized. See Note 4 of Notes to Consolidated Financial
Statements.
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<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the five quarters ended June 30, 1997. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited Consolidated Financial Statements appearing elsewhere in this
Prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results. The quarterly data should be read in
conjunction with the audited Consolidated Financial Statements of the Company
and the Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1997 1997
-------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues.................. $ 2,479 $ 4,030 $ 5,738 $ 6,356 $ 7,010
Total cost of revenues.............. 249 575 1,216 2,021 1,033
---- ------ ------- ------- -------
Gross profit...................... 2,230 3,455 4,522 4,335 5,977
Operating expenses:
Research and development....... 989 1,334 1,739 2,725 2,738
Selling and marketing.......... 1,445 2,125 3,151 4,350 4,811
General and administrative..... 820 906 1,173 1,171 1,325
---- ------ ------- ------- -------
Total operating
expenses................ 3,254 4,365 6,063 8,246 8,874
---- ------ ------- ------- -------
Operating loss.................... (1,024) (910) (1,541) (3,911) (2,897)
Net other income.................... 68 43 67 205 231
---- ------ ------- ------- -------
Net loss............................ $ (956) $ (867) $(1,474) $(3,706) $(2,666)
==== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL NET REVENUES
--------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1997 1997
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Total net revenues.................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Total cost of revenues............ 10.0 14.3 21.2 31.8 14.7
----- ----- ----- ----- -----
Gross profit................... 90.0 85.7 78.8 68.2 85.3
Operating expenses:
Research and development.......... 39.9 33.1 30.3 42.9 39.1
Selling and marketing............. 58.3 52.7 54.9 68.4 68.6
General and administrative........ 33.1 22.5 20.5 18.4 18.9
----- ----- ----- ----- -----
Total operating
expenses................ 131.3 108.3 105.7 129.7 126.6
----- ----- ----- ----- -----
Operating loss................. (41.3) (22.6) (26.9) (61.5) (41.3)
Net other income.................... 2.7 1.1 1.2 3.2 3.3
----- ----- ----- ----- -----
Net loss............................ (38.6)% (21.5)% (25.7)% (58.3)% (38.0)%
===== ===== ===== ===== =====
</TABLE>
The Company's total net revenues have increased in all quarters presented
as a result of increasing market acceptance of the Company's direct products,
diversification of the Company's sales channels, including electronic
distribution, expansion of the Company's direct sales efforts, and continued
increases in its installed customer base. In the third quarter of 1996, the
Company released RealPlayer Plus. During the first quarter of 1997, the Company
released a beta version of RealVideo and began recognizing revenues upon the
final release of RealVideo in the second quarter of 1997. The increases in total
cost of revenues as a percentage of total net revenues in the third and fourth
quarters of 1996 were due to a shift in product mix toward RealPlayer Plus
products, a greater percentage of sales through indirect channels and the
utilization of a third-party order fulfillment agency. In the first quarter of
1997,
30
<PAGE> 33
the Company held its first RealMedia conference and recognized revenues and cost
of revenues of $498,000 and $1,000,000, respectively, which increased total cost
of revenues as a percentage of total net revenues.
Operating expenses increased in each quarter reflecting increased spending
on developing, selling, marketing and supporting the Company's products, as well
as building the Company's market presence. Research and development expenses
have increased as a result of continued enhancements to existing products and
development of new products. Selling and marketing expenses increased as a
result of increased sales personnel and commissions. In the first and second
quarters of 1997, the Company increased marketing activities associated with the
release of RealVideo. The trend of increasing general and administrative
expenses is due primarily to additional personnel and facilities costs.
FACTORS AFFECTING OPERATING RESULTS
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to forecast
accurately its revenues. The Company's expense levels are based in part on its
expectations with regard to future revenues. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
As a result, any significant shortfall in demand for the Company's products and
services relative to the Company's expectations would have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Further, as a strategic response to changes in the competitive
environment, the Company may from time to time implement pricing, service or
marketing changes that could have a material adverse effect on its business,
financial condition and results of operations. See "Risk
Factors -- Unpredictability of Future Revenues; Potential Fluctuation in
Quarterly Operating Results," "-- Competition; Relationship With Microsoft" and
"Business -- Competition."
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control, including (i) demand for the Company's products
and services, (ii) introduction or enhancement of products and services by the
Company and its competitors, (iii) market acceptance of new products and
services of the Company and its competitors, (iv) price reductions by the
Company or its competitors or changes in how products and services are priced
(such as the Company's recent decision to distribute free of charge a version of
its basic EasyStart Server, which previously sold for $295 to $995), (v) the mix
of products and services sold by the Company and its competitors, (vi) the mix
of distribution channels through which the Company's products are licensed and
sold, (vii) the mix of international and North American revenues, (viii) costs
of litigation and intellectual property protection, (ix) the growth in the use
of the Internet, (x) the Company's ability to attract and retain qualified
personnel, (xi) the amount and timing of operating costs and capital
expenditures related to expansion of the Company's business, operations and
infrastructure, (xii) technical difficulties with respect to the use of the
Company's products, (xiii) governmental regulations and (xiv) general economic
conditions and economic conditions specifically related to the Internet. It is
often difficult to forecast what the effect of such factors would be, or the
effect that any such factors or any combination thereof would have on the
Company's results of operations for any given fiscal quarter. The Company has
used, and expects to continue to use, price promotions to increase trial,
purchase and use of its products, as well as to increase the overall brand
awareness of RealNetworks. The effect of such promotions on revenues in a
particular period may be significant and extremely difficult to forecast. Based
on the foregoing, the Company believes that its quarterly revenues, expenses and
operating results could vary significantly in the future, and that period-
to-period comparisons should not be relied upon as indications of future
performance.
Management has observed that revenues from advertising sales have tended to
be higher in the second and fourth quarters, and retail sales have tended to be
highest in the fourth quarter. The Company typically operates with little or no
backlog. As a result, quarterly sales and operating results depend primarily on
the volume and timing of orders received in the quarter, both of which are
difficult to forecast. The Company typically recognizes a substantial portion of
its revenues in the last month of each quarter.
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<PAGE> 34
Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse affect on the
trading price of the Common Stock.
DONATION OF NET INCOME TO CHARITY
The Company's philosophy includes a commitment to charitable
responsibility. If sustained profitability is achieved, the Company intends to
donate approximately 5% of its annual net income to charitable organizations. As
a result, the Company's net income will be reduced by the amount of these
charitable donations. See "Business -- Position on Charitable Responsibility."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of preferred stock and common stock and contributions of capital
by the Company's founder. Net proceeds from these sales and contributions
totaled $25,611,000.
Net cash used in operating activities was $1,240,000 and $635,000 in 1995
and 1996, respectively. Cash used in operating activities in 1995 was primarily
attributable to a net loss of $1,501,000. For 1996, cash used in operating
activities resulted primarily from a net loss of $3,789,000 and an increase of
$2,608,000 in trade accounts receivable, largely offset by increases of
$2,267,000 in deferred revenue, $2,220,000 in accounts payable and $822,000 in
accrued expenses. Net cash used in operating activities was $5,658,000 for the
six months ended June 30, 1997. This was attributable primarily to a net loss of
$6,372,000, a decrease in accounts payable of $862,000 and an increase of
$1,049,000 in trade accounts receivable, partially offset by increases of
$801,000 in accrued expenses and $620,000 in deferred revenue.
Net cash used in investing activities of $3,660,000, $4,837,000, and
$5,107,000 for the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997, respectively, was primarily related to purchases of
property and equipment and increases in short-term investments.
Cash provided by financing activities of $8,029,000 in 1995 consisted
primarily of $7,405,000 in net proceeds from the issuance of Series B and C
Preferred Stock and a capital contribution by the founder of $372,000. Cash
provided by financing activities of $17,091,000 in 1996 was primarily from net
proceeds of $17,047,000 from the issuance of Series D Preferred Stock. Cash
flows provided by financing activities of $1,009,000 for the six months ended
June 30, 1997 were primarily from $991,000 of proceeds from the issuance of a
note payable.
As of June 30, 1997, the Company had $4,972,000 of cash and cash
equivalents and $6,524,000 in short-term investments. As of June 30, 1997, the
Company's principal commitments consisted of obligations outstanding under
operating leases and a $991,000 note payable. Although the Company has no
material commitments for capital expenditures, it anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.
In October 1996, the Company established a $1,000,000 line of credit and a
$1,500,000 term loan with Silicon Valley Bank. The line of credit and term loan
bear interest at the prime rate plus 0.75% and 1.0% per annum, respectively. In
December 1996, Silicon Valley Bank amended the agreements to waive the financial
covenants applicable thereunder. There were no borrowings outstanding under the
line of credit or the term loan as of December 31, 1996 and June 30, 1997.
Since inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
its operating expenses will be a material use of the Company's cash resources.
The Company believes that the net proceeds from the offering, together with its
current cash, cash equivalents and short-term investments, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures for
at least the next 12 months.
32
<PAGE> 35
RECENT DEVELOPMENTS
In June 1997, the Company and Microsoft entered into a strategic agreement
pursuant to which the Company granted Microsoft a nonexclusive license to
certain substantial elements of the source code of the Company's
RealAudio/RealVideo Version 4.0 technology, including its basic RealPlayer and
substantial elements of its EasyStart Server products, and related Company
trademarks. In July 1997, the Company received a $30,000,000 prepayment related
to the license agreement. The agreement requires the Company to provide
Microsoft with engineering consultation services, certain error corrections and
certain technical support over a defined term. In connection with the agreement,
Microsoft purchased a minority interest in the Company in the form of 3,338,374
shares of Series E Preferred Stock for $30,000,000, plus a warrant to purchase
up to 3,709,305 shares of Series E Preferred Stock at an exercise price of
$13.48 per share.
In August 1997, the U.S. Department of Justice commenced an investigation
into horizontal merger activities within the streaming media industry. The
Department of Justice served several companies, including the Company and
Microsoft, with subpoenas to produce certain documents. As a result of the
investigation, it is possible that the Department of Justice will require
certain actions by the Company, Microsoft or other companies in the streaming
media industry that could, among other things, affect Microsoft's obligations
with respect to the distribution of the Company's products, require the Company
to refund all or a portion of the license fee paid by Microsoft to the Company,
require Microsoft to limit or divest certain of its acquisitions or investments
in the streaming media industry, including its investment in the Company, and,
if Microsoft were forced to rescind its agreement with the Company, place the
Company at a significant competitive disadvantage within the industry. There can
be no assurance that any such outcome would not have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Department of Justice Subpoena."
In September 1997, the Company terminated its line of credit and term loan
with Silicon Valley Bank.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("Statement 128"). Statement 128 establishes standards for the computation,
presentation and disclosure of earnings per share ("EPS"), replacing the
presentation of the currently required Primary EPS with a presentation of Basic
EPS. It also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for entities with complex capital structures. Basic EPS
is based on the weighted average number of common shares outstanding during the
period. Diluted EPS is based on the potential dilution that would occur upon
exercise or conversion of securities into common stock using the treasury stock
method. Statement 128 is effective for financial statements for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of Statement 128 to be material to its reported EPS amounts.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not determined the manner in
which it will present the information required by Statement 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. The Company has not determined the manner in which it
will present the information required by Statement 131.
33
<PAGE> 36
BUSINESS
THE COMPANY
RealNetworks is a leading provider of branded software products and
services that enable the delivery of streaming media content over the Internet
and intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site designed to promote
the proliferation of streaming media products and a network of advertising-
supported content aggregation Web sites. As the Web continues to evolve as a
mass communications medium, the Company believes that an increasing amount of
the types of content currently delivered through traditional media, such as
radio and television, will be delivered over the Internet. The Company believes
that streaming media technology is essential to this transition because it
enables a more compelling user experience, allowing the Internet to compete more
effectively with traditional media for audience share.
From its inception, the Company has strategically chosen to offer its
RealPlayer software to individual users free of charge to promote the widespread
adoption of its client software and to speed the acceptance of Internet
multimedia. The Company believes that more than 18 million copies of its
RealPlayer software have been downloaded and that over 200,000 copies of its
premium client product, RealPlayer Plus, have been sold electronically in the
product's first year of distribution. In addition, the Company believes that
more than 55,000 hours per week of live audio and video content are broadcast
over the Web using RealAudio and RealVideo technology, and that more than
150,000 Web pages use the Company's software. The Company's customers, including
ABC Radio Net, Bloomberg Online, The Boeing Company, Dow Jones & Company, Inc.
("Dow Jones"), NBC Desktop, News Corporation ("News Corp."), Starwave
Corporation ("Starwave") and 3Com Corporation ("3Com"), use its software
products and services to deliver a broad range of streaming audio and video
news, sports, entertainment and corporate information over the Internet and
intranets.
INDUSTRY BACKGROUND
The Internet has grown rapidly in recent years, driven by the development
of the Web and graphically intuitive Web browsers, the proliferation of
multimedia PCs, increasingly robust network architectures and the emergence of
compelling Web-based content and commerce applications. The broad acceptance of
the standard Internet Protocol ("IP") has also led to the emergence of intranets
and the development of a wide range of non-PC devices that allow users to access
the Internet and intranets. International Data Corporation ("IDC") estimates
that the number of Web users worldwide will continue to grow rapidly from 28
million in 1996 to an estimated 175 million in 2001. In addition, users are
spending an increasing amount of time on the Web. A recent study by the Georgia
Institute of Technology indicates that 51% of total Internet users access the
Internet for 10 or more hours per week as of April 1997, compared with 29% as of
April 1995.
The development of the Web has contributed to the transition of the
Internet from a text and e-mail-focused data-sharing network to a richer
environment, capable of delivering graphical and interactive content. The Web
has a number of features unavailable in traditional media and commerce channels
that attract online users, content providers, advertisers and merchants. The
relatively low barriers to publishing content on the Web have led to an
explosion of Web-based content and the development of a large and diverse group
of Web-based communication channels. As an interactive, searchable,
user-controlled medium, the Web provides a highly engaging user experience and
allows users to access this broad range of online content on demand and at their
convenience. The narrow-casting capabilities of the Web enable content providers
and advertisers to establish customized, personalized interactions with
consumers.
The development of streaming media technology has further enhanced the
graphical capabilities of the Internet and intranets. Streaming technology
enables the transmission and playback of continuous "streams" of multimedia
content, such as audio and video, and represents a significant advancement over
earlier technologies. Prior to the advent of streaming technology, users could
not initiate the
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playback of audio or video clips until such content was downloaded in its
entirety, resulting in significant waiting times. As a result, live broadcasts
of audio and video content over the Internet or intranets were not possible.
MARKET OPPORTUNITY
The Company believes that the emergence of rich multimedia capabilities,
such as streaming audio and video, has significantly enhanced the effectiveness
of the Web as a global mass communications medium and has accelerated the
adoption of corporate intranets as a means to improve communications within
enterprises. Many businesses and content providers now offer interactive audio,
video and other multimedia content as a means of enriching and differentiating
their Web sites. The Company believes that more than 55,000 hours per week of
live audio and video content are broadcast over the Web using RealAudio and
RealVideo technology, with a substantially greater amount of recorded media
available on demand.
These enhanced multimedia capabilities, combined with the unique
interactive properties of the Internet, are attracting a large and expanding
audience, a growing number of advertisers and an increasing breadth and depth of
content and online commercial applications. The market for Web advertising
revenues is expected to grow from $180 million in 1996 to $2.9 billion in 2000,
according to IDC. Overall usage growth, together with the Internet's unique
interactive properties, has also led to a rapidly evolving online commerce
opportunity. IDC estimates that worldwide revenues generated by Web-based
commerce will grow from $2.6 billion in 1996 to $223 billion in 2001. As a
result of the growth in business opportunities on the Internet, the market for
software solutions that focus on the Internet and intranets is also growing
rapidly. IDC estimates that Internet-focused software revenues will grow from
$359 million in 1996 to $4.3 billion in 2000.
As the Web continues to evolve as a mass communications medium, the Company
believes that an increasing amount of the types of content currently delivered
through traditional media, such as radio and television, will be delivered over
the Internet. The Company believes that streaming media technology is essential
to this evolution because it provides a more compelling user experience,
allowing the Internet to compete more effectively with traditional media for
audience share.
The Company believes that to successfully capitalize on this opportunity,
streaming media providers must address the following challenges:
DELIVER COMPELLING STREAMING MEDIA CONTENT IN BANDWIDTH CONSTRAINED
ENVIRONMENTS. The Internet was designed to transmit discrete packets of data and
is not inherently well suited to the delivery of continuous streams of
multimedia data without additional software. In addition, bandwidth is limited
in Internet and intranet environments, posing significant technological
challenges for delivery of high-quality streaming audio and video content.
ENABLE BROAD-BASED ACCESS TO STREAMING MEDIA TECHNOLOGY. Online content
providers, advertisers and merchants must make a significant investment to
create and deliver streaming media content and need to reach a sufficiently
large audience to generate an adequate return on such investment. As a result,
content providers must consider the popularity and quality of a particular
streaming media solution before committing resources to delivering content using
that solution. The Company believes that Internet users prefer client software
that has widespread market acceptance and is compatible with substantial amounts
of encoded content.
DRIVE CONSUMER USAGE. The Company believes that consumer interest in
streaming media content is driven in large part by the ability to locate and
experience such content easily. As a result, the Company believes that the
development of well-marketed, compelling Web sites that aggregate streaming
media content is central to the continued growth of multimedia content on the
Web.
The Company believes that a substantial opportunity exists to provide
software solutions and content aggregation and delivery services that address
these challenges and support the development of large and growing advertising
and electronic commerce markets on the Web.
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THE REALNETWORKS SOLUTION
RealNetworks enables and promotes the transmission of real-time streaming
media content over the Internet and intranets. The Company provides an
integrated suite of branded streaming media software products and services,
including its RealAudio and RealVideo system, an electronic commerce Web site
designed to promote the proliferation of streaming media products and a network
of advertising-supported content aggregation Web sites. Each of the Company's
products and services has been designed to address the technological and market
development challenges that confront streaming media content providers.
STREAMING MEDIA TECHNOLOGY. RealNetworks has been a pioneer in the
development of streaming technology and continues to offer leading streaming
media software solutions. The Company's products use advanced compression and
error-correction technologies to deliver acceptable performance even in
bandwidth-constrained environments. The Company has won numerous awards for its
technology, including a PC Magazine Editor's Choice award for streaming video in
October 1997. The Company's software runs on a broad range of operating systems
and hardware platforms, enabling content providers to reach a broad audience and
enterprises to deliver intranet content in heterogeneous computing environments.
REALPLAYER UBIQUITY AND BRAND STRENGTH. From its inception, the Company has
strategically chosen to offer its RealPlayer software to individual users free
of charge to promote the widespread adoption of its client software and speed
the acceptance of Internet multimedia. The Company estimates that more than 18
million copies of its RealPlayer software have been downloaded and that more
than 150,000 Web pages use the Company's software. In addition, over 1,200
third-party developers have joined the Company's Real Developer Program. To
continue the broad market adoption of its server products, the Company now
offers its basic server free of charge to accelerate the delivery of RealAudio
and RealVideo content. As a result of these activities and the Company's
aggressive promotional programs, the Company believes that the "Real" brand has
become one of the most widely recognized brands on the Internet.
ELECTRONIC COMMERCE DISTRIBUTION CHANNEL. The Company has pursued an
electronic commerce distribution strategy designed to further accelerate product
adoption and drive upgrade and cross-selling opportunities among its existing
installed user base. The Company's online distribution efforts have resulted in
electronic sales of over 200,000 copies of the Company's RealPlayer Plus in its
first year of distribution and the collection of a database of information of
over 7 million names. Recently, the Company opened its RealStore Web site, an
online store for the sale of the Company's products, third-party multimedia
tools and utilities, and intranet-based training products. The Company believes
that it will be able to continue to facilitate the adoption and growth of
streaming media content by providing a concentrated marketplace and a low-cost
distribution mechanism for emerging streaming media tools and their developers.
STREAMING MEDIA CONTENT AND AGGREGATION. The Company's
advertising-supported Web sites, including Timecast, LiveConcerts.com, and
Film.com, aggregate, organize and provide streaming media programming, in order
to build consumer awareness and Web site traffic for streaming media content.
According to I/Pro, the Company's network of Web sites attracted on average over
380,000 visitors and generated over two million page impressions per day. The
Company's Daily Briefing and Destination Button services provide one-click
access to a range of third-party programming. In addition to generating
advertising revenues, these sites and services stimulate demand for and creation
of streaming media content and the Company's RealAudio and RealVideo system.
BUSINESS STRATEGY
The Company's objective is to be the leading streaming media company,
providing software and services that enable the delivery of a broad range of
multimedia content over the Internet and intranets, thereby facilitating the
evolution of the Internet into a mass communications and commerce medium. To
achieve this objective, the Company's strategy includes the following key
elements:
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EXTEND TECHNOLOGY LEADERSHIP. The Company has established a reputation as
a leader in streaming media technology and intends to continue to maintain its
reputation for quality and innovation by expanding the features and breadth of
its audio and video product offerings. The Company believes that the fundamental
architecture of its products can also be expanded to support synchronized
streaming of a wide variety of other time-based data types, such as MIDI,
images, animation and multimedia presentations. As part of this strategy, the
Company has devoted and will continue to commit significant resources to the
development of technologies that increase the scaleability of streaming media
solutions.
MAXIMIZE MARKET PENETRATION AND BRAND NAME RECOGNITION. The Company
believes that it is the recognized leader in the streaming media technology and
that its "Real" brand is one of the most widely recognized brand names on the
Internet. Since its inception, the Company has sought to achieve rapid and broad
adoption of its technologies and strong brand recognition. This strategy has
been pursued through various means, such as offering the Company's RealPlayer to
individual users free of charge over the Internet, bundling the Company's
products with those of other major vendors and using multiple distribution
channels, including both direct sales and indirect OEM and retail relationships.
The Company has recently intensified its efforts to proliferate its streaming
technology by offering its basic EasyStart Server free of charge and entering
into a licensing and distribution agreement with Microsoft. The Company also
intends to continue to promote the adoption of industry standards that are
either based on or compatible with its technologies. For example, the Company is
one of the principal co-authors of RTSP, a proposed industry standard for the
control and delivery of streaming media.
LEVERAGE MARKET POSITION TO EXPAND BUSINESS MODEL. Management believes
that the Company's technology leadership, market position and brand name are
significant assets that the Company can leverage to maintain and increase its
market share and diversify its revenue base. The Company intends to leverage
these assets as follows:
- GROW STREAMING MEDIA SOFTWARE BUSINESS. The Company intends to
capitalize on the growth in demand for streaming media software by
continuing to develop, market and support industry-leading products and
services. The Company also plans to strengthen its marketing, sales and
customer support efforts as the size of its market opportunity and
customer base increases.
- EXPAND INTERNET COMMERCE BUSINESS. The Company's Web sites provide
product information and fulfillment resources for streaming media content
users and developers. The Company recently opened its RealStore Web site,
an online store for the sale of the Company's products, third-party
multimedia tools and utilities and intranet-based training products. The
Company believes that it will be able to continue to facilitate the
adoption and growth of streaming media content by providing a
concentrated marketplace and a low-cost distribution mechanism for
emerging streaming media tools and their developers.
- OFFER LEADING CONTENT AGGREGATION SITES FOR STREAMING MEDIA. The Company
has developed a network of Web sites that aggregate links to third-party
streaming media programming. The Company plans to continue building Web
site traffic from these activities to increase Web site advertising
revenues, increase visibility and sales of the Company's products,
promote the use of streaming media content on the Internet or intranets
and promote the Company's Internet commerce platform.
DEVELOP AND MARKET STREAMING MEDIA SOLUTIONS FOR A VARIETY OF PLATFORMS AND
BANDWIDTHS. The Company's rapid growth is attributable in part to the wide
acceptance of the streaming media solutions it has developed for PCs networked
in low-bandwidth environments. However, significant efforts are underway to make
the Internet available on a wider range of platforms, including non-PC Internet
appliances, and over higher-speed connections, including cable modems.
Accordingly, the Company has designed its solutions to add value in a range of
bandwidth environments and to be flexible enough to port easily to new
platforms. As a result, management believes that the Company is positioned to
capitalize on possibly significant platform and bandwidth changes.
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STRENGTHEN STRATEGIC RELATIONSHIPS. The Company has established strategic
relationships with a variety of industry participants, including software and
hardware vendors, entertainment companies, content publishers and broadcast
media companies. The Company's relationship with Microsoft enables wider
distribution of the Company's products and promotes interoperability among
numerous streaming media technologies. In addition to its relationship with
Microsoft, the Company has formed strategic distribution relationships with
several other companies, including Starlight Networks Inc. ("Starlight") and
Macromedia, has formed a joint venture in Japan with NTT PC Communications, Inc.
("NTT"), Kokusai Denshin Denwa Co., Ltd. ("KDD") and Trans Cosmos, Inc. ("Trans
Cosmos") and has entered into a pilot program with MCI Communications
Corporation ("MCI") to distribute the RealNetwork broadcast service. The Company
pursues strategic relationships for a variety of purposes, such as maximizing
rapid penetration, validation and adoption of its technologies; aiding the
development of compelling content to build consumer demand for streaming media
over the Internet; and expanding the range of commercial activities based on its
technology and brand name. The Company has also collaborated with other industry
leaders for the purpose of developing software protocols for proposed adoption
as industry standards. Although the Company has not engaged in significant joint
technology development relationships to date, it anticipates that it may form
third-party development relationships in the future as it seeks to expand the
fundamental architecture of its technology and influence the direction of
technological developments in the industry.
PRODUCTS AND SERVICES
The Company develops and markets software products and services that enable
the delivery of streaming audio and video content over the Internet and
intranets. The Company also conducts electronic commerce and sells advertising
through its Web sites, provides audio and video broadcast services to third
parties, and provides various other services designed to promote widespread
usage of the Company's technology.
MEDIA SYSTEM
The Company's streaming media system allows content providers to encode
content such as live music, video or other multimedia programming into discrete
data packets that can be broadcast to large numbers of simultaneous users.
EASYSTART SERVERS. The Company offers a basic EasyStart Server free of
charge from its Web site. This product enables content providers to stream both
audio and video to as many as 60 simultaneous users.
PROFESSIONAL SERVERS. The Professional Server is designed for use by
commercial Web sites, including media content providers that distribute audio
and/or video content over the Internet to a broad base of consumers. This server
can be purchased for either audio-only or both audio and video broadcasting
purposes. In addition to the basic streaming features of the EasyStart Server,
the Professional Server offers advanced administrative features and the ability
to reach a larger audience. Professional Server licenses start at $4,995 and are
priced based on the number of streams licensed.
INTRANET SYSTEMS. The Intranet System is a Professional Server designed
specifically for use in intranet applications. The Intranet System includes a
site license for the RealPlayer. A 10-user Intranet System is available free of
charge from the Company's Web site. Larger system licenses start at $6,995 and
are priced according to the number of licensed users.
REALENCODERS. The Company's RealEncoders enable content providers to
convert live or recorded audio and video programming into the Company's
proprietary file format. This highly compressed file format increases the
efficiency of limited-bandwidth transmissions and is readable by the Company's
players. The RealEncoder is distributed free of charge from the Company's Web
site.
REALNETWORK BROADCAST SERVICE. The Company operates the RealNetwork
broadcast service, which uses the Company's splitter technology to broadcast
content to thousands of simultaneous users
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through IP multicasting or traditional unicasting. In August 1997, the Company
and MCI announced that they had commenced a pilot program in which the Company's
technology will be incorporated into MCI's Internet backbone. The RealNetwork
broadcast service will enable broadcasters to reach up to 50,000 users
simultaneously by combining MCI's nationwide network of datalines and computer
centers with the Company's streaming media and splitter technologies. Current
content providers using the RealNetwork broadcast service include ABC News,
Inc., Atlantic Recording Corporation, ESPN, Inc., and Major League Baseball
teams, including the Los Angeles Dodgers and the Seattle Mariners. The Company
often uses the RealNetwork broadcast service to host its own content. In select
cases, the Company has and will continue to enter into relationships with
content providers in which the providers' content is hosted on the RealNetwork
broadcast service at the Company's expense in exchange for a share of the
advertising or other revenue generated.
In May 1997, the Company entered into a joint venture with NTT, KDD and
Trans Cosmos in Japan to establish J-Stream Co. Inc. ("J-Stream"), which, like
the Company's RealNetwork broadcast service, streams audio and video content to
users through IP multicasting or traditional unicasting. The Company supplies
its RealAudio and RealVideo system and technical support for the operation of
the J-Stream broadcast network. The Company holds a 24% interest in the joint
venture.
CONSULTING. The Company provides a range of consulting services that
principally relate to the creation and maintenance of streaming media networks
based on the Company's technology. Commonly provided services include sound
editing, video production assistance and network design.
CONSUMER PRODUCTS AND ELECTRONIC COMMERCE
The Company's player enables a user to listen to or view content from Web
sites that use the Company's server products. The player decompresses and
decodes audio and video packets transmitted by the server, reassembles them in
the correct order, identifies and requests retransmission of any missing data
packets, and then plays back the reassembled audio or video content for the user
in real-time. The players can be easily installed and used by nontechnical
computer users, even using dial-up modems over standard voice-grade telephone
lines.
REALPLAYER. RealPlayer, the Company's standard player, can be downloaded
free of charge from the Company's Web site and currently is distributed by a
number of third parties in combination with their own products. RealPlayer
offers basic functions such as play, stop, fast-forward, rewind and volume
adjustment, as well as the ability to program six Destination Buttons, which
provide one-click access to preprogrammed audio and video content.
REALPLAYER PLUS. The RealPlayer Plus is an enhanced player that can be
downloaded from the Company's Web site or purchased in a retail store for a
suggested price of $29.95. RealPlayer Plus not only offers basic RealPlayer
functions, but also features a scan function and 40 programmable buttons that
allow users to preset favorite content. Customers who purchase a RealPlayer Plus
also have access to special content available only to RealPlayer Plus users.
ELECTRONIC COMMERCE AND REALSTORE. Since August 1996, the Company has sold
its products electronically. On September 8, 1997, it opened its RealStore Web
site, an online store for the sale of the Company's products, third-party
streaming media tools and utilities and intranet-based corporate training
products. Through this distribution channel, the Company is able to offer a
broad selection of products with little inventory risk or merchandising expense.
MEDIA PUBLISHING PRODUCTS AND SERVICES
The Company's network of Web sites aggregates, organizes and provides
streaming media programming through a variety of navigational and theme-oriented
content sites. These sites derive revenues from the sale of advertising to third
parties such as General Motors Corporation, International Business Machines
Corporation, AT&T Corp. and Microsoft. The Company has been instrumental in
pioneering new forms of Internet advertising, including in-stream advertising,
in which streamed audio and video advertisements are inserted into selected
programming.
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In addition to its main Web site, the Company's network of Web sites
includes:
Timecast, a guide to RealAudio and RealVideo content that offers
programming information from and links to over 2,500 Web sites, including
over 500 radio and television stations;
LiveConcerts.com, which, in cooperation with House of Blues, offers
live streamed music concerts using the Company's products as well as access
to services, including up-to-date concert schedules;
Film.com, which the Company began hosting in September 1997, provides
in-depth information about, and streaming media clips of, movies, including
reviews and previews; and
Daily Briefing allows customers to design their own custom streaming
media newscasts from over 35 short programs in the areas of news, sports,
entertainment, weather and business/technology, and to receive the custom
newscasts daily. Daily Briefing providers include NBC News, The Weather
Channel, CBS/SportsLine, and Warner Bros.
TECHNOLOGY
The Company's client/server software system is designed to optimize the
delivery of streaming media over the Internet, intranets or any IP-based
network. The system is based on open industry standards and works with a broad
range of operating systems, hardware platforms and media types.
CODECS
The Company's system uses multiple compression/decompression algorithms (or
"codecs") to translate time-based data-intensive content such as audio and video
data into discrete data packets and then broadcast (or "stream") the packets to
the client (or "player"). The player then reassembles the packets in the correct
order and plays back the streaming media content in real-time. The compression
process enables the data to be streamed to the player even in very low bandwidth
(14.4 kbps) or congested network environments by reducing the amount of data to
be streamed.
TRANSMISSION TECHNOLOGY AND PROTOCOLS
Neither of the two basic Internet transport protocols, User Datagram
Protocol ("UDP") and Transport Control Protocol ("TCP"), was originally designed
to handle the transmission of real-time content. UDP is able to transmit data
packets efficiently and without delays, but is not generally robust enough to
ensure delivery of all data packets. TCP generates robust and reliable
transmissions, but is not designed for efficient and continuous real-time
delivery of content. Higher level Internet protocols, such as File Transfer
Protocol ("FTP") and Hypertext Transfer Protocol ("HTTP"), were designed
originally for one-way continuous transmissions and as such do not efficiently
allow the player to communicate back to the server to activate functions such as
fast forward, pause and rewind or to select a particular portion of a clip for
playing.
To address the inherent limitations of the Internet with respect to
multimedia delivery, the Company has developed its own client/server software
architecture based on advanced transmission technologies and protocols. Key
elements of the Company's technology solution include:
- BUFFERING: Because the streaming of continuous, time-based content such
as audio or video must occur in real-time and with minimal transmission
loss, the Company's technology incorporates a time delay (or "buffering")
feature that allows the player extra time to accumulate data packets and,
if any are missing, request retransmission of particular packets. As a
result, transmission and playback quality can be optimized, even in highly
congested transmission environments.
- BIDIRECTIONAL COMMUNICATION: The Company's server and player communicate
during transmission regarding the bandwidth and quality of the user's
connection to optimize the transmission by using the system's bandwidth
negotiation and dynamic connection management capabilities. For
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example, the system is able to detect the available bandwidth and the extent of
packet loss and performance degradation.
- ERROR-MITIGATION: To the extent that buffering and packet retransmission
efforts are insufficient to maintain acceptable quality of user
experience, the Company's system draws on several techniques designed to
mitigate performance degradation, including interpolation methods that
"reconstruct" lost data packets based on approximations regarding adjacent
or closely related data packets, UDP-based retransmission of lost packets
and forward error correction.
- SMART NETWORKING: This feature allows a server to stream content to the
player via unicasting or IP multicasting and automatically select the
appropriate transmission protocol (UDP, TCP or HTTP) depending on current
network conditions and the presence of firewalls or proxies.
- VIDEO-OPTIMIZED TRANSMISSION: Because video transmissions are more
data-intensive than audio transmissions, the encoding of video streams for
low bandwidth requires a higher compression ratio. In addition to standard
compression techniques, the Company uses a technique known as interframe
compression, which reduces unnecessary repetition of redundant background
data in neighboring video frames, thereby reducing the number of data
packets being transmitted. The system also incorporates "stream thinning"
technology that responds to episodes of performance degradation by
dynamically reducing the amount of video content being streamed to the
user, thereby preserving bandwidth for audio packets to maintain the
continuity of the audio stream, which is often more central to the user
experience than video.
In addition to its core client/server technology, the Company has adopted
RTSP, a proposed protocol for standardizing the control and delivery of
streaming media over the Internet. RTSP is a unified standard for a broad range
of media data types and is intended to promote a greater level of
interoperability among various streaming media solutions. RTSP is built on top
of a number of other Internet standard protocols such as HTTP, TCP/IP and Real
Transport Protocol, and is complementary with ASF, a file format for streaming
media that does not specify a method of client-server interaction. RTSP provides
the client-server specification necessary to stream ASF files (and many other
file types) on the Internet. RTSP was submitted to the IETF in October 1996 with
the support of over 40 companies. See "-- Microsoft Relationship" and "Risk
Factors -- Impact of Evolving Standards."
NETWORKED MULTIMEDIA FOR LARGE-SCALE DELIVERY
The Company's splitter technology allows broadcasters to transmit large
numbers of simultaneous streams. Traditionally, a standalone server sends a
separate signal to each individual user, which is an inefficient use of network
bandwidth because the same signal is often being distributed through many of the
same links on the network.
The Company's splitter technology enables one "central" server to broadcast
a signal to a set of servers distributed around a network, which servers then
transmit the signal to the end user, thereby minimizing the use of the network
backbone and improving signal quality. The Company uses this technology in its
RealNetwork broadcasting service, as well as in its J-Stream joint venture in
Japan. See "-- Business Strategy -- Strengthen Strategic Relationships" and
"-- Products and Services -- Media System."
RESEARCH AND DEVELOPMENT
The Company devotes a substantial portion of its resources to developing
new products and product features, expanding and improving its fundamental
streaming technology, and strengthening its technological expertise. During the
fiscal year ended December 31, 1996, and the six months ended June 30, 1997, the
Company expended approximately 34% and 41%, respectively, of its total net
revenues on research and development activities. The Company intends to continue
to devote substantial resources toward research and development for the next
several years. At August 31, 1997, the Company had 90 employees, or 32% of its
workforce, engaged in research and development activities. The Company must
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hire additional skilled software engineers to further its research and
development efforts. The Company's business, financial condition and results of
operations could be adversely affected if it is not able to hire and retain the
required number of engineers.
SALES, MARKETING AND DISTRIBUTION
The Company believes that any individual or company that desires to
transmit or receive streaming media content over the Internet or intranets is a
potential Company customer. To reach as many customer segments as possible, the
Company markets its products and services through several direct and indirect
distribution channels, including over the Internet, through a direct sales
force, through OEMs and VARs, and internationally through distributors and the
J-Stream joint venture. As of August 31, 1997, the Company employed 98 sales and
marketing personnel worldwide.
ELECTRONIC COMMERCE. The Company's Consumer and E-Commerce Divisions are
responsible for electronic commerce sales and marketing of the Company's
products as well as third-party multimedia development products sold on the
Company's RealStore Web site. Substantially all of the Company's products may be
downloaded directly from the Company's Web sites, with over 18 million product
downloads to date. The Company sells third-party products on its RealStore Web
site on a consignment basis and, accordingly, incurs no inventory risk with
respect to such products. Electronic distribution provides the Company with a
low-cost, globally accessible, 24-hour sales channel.
DIRECT SALES FORCE. The Company's direct sales force markets the Company's
products and services primarily to corporate customers worldwide. The direct
sales force is comprised of the Major Accounts, National Accounts and Telesales
groups of the Company's Media Systems Division. The Major Accounts and National
Accounts groups market and sell to corporate customers primarily interested in
server products for commercial Internet Web sites or intranets. The Telesales
group develops and pursues leads generated from inquiries on the Company's Web
sites and from downloads of its EasyStart Server.
OEMS AND VARS. The Strategic Channels, OEM and Consulting groups of the
Company's Media Systems Division market and establish indirect distribution
agreements. The Company has entered into various distribution relationships with
third parties pursuant to which the Company's products are incorporated into, or
bundled with, the third party's products for delivery by the third party to end
users. Such third parties include Creative Labs, Inc., Apple Computer, Inc.,
Network Computer, Inc., WebTV Networks, Inc. and Microsoft.
ADVERTISING SALES. The Company's Advertising Sales group markets and sells
advertising on the Company's Web sites and within media streams that the Company
hosts on behalf of its corporate customers.
INTERNATIONAL SALES. The Company has three international subsidiaries that
market and sell the Company's products outside the U.S. and Canada. The Company
distributes its products internationally through a direct sales force and
distribution arrangements.
MARKETING PROGRAMS. The Company participates in trade shows, conferences
and seminars, provides product information through the Company's Web sites,
promotes and co-promotes special events, places advertising for the Company's
products and services in print and electronic media, and sponsors special
programs for software developers, including its own conference. The Company's
marketing programs are aimed at informing distributors and end users about the
capabilities and benefits of the Company's products and services, increasing
brand name awareness, stimulating demand across all market segments and
encouraging independent software developers to develop products and applications
that are compatible with the Company's products and technology.
MICROSOFT RELATIONSHIP
In June 1997, the Company entered into a strategic agreement with
Microsoft, pursuant to which the Company granted Microsoft a nonexclusive
license to certain substantial elements of the source code of
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the Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio and RealVideo Version 4.0 technology to third parties
under certain circumstances. The agreement also provides for substantial refunds
to Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote ASF as a standard file format for streaming
media. The agreement also requires the Company to provide Microsoft with
engineering consultation services, certain error corrections and certain
technical support over a defined term.
In connection with the agreement, Microsoft also purchased a minority
interest in the Company. Microsoft currently offers its own streaming media
product, NetShow. In addition, Microsoft recently acquired VXtreme, a direct
competitor of the Company in the market for streaming media software. Microsoft
also owns a minority interest in VDOnet, a direct competitor of the Company in
the market for streaming video software. As a result of Microsoft's agreement
with the Company, its acquisition of VXtreme, and is investment in VDOnet,
Microsoft will be able to augment substantially the functionality of NetShow,
its streaming media product, which could have a material adverse effect on the
competitiveness of the Company's products. See "Risk Factors -- Department of
Justice Subpoena."
Microsoft currently competes with the Company in the market for streaming
media server and player software. The Company believes that Microsoft will
compete more directly with the Company in the future. The Company also believes
that Microsoft's commitment to and presence in the streaming media industry will
dramatically increase competitive pressure in the overall market for streaming
media software, leading to, among other things, increased pricing pressure and
longer sales cycles. Such pressures may result in further price reductions in
the Company's products and may also materially reduce the Company's market
share. The Company believes that Microsoft will incorporate streaming media
technology in its Web browser software and certain of its server software
offerings, possibly at no additional cost to the user. In addition,
notwithstanding the Company's cooperation with Microsoft regarding ASF,
Microsoft may promote technologies and standards not compatible with the
Company's technology. Microsoft has a longer operating history, a larger
installed base of customers and dramatically greater financial, distribution,
marketing and technical resources than the Company. As a result, there can be no
assurance that the Company will be able to compete effectively with Microsoft
now or in the future, or that the Company's financial condition and results of
operations will not be materially adversely affected. In addition, if
considerable consolidation occurs, there can be no assurance that the Company
will be able to continue to compete effectively.
CUSTOMERS
Since the Company's inception, the following companies have paid $45,000 or
more to the Company for the purchase of products or services or the license of
technology: ABC Radio Net, Apple Computer, Inc., Bandai Digital Entertainment
Corporation, Bloomberg L.P., Boeing-Inform, Cisco Systems, Inc., Creative Labs,
Inc., Dow Jones, Forefront Graphics Corporation, Internet Canada, Merrill Lynch
& Co. Inc, Microsoft, Multiple Zones, Muzak, Navio Communications, Inc., NBC
Desktop, NetRadio Network, Network Computer Inc., News Corp., Prodigy Services
Company, Starwave, Tele2 Danmark A/S, Teledanmark In, Telia Data AB, 3Com,
United Technologies Corp., WavePhore, Inc. and WebTV Networks, Inc. The
Company's customers consist primarily of resellers and users located in the U.S.
and Canada and various foreign countries. Sales to customers outside the U.S.
and Canada, primarily Asia and Europe, were approximately 15%, 19% and 27% of
total net revenues in the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1997, respectively.
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CUSTOMER SUPPORT
The Company's customers have a choice of support options depending on the
level of service desired. The Company maintains a technical support hotline to
answer inquiries and provides an online database of technical information. The
Company's support staff also responds to e-mail inquiries. The Company tracks
all support requests through a series of customer databases, including current
status reports and historical customer interaction logs. The Company uses
customer feedback as a source of ideas for product improvements and
enhancements. As of August 31, 1997, the Company employed 10 technical
representatives to respond to customer requests for support.
COMPETITION
The market for software and services for the Internet and intranets is
relatively new, constantly evolving and intensely competitive. The Company
expects that competition will intensify in the future. Many of the Company's
current and potential competitors have longer operating histories, greater name
recognition and significantly greater financial, technical and marketing
resources than the Company. The Company's principal competitors in the
development and distribution of audio and video streaming solutions include
Microsoft, VXtreme, VDOnet, Xing, Precept, Cubic, Motorola, Vivo, Vosaic and
Oracle. The Company's RealAudio and RealVideo system also competes to a lesser
degree with non-streaming audio and video delivery technologies such as AVI and
Quicktime, and indirectly with delivery systems for multimedia content other
than audio and video, such as Flash by Macromedia and Enliven by Narrative.
Competitive factors in this market include the quality and reliability of
software; features for creating, editing and adapting content; ease of use and
interactive user features; scaleability and cost per user; and compatibility
with the user's existing network components and software systems. To expand its
user base and further enhance the user experience, the Company must continue to
innovate and improve the performance of its RealAudio and RealVideo system. The
Company anticipates that consolidation will continue in the streaming media
industry and related industries such as computer software, media and
communications. Consequently, competitors may be acquired by, receive
investments from or enter into other commercial relationships with, larger,
well-established and well-financed companies. There can be no assurance that the
Company can establish or sustain a leadership position in this market segment.
See "-- Microsoft Relationship."
The Company is committed to the continued market penetration of its brand,
products and services, which, as a strategic response to changes in the
competitive environment, may require pricing, licensing, service or marketing
changes intended to extend its current brand and technology franchise. By way of
example, the Company recently decided to distribute free of charge a version of
its EasyStart Server, which previously sold for $295 to $995. Continued price
concessions or the emergence of other pricing or distribution strategies by
competitors may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company derives significant revenues from the electronic distribution
of certain of its products. The Company recently opened its RealStore Web site,
an online store for the sale of the Company's products, third-party streaming
media tools and utilities and Internet-based training products. The Company
competes with a variety of Web sites, such as Buydirect.Com and Sofware.Net,
which also offer software products for download. To compete successfully in the
electronic commerce market, the Company must attract sufficient commercial
traffic to its RealStore Web site by offering high-quality merchandise in a
compelling, easy-to-purchase format. There can be no assurance that the Company
will be able to compete successfully in this market, and any failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In the Internet advertising segment, the Company competes for Internet
advertising revenues with a wide variety of Web sites and Internet service
providers. While Internet advertising revenues across the industry continue to
grow, the number of Web sites competing for such revenue is also growing
rapidly. The Company's advertising sales force and infrastructure are still in
early stages of development relative to the Company's competitors. There can be
no assurance that advertisers will place advertising with the
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Company or that revenues derived from such advertising will be material. In
addition, if the Company loses advertising customers, fails to attract new
customers, is forced to reduce advertising rates or modify its rate structure to
retain or attract customers, or loses Web site traffic, the Company's business,
financial condition and results of operations may be materially adversely
affected.
POSITION ON CHARITABLE RESPONSIBILITY
Immediately subsequent to the offering, Mr. Glaser will contribute 5% of
his Common Stock to charitable organizations. In addition, Mr. Jacobsen will
also make a sizable contribution of his Common Stock to charitable
organizations. The Company is strongly committed to charitable responsibility,
as evidenced by its donations of software to charitable organizations. If
sustained profitability is achieved, the Company intends to donate approximately
5% of its annual net income to charitable organizations. The Company hopes to
encourage employee giving by using a portion of its intended contribution to
match charitable donations made by employees. See "Risk Factors -- Position on
Charitable Responsibility."
GOVERNMENTAL REGULATION
The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses, although certain U.S. export controls and import controls of other
countries, including controls on the use of encryption technologies, may also
apply to the Company's products. However, due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted in the U.S. and abroad with particular applicability to the Internet. It
is possible that governments will enact legislation that may be applicable to
the Company in areas such as content, network security, encryption and the use
of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
retransmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain. The majority of such laws were
adopted before the widespread use and commercialization of the Internet and, as
a result, do not contemplate or address the unique issues of the Internet and
related technologies. Any such export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase the Company's cost of doing business or
increase the Company's legal exposure, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, financial condition and
results of operations. Although those sections of the Communications Decency Act
of 1996 ("CDA") that, among other things, proposed to impose criminal penalties
on anyone distributing "indecent" material to minors over the Internet, were
held to be unconstitutional by the U.S. Supreme Court, there can be no assurance
that similar laws will not be proposed and adopted. While the Company does not
currently distribute the types of materials that the CDA may have deemed
illegal, the nature of such similar legislation and the manner in which it may
be interpreted and enforced cannot be fully determined and, therefore,
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, financial
condition and results of operations.
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INTELLECTUAL PROPERTY
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreements in every case. Despite such protections, a third
party could, without authorization, copy or otherwise obtain and use the
Company's products or technology to develop similar technology independently.
There can be no assurance that the Company's agreements with employees,
consultants and others who participate in product development activities will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or
independently developed by competitors.
The Company currently has two patents pending in the U.S. relating to its
product architecture and technology and holds one patent entitled "Method and
Apparatus for Recommending Selections Based on Preferences in a Multi-User
System." There can be no assurance that any pending or future patent
applications will be granted, that any existing or future patent will not be
challenged, invalidated or circumvented, or that the rights granted under any
patent that has issued or may issue will provide competitive advantages to the
Company. Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need either to obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the U.S. and in certain other countries, although it has not
secured registration of all its marks. As of September 19, 1997, the Company had
9 registered U.S. trademarks or service marks, and had applications pending for
an additional 26 U.S. trademarks. A significant portion of the Company's marks
begin with the word "Real" (such as RealAudio and RealVideo). The Company is
aware of other companies that use "Real" in their marks alone or in combination
with other words, and the Company does not expect to be able to prevent all
third-party uses of the word "Real" for all goods and services. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the U.S., and effective patent, copyright,
trademark and trade secret protection may not be available in such
jurisdictions. The Company licenses certain of its proprietary rights to third
parties, and there can be no assurance that such licensees will not fail to
abide by compliance and quality control guidelines with respect to such
proprietary rights or take actions that would materially adversely affect the
Company's business, financial condition and results of operations.
To license many of its products, the Company relies in part on "shrinkwrap"
and "clickwrap" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. As with other software
products, the Company's products are susceptible to unauthorized copying and
uses that may go undetected, and policing such unauthorized use is difficult. In
general, there can be no assurance that the Company's efforts to protect its
intellectual property rights through patent, copyright, trademark and trade
secret laws will be effective to prevent misappropriation of its technology, or
to prevent the development and design by others of products or technologies
similar to or competitive with those developed by the Company, and the Company's
failure or inability to protect its proprietary rights could materially
adversely affect the Company's business, financial condition and results of
operations.
The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce and protect the Company's
intellectual property and trade secrets or to defend against a claim of
infringement or invalidity. The Company has been and expects to continue to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of third-party
proprietary rights by the Company and its licensees. The Company attempts to
avoid infringing known
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proprietary rights of third parties in its product development efforts. However,
the Company has not conducted and does not conduct comprehensive patent searches
to determine whether the technology used in its products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. If the Company were to discover that its products violate
third-party proprietary rights, there can be no assurance that it would be able
to obtain licenses to continue offering such products without substantial
reengineering or that any effort to undertake such reengineering would be
successful, that any such licenses would be available on commercially reasonable
terms, if at all, or that litigation could be avoided or settled without
substantial expense and damage awards. Any claims relating to the infringement
of third-party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and could result
in injunctions preventing the Company from distributing certain products. Such
claims could materially adversely affect the Company's business, financial
condition and results of operations.
The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products, to perform key functions. There can
be no assurance that such third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of any of
these technologies could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, although the
Company is generally indemnified against claims that such third-party technology
infringes the proprietary rights of others, such indemnification is not always
available for all types of intellectual property rights (for example, patents
may be excluded) and in some cases the scope of such indemnification is limited.
Even if the Company receives broad indemnification, third-party indemnitors are
not always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company. There
can be no assurance that infringement or invalidity claims arising from the
incorporation of third-party technology, and claims for indemnification from the
Company's customers resulting from such claims, will not be asserted or
prosecuted against the Company. Such claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources in
addition to potential product redevelopment costs and delays, all of which could
materially adversely affect the Company's business, financial condition or
results of operations. See "Risk Factors -- Uncertain Protection of Intellectual
Property; Risks Associated with Licensed Third-Party Technology."
EMPLOYEES
At August 31, 1997, the Company had 276 full-time employees and two
part-time employees, 250 of whom were based at the Company's executive offices
in Seattle, Washington, 21 of whom were based at the Company's offices in Japan,
England or France and five of whom were salespersons based at other locations.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company believes that its relations with its employees are good.
FACILITIES
The Company's executive offices are located in downtown Seattle, Washington
in an office building in which, as of September 30, 1997, the Company leases an
aggregate of 80,345 square feet at a current monthly rental of $122,411. The
lease agreement terminates on April 30, 2001. The Company has an option to
extend the lease agreement for two additional five-year terms.
The Company anticipates that it will require additional space within the
next 12 months, but that suitable additional space will be available on
commercially reasonable terms, although there can be no assurance in this
regard. The Company does not own any real estate.
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LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business,
including claims of alleged infringement of third-party trademarks and other
intellectual property rights by the Company and its licensees. Such claims, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources. In August 1997, the Company was subpoenaed by the
Department of Justice in connection with its investigation into horizontal
merger activity in the streaming media industry. The investigation, including
interviews by the Department of Justice of Company officers, and document
production requests, is ongoing. As a result of the investigation, it is
possible that the Department of Justice will require certain actions by the
Company or other companies in the streaming media industry, which could have a
material adverse effect on the Company's competitive position, and on its
business, financial condition and results of operations. The Company is
cooperating in the investigation. The Company is not aware of any other legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, financial condition or
results of operations. See "Risk Factors -- Department of Justice Subpoena" and
"-- Uncertain Protection of Intellectual Property; Risks Associated With
Licensed Third-Party Technology."
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company as of
September 26, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Robert Glaser(1).......... 35 Chairman of the Board, Chief Executive Officer, Secretary
and Treasurer
Bruce Jacobsen(2)......... 37 President, Chief Operating Officer and Director
Mark Klebanoff............ 35 Chief Financial Officer
Len Jordan................ 31 Senior Vice President -- Media Systems
Phillip Barrett........... 44 Senior Vice President -- Media Systems
Maria Cantwell............ 38 Senior Vice President -- Consumer and E-Commerce
James Higa................ 39 Vice President -- Asia/Rest of World ("ROW")
John Atcheson............. 38 Vice President -- Media Publishing
James Wells............... 50 Vice President -- Sales
Kelly Jo MacArthur........ 33 Vice President and General Counsel
Erik Moris................ 38 Vice President -- Marketing
James Breyer(1)(2)........ 36 Director
Mitchell Kapor(1)(2)...... 46 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Set forth below is certain information regarding the business experience
during the past five years for each of the above-named persons.
ROBERT GLASER has served as Chairman of the Board, Chief Executive Officer
and Treasurer of the Company since its inception in February 1994, and as
Secretary since March 1995. On closing of the offering, he will also serve as
the Company's Policy Ombudsman, with the exclusive authority to adopt or change
the editorial policies of the Company as reflected on the Company's Web sites or
other communications or media where the Company has a significant editorial or
media voice. See "Description of Capital Stock -- Certain Voting and Other
Matters." From 1983 to 1993, Mr. Glaser was employed at Microsoft, most recently
as Vice President of multimedia and consumer systems, where he focused on the
development of new businesses related to the convergence of the computer,
consumer electronics and media industries. Mr. Glaser holds a B.A. and an M.A.
in Economics and a B.S. in Computer Science from Yale University.
BRUCE JACOBSEN has served as President and Chief Operating Officer of the
Company since February 1996 and as a Director since August 1997. From April 1995
to February 1996, Mr. Jacobsen was Chief Operating Officer of Dreamworks
Interactive, a joint venture between Microsoft and Dreamworks SKG, a partnership
among Steven Spielberg, Jeffery Katzenberg and David Geffen. From August 1986 to
April 1995, Mr. Jacobsen was employed at Microsoft in a number of capacities,
including General Manager of the Kids/Games business unit. Mr. Jacobsen
graduated summa cum laude with Honors from Yale University and holds an M.B.A.
from Stanford University.
MARK KLEBANOFF has served as Chief Financial Officer of the Company since
June 1996. From May 1992 to June 1996, Mr. Klebanoff was Vice President of
Finance and Operations of Industrial Systems, Inc., a client/server process
information management software vendor, which merged with Aspen Technology, Inc.
in 1995. From 1989 to 1992, Mr. Klebanoff worked in a number of general
management capacities for the Japanese trading company Itochu Corporation. Mr.
Klebanoff holds a B.A. from Yale University and a Masters degree from the Yale
School of Management.
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LEN JORDAN has served as Senior Vice President -- Media Systems of the
Company since January 1997. From November 1993 to November 1996, Mr. Jordan was
employed at Creative Multimedia, Inc., a developer and publisher of
CD-ROM/Internet products in a number of capacities, most recently as President.
From September 1989 to November 1993, Mr. Jordan was employed at Central Point
Software, Inc., a utility software publisher. Mr. Jordan graduated magna cum
laude from the Eccles School of Business at the University of Utah with B.S.
degrees in Finance and Economics.
PHILLIP BARRETT has served as Senior Vice President -- Media Systems of the
Company since January 1997, and from November 1994 to January 1997 as Vice
President -- Software Development. From March 1986 to October 1994, Mr. Barrett
was a Development Group Manager at Microsoft, where he led development efforts
for Windows 386, Windows 3.0 and Windows 3.1. Mr. Barrett holds an A.B. in
Mathematics from Rutgers University and an M.S. in Computer Sciences from the
University of Wisconsin, Madison.
MARIA CANTWELL has served as Senior Vice President -- Consumer and
E-Commerce of the Company since July 1997. From April 1995 to July 1997, Ms.
Cantwell served as Vice President -- Marketing of the Company. From February
1995 to April 1995, Ms. Cantwell was a consultant to the Company. From 1992 to
January 1995, Ms. Cantwell served as a member of the 103rd Congress. Ms.
Cantwell holds a B.A. in Public Administration from Miami University.
JAMES HIGA has served as Vice President -- Asia/ROW of the Company since
September 1996. From January 1989 to August 1996, Mr. Higa was the Director for
Asia/Pacific for NeXT Software, Inc. From 1986 to 1989, Mr. Higa served as
Director of Product Marketing at Apple Japan, Inc. Mr. Higa holds a B.A. in
Political Science from Stanford University.
JOHN ATCHESON has served as Vice President -- Media Publishing of the
Company since January 1997. From March 1990 to May 1996, Mr. Atcheson was
President and Chief Executive Officer of MNI Interactive, Inc., a developer and
distributor of consumer interactive services. Mr. Atcheson holds a B.A. from
Brown University and an M.B.A. from the Stanford Graduate School of Business.
JAMES WELLS has served as Vice President -- Sales of the Company since May
1995. From March 1994 to April 1995, Mr. Wells served as a consultant in sales,
marketing and product strategy at Aldus Corporation, a developer and marketer of
publishing software. From January 1991 to February 1994, Mr. Wells served in
various senior sales and marketing positions with Apple Computer, Inc. Mr. Wells
holds a B.S. in Engineering from Lamar University and an M.B.A. from the
University of Delaware.
KELLY JO MACARTHUR has served as Vice President and General Counsel of the
Company since October 1996. From January 1995 to March 1996, Ms. MacArthur
served as General Counsel and Director of Business Affairs for Compton's
NewMedia, Inc., which was acquired by Learning Co., Inc. in 1996. From July 1989
to December 1994, Ms. MacArthur was an attorney at Sidley & Austin. Ms.
MacArthur graduated summa cum laude from the University of Illinois at
Champaign-Urbana and holds a J.D. from Harvard Law School.
ERIK MORIS has served as Vice President -- Marketing of the Company since
August 1997. From April 1997 to July 1997, Mr. Moris served as a Product Manager
for the Company. From September 1996 to April 1997, Mr. Moris was a consultant
to the Company. From May 1995 to August 1996, Mr. Moris was employed at
Microsoft, where he managed advertising for the Windows 95 launch and was Group
Manager for the Internet Platform and Tools Division. From 1985 to 1994, Mr.
Moris was a Senior Vice President at McCann-Erickson Advertising. Mr. Moris
holds a B.A. in Communications and Business from Western Washington University.
JAMES BREYER has been a Director of the Company since October 1995. Mr.
Breyer has served as a Managing Partner of Accel Partners L.P. in Palo Alto/San
Francisco since November 1995 and as a general partner from 1990 to 1995. At
Accel Partners L.P., Mr. Breyer has sponsored investments in over a dozen
companies that have completed public offerings or successful mergers.
Previously, Mr. Breyer was a management consultant at McKinsey & Company, and
worked in product management and
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marketing at Apple Computer, Inc. and Hewlett-Packard Corporation. Mr. Breyer
holds a B.S. from Stanford University and an M.B.A. from Harvard University,
where he was named a Baker Scholar.
MITCHELL KAPOR has been a Director of the Company since October 1995. From
1990 to 1993, Mr. Kapor was President, from 1993 to 1995 he was Chairman and
from 1995 to 1996 he was a director, of the Electronic Frontier Foundation, a
nonprofit public Internet organization that he co-founded in 1990. Mr. Kapor
designed Lotus 1-2-3, and founded Lotus Development Corporation in 1982 and
served as its President and Chief Executive Officer from April 1982 to July
1986. Mr. Kapor holds a B.A. in Cybernetics from Yale University and an M.A. in
Psychology from Beacon College.
NUMBER, TERM AND ELECTION OF DIRECTORS
The Company's Articles provide that the number of directors shall be
determined in the manner provided by the Company's Bylaws. The Bylaws provide
that the number of directors shall not be less than one, with the precise number
to be determined by resolution of the Board of Directors. The Board of Directors
has determined that the number of directors shall be seven. Four directors
currently serve on the Board, with three vacancies currently existing.
Prior to September 1997, each director was elected to serve until the next
annual meeting of shareholders and the election and qualification of his or her
successor or until his or her earlier resignation or removal. In September 1997,
the Company established a classified Board of Directors with three classes
(Class 1, Class 2 and Class 3), each class as nearly equal in number of
directors as possible. Each of the current directors was elected in September
1997 to one of these three classes. Commencing with the annual shareholders
meeting in 1998 and thereafter, each director shall serve for a term ending at
the third annual meeting of shareholders following such director's election. Mr.
Kapor was elected to Class 1 with a term expiring at the annual shareholders
meeting in 1998; Messrs. Breyer and Jacobsen were elected to Class 2 with terms
expiring at the annual shareholders meeting in 1999; and Mr. Glaser was elected
to Class 3 with a term expiring at the annual shareholders meeting in 2000.
CONTRACTUAL ARRANGEMENTS
Pursuant to the terms of a Second Amended and Restated Investors' Rights
Agreement (the "Investors' Rights Agreement"), the holders of Series B Preferred
Stock are entitled to nominate one member to the Board of Directors, the holders
of Series C Preferred Stock are entitled to nominate one member to the Board of
Directors and the holders of Series E Preferred Stock are entitled to nominate
one member to the Board of Directors. Mr. Kapor is the director nominated by the
holders of the Series B Preferred Stock, Mr. Breyer is the director nominated by
the holders of the Series C Preferred Stock, and the holders of the Series E
Preferred Stock currently have not nominated a director. The right to nominate
directors pursuant to the Investors' Rights Agreement will terminate on closing
of the offering.
Under a voting agreement (the "Voting Agreement") entered into in September
1997 among the Company, Accel IV L.P. ("Accel IV") and Messrs. Jacobsen, Kapor
and Glaser, each of Accel IV and Messrs. Jacobsen and Kapor have agreed,
effective on closing of the offering, to vote all shares of stock of the Company
owned by such shareholders to elect Mr. Glaser to the Board of Directors of the
Company in each election in which he is a nominee. The obligations under the
Voting Agreement terminate with respect to shares transferred by the parties
thereto. The Voting Agreement terminates upon the death of Mr. Glaser.
Pursuant to the terms of the Glaser Agreement, the Company granted to Mr.
Glaser a direct contractual right to require the Company to abide by and perform
all terms of the Articles with respect to strategic transactions. The agreement
also provides that so long as Mr. Glaser owns a specified number of shares, the
Company shall use its best efforts to cause Mr. Glaser to be nominated to, not
removed from, and elected to, the Board of Directors.
51
<PAGE> 54
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their
services as directors or members of committees of the Board of Directors, but
are reimbursed for their reasonable expenses incurred in attending Board of
Directors meetings. The Company has not made option grants to outside directors,
but intends to make such grants to outside directors.
BOARD COMMITTEES
The Company has established an Audit Committee, a Compensation Committee
and a Strategy Committee. In addition, the Articles provide that, following the
closing of the offering, the Company will establish a Strategic Transactions
Committee. Following the closing of the offering, the Company also intends to
establish a Nominating Committee.
The Audit Committee consists of Messrs. Breyer, Jacobsen and Kapor. The
functions of the Audit Committee are to make recommendations to the Board of
Directors regarding the selection of independent auditors, review the results
and scope of the audit and other services provided by the Company's independent
auditors and evaluate the Company's internal controls.
The Compensation Committee consists of Messrs. Breyer, Glaser and Kapor.
The functions of the Compensation Committee are to review and approve the
compensation and benefits for the Company's executive officers, administer the
Company's stock option and stock purchase plans and make recommendations to the
Board of Directors regarding such matters.
The Strategy Committee consists of Messrs. Breyer, Glaser, Jacobsen and
Kapor. The functions of the Strategy Committee are to make recommendations to
the Board of Directors regarding the overall strategic goals of the Company and
review significant business transactions that affect the future strategic
direction of the Company.
The Strategic Transactions Committee will be comprised of three directors,
who shall initially be Messrs. Glaser, Breyer and Kapor. Without the prior
approval of such committee, and subject to certain limited exceptions, the Board
of Directors shall not have the authority to (i) adopt a plan of merger, (ii)
authorize the sale, lease, exchange or mortgage of (A) assets representing more
than 50% of the book value of the Company's assets prior to the transaction or
(B) any other asset or assets on which the long-term business strategy of the
Company is substantially dependent, (iii) authorize the Company's voluntary
dissolution or (iv) take any action that has the effect of clauses (i) through
(iii). Any vacancy on the Committee shall be filled by the remaining members of
the Committee. If two members of the Committee remain and they are unable to
agree on an individual to fill the vacancy, the vacancy may be filled by the
member who holds or controls, directly or indirectly, the larger percentage of
the outstanding shares of the Company's capital stock. The Committee, by vote of
the Chairman of the Committee and one additional member, may limit the powers of
the Committee or may terminate the Committee. The existence and powers of the
Committee shall terminate when the members in the aggregate cease to hold or
control, directly or indirectly, at least 10% of the outstanding shares of the
Company's capital stock.
The Nominating Committee will be comprised of the Company's Chief Executive
Officer and certain other directors of the Company. The function of the
Nominating Committee will be to recommend persons for election to the Board of
Directors.
POLICY OMBUDSMAN
Under the Articles, Mr. Glaser shall serve, or shall appoint another
officer of the Company who shall serve, as the Company's Policy Ombudsman, with
the exclusive authority to adopt or change the editorial policies of the Company
as reflected on the Company's Web sites or other communications or media where
the Company has a significant editorial or media voice. Upon the death,
resignation or removal of Mr. Glaser as the Policy Ombudsman, the Chief
Executive Officer shall serve or appoint another officer of the Company to serve
as his or her successor.
52
<PAGE> 55
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company in all capacities during the year
ended December 31, 1996 by the Company's Chief Executive Officer and by the
other three executive officers of the Company whose salary and bonus exceeded
$100,000 in 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#)
- ------------------------------------------------ ------------ -------- -------------
<S> <C> <C> <C>
Robert Glaser................................... $100,000 $ -- --
Chairman, Chief Executive Officer, Secretary
and Treasurer
Bruce Jacobsen.................................. 118,158 -- 1,176,367
President and Chief Operating Officer
James Wells..................................... 90,000 23,625 --
Vice President -- Sales
Andrew Sharpless................................ 102,295 -- 125,000(2)
Senior Vice President
</TABLE>
- ---------------
(1) The current annual salaries for Messrs. Glaser, Jacobsen and Wells are
$100,000, $135,000 and $90,000, respectively.
(2) Mr. Sharpless resigned as an officer of the Company effective August 2,
1996, after which time he served as a Vice President of the Company until
February 1997, when he terminated his employment with the Company. Mr.
Sharpless exercised this option with respect to 12,500 shares on April 8,
1997, after terminating his employment with the Company. The remainder of
the shares subject to this option were unvested as of his termination date,
and therefore were canceled.
The following table shows information concerning stock options granted to
the Named Executive Officers in 1996 and reflects the conversion of Series B
Common Stock and Series C Common Stock underlying such options into Common Stock
on closing of the offering.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED(#)(1) IN 1996 ($/SHARE)(2) DATE 5%($) 10%($)
- -------------------- ------------- ---------- ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Glaser....... -- -- -- -- $ -- $ --
Bruce Jacobsen...... 1,176,367 31.2% $ 0.20 2/16/2016 388,977 1,347,528
James Wells......... -- -- -- -- -- --
Andrew Sharpless.... 125,000 3.3% $ 0.20 5/29/1997(4) 41,332 143,187
</TABLE>
- ---------------
(1) All options granted to the Named Executive Officers in 1996 were
nonqualified stock options that vest with respect to 20% of the shares on
the first anniversary of the date of grant and thereafter at a rate of 10%
for each six months of services rendered by the optionee to the Company,
except for one option granted to Mr. Jacobsen on February 16, 1996 for the
purchase of 470,544 shares of Common Stock, of which 50% vests one year from
date of grant and 25% vests every six months thereafter.
53
<PAGE> 56
(2) The exercise price of each option was the estimated fair market value of the
underlying securities on the date of grant, as determined by the Board.
(3) Based on the estimated fair market value of the underlying securities on the
date of grant and assumed appreciation over the original 20-year option term
at the respective annual rates of stock appreciation shown. Potential gains
are net of the exercise price but before taxes associated with the exercise.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission (the
"Commission") and do not represent the Company's estimate of the future
price of the Common Stock. Actual gains, if any, on stock option exercises
depend on the future financial performance of the Company and overall market
conditions. The actual value realized may be greater or less than the
potential realizable value set forth in the table.
(4) Mr. Sharpless exercised this option with respect to 12,500 shares on April
8, 1997, after terminating his employment with the Company. The remainder of
the shares subject to this option were unvested as of his termination date
and therefore were canceled.
The following table sets forth information regarding option exercises, and
the fiscal year-end values of stock options held, by each of the Named Executive
Officers during the year ended December 31, 1996. The table reflects the
conversion of Series B Common Stock and Series C Common Stock underlying such
options into Common Stock on closing of the offering.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT DECEMBER 31,
SHARES VALUE REALIZED($) DECEMBER 31, 1996(#) 1996($)
ACQUIRED (MARKET PRICE AT ---------------------- --------------------
ON EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#)(1) EXERCISE PRICE) UNEXERCISABLE(3) UNEXERCISABLE(4)
- ---------------------- -------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Robert Glaser......... -- $ -- --/-- $ --/--
Bruce Jacobsen........ -- -- --/1,176,367 --/941,094
James Wells........... -- -- 82,500/192,500 76,725/179,025
Andrew Sharpless(2)... 300,000 87,750 12,500/112,500 (5) 10,000/90,000
</TABLE>
- ---------------
(1) Does not include options exercised in 1997.
(2) The fair market value of the underlying securities at the close of business
on the dates of exercise of Mr. Sharpless' options to purchase 225,000
shares and 75,000 shares were estimated to be approximately $0.20 and $0.85
per share, respectively, as determined by the Company's Board of Directors.
(3) Does not include options granted in 1997.
(4) The fair market value of the underlying securities at the close of business
on December 31, 1996 was estimated to be approximately $1.00 per share, as
determined by the Company's Board of Directors.
(5) Mr. Sharpless exercised this option with respect to 12,500 shares on April
8, 1997, after terminating his employment with the Company. The remainder of
the shares subject to this option were unvested as of his termination date,
and therefore were canceled.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles limit the liability of the Company's directors to
the full extent permitted by Washington law. The Washington Business Corporation
Act (the "Washington Act") provides that a corporation's articles of
incorporation may contain a provision eliminating or limiting the personal
liability of directors for monetary damages for breach of their fiduciary duty
as directors, except for liability for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law, (ii) unlawful
54
<PAGE> 57
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 23B.08.310 of the Washington Act ("Washington Act") or (iii) any
transaction from which the director derived an improper personal benefit. The
Articles provide that the Company shall indemnify its directors and officers,
and may indemnify its employees and agents, to the fullest extent permitted by
law.
The Company has entered into agreements with its directors and executive
officers that, among other things, indemnify them for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such persons in any action or proceeding, including any action by or in the
right of the Company, arising out of such person's services as a director or
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the Company.
The Company believes that these provisions and agreements are necessary to
attract and retain qualified directors and officers. These agreements also
provide officers with the same limitation of liability for monetary damages that
the Washington Act and the Articles provide to directors.
BENEFIT PLANS
1995 STOCK OPTION PLAN. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors, and approved by the Company's
shareholders, in March 1995. The 1995 Plan provides for the grant of
nonqualified options to purchase up to an aggregate of 3,600,000 shares of
Common Stock to employees, officers, directors, consultants and independent
contractors of the Company. As of June 30, 1997, options to purchase 2,122,545
shares of Common Stock were outstanding under the 1995 Plan, with exercise
prices ranging from $0.07 to $1.00 per share, options to purchase 864,236 shares
were available for grant and options to purchase 613,219 shares had been
exercised. The Company has resolved to not grant any additional options under
the 1995 Plan, and has amended its Amended and Restated 1996 Stock Option Plan
to provide for an increase in the number of shares reserved for issuance
thereunder. See "-- Amended and Restated 1996 Stock Option Plan."
The provisions of the 1995 Plan with respect to the administration of the
1995 Plan and options granted thereunder, the term and termination of options
granted, including any provision regarding the acceleration of exercisability
thereof, are as set forth below with respect to the Amended and Restated 1996
Stock Option Plan.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN. The Company's Amended and
Restated 1996 Stock Option Plan (the "1996 Plan") was originally adopted by the
Board of Directors in February 1996, and will be approved by the Company's
shareholders in October 1997. The 1996 Plan provides for the grant of incentive
and non-qualified options to purchase up to an aggregate of 9,692,736 shares of
Common Stock to employees, officers, directors, consultants and independent
contractors of the Company or any of its affiliates (the "Initial Option
Amount"). The Initial Option Amount can be increased to up to 11,233,209 shares
after taking into account 1,540,473 shares of Common Stock subject to options
outstanding under the 1995 Plan on September 24, 1997, to the extent that such
options terminate without having been exercised in full. As of June 30, 1997,
options to purchase 4,213,941 shares of Common Stock were outstanding under the
1996 Plan, with exercise prices ranging from $0.20 to $2.75 per share, options
to purchase 1,456,956 shares of Common Stock were available for grant and
options to purchase 129,103 shares of Common Stock had been exercised.
The 1996 Plan is administered by the Board of Directors, which has the
authority to grant options and to specify the terms and conditions of each
option so granted, including the number of shares covered by the option, the
type of option, the exercise price and the vesting provisions.
Options granted under the 1996 Plan must be exercised within three months
of the termination of the optionee's employment with, or service to, the
Company, or within one year after the optionee's termination due to death or
disability, but in no event later than the expiration of the option term.
Options granted under the 1996 Plan are not transferable by the optionee except
by will or the laws of descent and distribution and generally are exercisable
during the optionee's lifetime only by the optionee.
55
<PAGE> 58
In the event of a sale of all or substantially all of the Company's assets,
a merger or reorganization in which the Company is not the surviving
corporation, or the sale or other transfer of shares representing more than 50%
of the combined voting power of the then outstanding securities of the Company
(each, a "Terminating Event"), the Board may determine whether provision will be
made for assumption of, or substitution for, the stock options granted under the
1996 Plan by the successor corporation. If, with respect to a Terminating Event
that has been approved by the Board, the Board determines that no such
assumption or substitution will be made, then all options will become fully
vested, and each optionee will have the right to exercise any unexercised
options prior to closing of the Terminating Event. All options not so exercised
will expire upon closing of the Terminating Event.
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "ESPP"), which was adopted by the Board of Directors and
approved by the Company's shareholders in September 1997, will become effective
on January 1, 1998. The Company has reserved 1,000,000 shares of Common Stock
for issuance under the ESPP. The ESPP is intended to qualify for favorable tax
treatment under Section 423 of the Internal Revenue Code of 1986, as amended.
The ESPP will be implemented through a series of offering periods of six months'
duration, with new offering periods commencing on January 1 and July 1 of each
year. The ESPP will be administered by the Compensation Committee of the Board
of Directors of the Company. Each eligible employee of the Company or of any
majority-owned subsidiary of the Company who has been employed by the Company or
such majority-owned subsidiary of the Company for at least 90 days will be
eligible to participate in the ESPP if such employee is employed by the Company
or any such subsidiary for more than 20 hours per week and more than five months
per year. The ESPP permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of their compensation, at a price
equal to 85% of the lower of the fair market value of the Common Stock at the
beginning or end of the offering period. Employees may terminate their
participation in the ESPP any time during the offering period; provided,
however, that employees may not change their level of participation in the ESPP
at any time during the offering period. Participation in the ESPP terminates
automatically on the employee's termination of employment with the Company.
401(k) PLAN. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit-sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors. The Company has not made any
such contribution to date and currently has no plans to do so. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 20% of their compensation, subject to maximum limits on contributions
prescribed by law.
56
<PAGE> 59
CERTAIN TRANSACTIONS
SALES OF PREFERRED STOCK
Since the Company's inception in February 1994, the Company has issued, in
private placement transactions, shares of Preferred Stock as follows: (i) in
April 1995, an aggregate of 2,686,567 shares of Series B Preferred Stock at
$0.67 per share, (ii) in October 1995, an aggregate of 2,904,305 shares of
Series C Preferred Stock at approximately $1.96 per share, (iii) in November
1996, an aggregate of 2,381,010 shares of Series D Preferred Stock at $7.53 per
share and (iv) in July 1997, an aggregate of 3,338,374 shares of Series E
Preferred Stock at $8.99 per share. In addition, in connection with these
private placements, the Company issued warrants as follows: (i) in April 1995, a
warrant to purchase up to 373,134 shares of Series B Preferred Stock at an
exercise price of $0.67 per share, which warrant was exercised in October 1995,
(ii) in October 1995, warrants to purchase up to 100,000 shares of Series C
Preferred Stock at an exercise price of approximately $1.96 per share and
warrants to purchase up to 183,755 shares of Series B Common Stock at an
exercise price of approximately $0.20 per share, (iii) in November 1996,
warrants to purchase up to 714,303 shares of Series D Preferred Stock at an
exercise price of approximately $9.41 per share and (iv) in July 1997, warrants
to purchase up to 3,709,305 shares of Series E Preferred Stock at an exercise
price of $13.48 per share. In April 1995, in connection with the Company's
Series B Preferred Stock financing, Mr. Glaser exchanged 10,000 shares of the
capital stock of the Company for one share of Series A Common Stock and
13,713,439 shares of Series A Preferred Stock to reflect capital contributions
made by Mr. Glaser of approximately $0.07 per share. The purchasers of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock and the accompanying warrants to purchase Series B
Common Stock and Series C, Series D and Series E Preferred Stock included, among
others, the following 5% shareholders, executive officers, directors and
entities associated with directors:
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------------------------
NAME SERIES B SERIES C SERIES D SERIES E
- ---------------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Robert Glaser......... 287,313 50,825 39,841
Mitchell Kapor........ 1,492,537 656,172 66,401
Accel Entities(1)..... 2,037,282 66,401
Microsoft
Corporation......... 3,338,374
Phillip Barrett....... 373,134
</TABLE>
<TABLE>
<CAPTION>
WARRANTS
---------------------------------------------------------------------------------
SERIES B SERIES C SERIES D SERIES E
NAME COMMON STOCK(2) PREFERRED STOCK(2) PREFERRED STOCK PREFERRED STOCK(2)
- ---------------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Robert Glaser......... 11,952
Mitchell Kapor........ 33,755 19,920
Accel Entities(1)..... 150,000 100,000 19,921
Microsoft
Corporation......... 3,709,305
</TABLE>
- ---------------
(1) The "Accel Entities" include Accel IV L.P., Accel Investors '95 L.P., Accel
Keiretsu L.P. and Ellmore C. Patterson Partners. James Breyer, a director of
the Company, is affiliated with the Accel Entities. See "Principal
Shareholders."
(2) These warrants terminate automatically on closing of the offering.
In addition, members of Mr. Glaser's immediate family purchased an
aggregate of 223,881 shares of Series B Preferred Stock in April 1995, and an
aggregate of 39,498 shares of Series C Preferred Stock in October 1995, in each
case on the same terms as the other investors.
Pursuant to the terms of the Investors' Rights Agreement, the holders of
Series B Preferred Stock are entitled to nominate one member to the Board of
Directors, the holders of Series C Preferred Stock are entitled to nominate one
member to the Board of Directors and the holders of Series E Preferred Stock are
entitled to nominate one member to the Board of Directors. In addition, all
holders of preferred stock hold
57
<PAGE> 60
preemptive rights to purchase their pro rata share of new securities issued by
the Company. The rights to nominate directors and the preemptive rights will
terminate on closing of the offering. In addition, the Investors' Rights
Agreement provides registration rights obligating it, under certain
circumstances, to effect a registration under the Securities Act of any common
stock issued upon conversion of the Preferred Stock, and the Common Stock issued
pursuant to the exercise of the Series B Common Stock warrants. See "Shares
Eligible for Future Sale -- Registration Rights." All shares of Preferred Stock
will be converted into an equivalent number of shares of Common Stock or Special
Common Stock on closing of the offering.
The Company has entered into indemnification agreements with each of its
executive officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
MICROSOFT CORPORATION
The Company and Microsoft entered into an agreement in June 1997 pursuant
to which the Company granted Microsoft a nonexclusive license to certain
substantial elements of the source code of the Company's core
RealAudio/RealVideo Version 4.0 technology, including its basic RealPlayer and
substantial elements of its EasyStart Server products. Under the agreement,
Microsoft may sublicense its rights to the RealAudio and RealVideo Version 4.0
technology to third parties under certain conditions. The agreement also
provides for substantial refunds to Microsoft under prescribed circumstances
that are solely within the Company's control. The amount of these refunds
diminishes over time. In addition, the Company may not assign the agreement
without Microsoft's consent. Microsoft is obligated to distribute the Company's
RealPlayer Version 4.0 for a defined term as long as the Company's player
supports certain Microsoft architectures. The Company also agreed to work with
Microsoft and several other companies to author and promote ASF as a standard
file format for streaming media. The agreement also requires the Company to
provide Microsoft with engineering consultation services, certain error
corrections, and certain technical support over a defined term. In connection
with the agreement, Microsoft purchased 3,338,374 shares of nonvoting Series E
Preferred Stock at approximately $8.99 per share for approximately $30,000,000.
Each share of Series E Preferred Stock is convertible at the option of Microsoft
into either one share of Common Stock or one share of Special Common Stock.
Microsoft also received a warrant to purchase 3,709,305 shares of Series E
Preferred Stock at an exercise price of $13.48 per share. If exercised, each
share of Series E Preferred Stock acquired upon exercise will be automatically
converted, at the election of the holder, into either one share of Common Stock
or one share of Special Common Stock. If Microsoft elects to convert shares of
Series E Preferred Stock into $15,000,000 or more of Common Stock, it may be
required to make a filing under the Hart-Scott-Rodino Antitrust Improvements Act
and obtain approval from the Department of Justice and the Federal Trade
Commission before completing the conversion into Common Stock. This warrant
terminates on closing of the offering. In connection with its equity investment,
Microsoft also granted a limited proxy to the Company. See "Risk
Factors -- Competition; Relationship With Microsoft," "-- Department of Justice
Subpoena," "Business -- Microsoft Relationship" and "Description of Capital
Stock -- Certain Voting and Other Matters."
JAPANESE JOINT VENTURE
Trans Cosmos is the beneficial owner of 1,381,142 shares of Common Stock of
the Company. In May 1997, Trans Cosmos, the Company and two other parties
entered into a joint venture agreement with respect to the establishment and
management of J-Stream to operate an Internet streaming business in Japan. Trans
Cosmos owns 28% of J-Stream and each of the Company and the other two parties
own 24%. Trans Cosmos is responsible for managing J-Stream, and the Company
supplies J-Stream with software and technology for streaming on Internet
networks. Trans Cosmos contributed approximately $1,165,000 for its 28% interest
and the Company contributed approximately $998,000 for its 24% interest in
J-Stream, Trans Cosmos loaned the Company the amount of the Company's
contribution, and the Company may, under certain circumstances, tender its 24%
interest to Trans Cosmos as repayment of the loan.
58
<PAGE> 61
CHANGES TO CAPITAL STRUCTURE
In connection with the offering, the Board recommended, and the Company's
shareholders approved, amendments to the Company's Articles that, among other
things, reduced the number of series of authorized Common Stock from five to
two: voting Common Stock and nonvoting Special Common Stock. A majority of the
previously authorized series were owned by certain of the Company's directors
and executive officers. The amendments to the Articles also establish the
Strategic Transactions Committee and provide for a Policy Ombudsman with
authority to determine certain matters related to editorial policies of the
Company. See "Management -- Policy Ombudsman" and "Description of Capital
Stock -- Certain Voting and Other Matters."
TRANS COSMOS RELATIONSHIP
The Company and Trans Cosmos are parties to a Master Distribution Agreement
pursuant to which the Company granted Trans Cosmos a nonexclusive,
nontransferable license to reproduce and distribute RealPlayer and RealPlayer
Plus, and distribute the Company's server products, in Japan. Trans Cosmos is
required to comply with certain marketing requirements, personnel commitments
and specified minimum distribution requirements. Under the distribution
agreement, Trans Cosmos paid the Company license fees of $820,000 in 1996, and
approximately $467,000 from January 1, 1997 through August 31, 1997. The
distribution agreement became effective on July 22, 1996 and terminated pursuant
to the terms of the agreement on July 22, 1997; however, the Company and Trans
Cosmos have continued to adhere to the terms of the agreement and are currently
renegotiating the agreement.
59
<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 19, 1997, assuming the conversion
of all shares of Series A Common Stock, Series B Common Stock, Series C Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock into Common Stock,
and as adjusted to reflect the sale of shares of Common Stock in the
offering for (i) each person known to the Company to own beneficially more than
5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------
NUMBER
OF PERCENT OWNERSHIP
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING(2)
- ------------------------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
Accel IV L.P.......................................... 2,373,604(3) 8.7% %
c/o Accel Partners L.P.
One Embarcadero Center
Suite 3820
San Francisco, CA 94111
Mitchell Kapor........................................ 2,258,785(4) 8.4
Kapor Enterprises, Inc.
238 Main Street
Cambridge, MA 02142
Robert Glaser......................................... 14,101,871(5) 52.3
c/o RealNetworks, Inc.
1111 Third Avenue
Suite 2900
Seattle, WA 98101
Microsoft Corporation................................. 7,047,679** 23.0
One Microsoft Way
Redmond, WA 98052-6399
Trans Cosmos USA, Inc................................. 1,381,142(6) 5.1
4040 Lake Washington Blvd. N.E.
Suite 205
Kirkland, WA 98033
Bruce Jacobsen........................................ 492,073(7) 1.8
James W. Breyer....................................... 2,373,604(8) 8.7
James Wells........................................... 137,500(9) * *
Andrew Sharpless...................................... 312,500 1.2
All directors and executive officers as a group (13
persons)(10)........................................ 20,255,867 73.2% %
</TABLE>
- ---------------
* Less than 1%.
** Includes 3,709,305 shares of Common Stock issuable on exercise of the Series
E Warrant. The Series E Warrant has an exercise price of $13.48 per share
and, if not exercised, will automatically terminate on closing of the
offering. Excluding shares subject to the Series E Warrant, Microsoft
currently owns 12.1% of the common stock. Assuming the Series E Warrant is
not exercised prior to closing of the offering, Microsoft will own only
% of the common stock immediately after closing. See "Risk
Factors -- Competition; Relationship With Microsoft," "Business -- Microsoft
Relationship" and "Description of Capital Stock -- Warrants to Purchase
Preferred Stock and Common Stock."
(1) Beneficial ownership is determined in accordance with rules of the
Commission and includes shares over which the beneficial owner exercises
voting or investment power. Shares of Common Stock
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<PAGE> 63
subject to options or warrants currently exercisable or exercisable within
60 days of September 19, 1997 are deemed outstanding for the purpose of
computing the percentage ownership of the person holding the options or
warrants, but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated, and subject
to community property laws where applicable, the Company believes, based on
information provided by such persons, that the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) In the event that Microsoft elects to exercise the Series E Warrant in its
entirety for the purchase of shares of Common Stock, the resulting
ownership percentages on the closing of the offering for the other
shareholders listed in the table would be as follows: Accel IV L.P. -- %;
Mr. Kapor -- %; Mr. Glaser -- %; Trans Cosmos USA, Inc. ("TCI") -- %;
Mr. Jacobsen -- %; Mr. Breyer -- %; Mr. Wells -- %; Mr.
Sharpless -- %; and all directors and executive officers as a
group -- %.
(3) Includes 1,926,973 shares owned by Accel IV L.P., 39,970 shares owned by
Accel Keiretsu L.P., 90,459 shares owned by Accel Investors '95 L.P. and
46,281 shares owned by Ellmore C. Patterson Partners (together the "Accel
Group"). Also includes 247,247 shares, 5,129 shares, 11,607 shares, and
5,938 shares of Common Stock issuable on exercise of warrants owned by
Accel IV L.P., Accel Keiretsu L.P., Accel Investors '95 L.P. and Ellmore C.
Patterson Partners, respectively.
(4) Includes 53,675 shares of Common Stock issuable on exercise of warrants.
(5) Includes 11,952 shares of Common Stock issuable on exercise of a warrant.
(6) Includes 796,813 shares of Common Stock owned by Trans Cosmos USA, Inc.
("TCI") and 265,604 shares of Common Stock owned by Encompass Group, Inc.,
an affiliate of TCI ("Encompass"). Also includes 239,043 and 79,682 shares
of Common Stock issuable on exercise of warrants owned by TCI and
Encompass, respectively.
(7) Includes 292,073 shares of Common Stock issuable on exercise of options.
(8) Mr. Breyer may be deemed to be the beneficial owner of the 2,373,604 shares
of Common Stock beneficially owned by the Accel Group because he is a
general partner of Accel Partners L.P., which is the general partner of
Accel IV L.P. Mr. Breyer disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein. See footnote (3)
above.
(9) Includes 27,500 shares of Common Stock issuable on exercise of options.
(10) Does not include shares owned by Mr. Sharpless, who terminated his
employment with the Company in February 1997. Includes an aggregate of
415,473 shares and 335,548 shares, respectively, of Common Stock issuable
upon exercise of options and warrants.
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<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Articles and the Bylaws is a summary and is qualified in its
entirety by reference to the provisions of the Articles and the Bylaws, copies
of which have been filed with the Commission as exhibits to the Company's
Registration Statement, of which this Prospectus forms a part. The descriptions
of the Common Stock and preferred stock reflect an amendment to the Articles,
which amendment will be effective prior to the closing of the offering.
The authorized capital stock of the Company consists of 300,000,000 shares
of common stock and 60,000,000 shares of preferred stock.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of Common Stock is entitled to one vote per share.
Holders of Common Stock on the applicable record date are entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefor and, in the event of liquidation, to share pro rata in any
distribution of the Company's assets after payment or providing for the payment
of liabilities and the liquidation preference of any outstanding preferred
stock. Holders of Common Stock have no cumulative voting rights or preemptive
rights to purchase or subscribe for any shares of Common Stock or other
securities of the Company.
The Company has 7,047,679 authorized shares of Special Common Stock that
have identical rights to the Common Stock, except that they have voting rights
only to the extent provided by applicable law. The Special Common Stock may only
be converted into common stock on the prior written consent of the Board of
Directors.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue shares of
preferred stock in one or more series and to fix and determine the relative
rights and preferences of the shares constituting any series to be established,
without any further vote or action by the shareholders. Any shares of preferred
stock so issued may have priority over the Common Stock with respect to dividend
or liquidation rights or both. On closing of the offering, no shares of
preferred stock will be outstanding. The Company has no current intention to
issue any shares of preferred stock.
WARRANTS TO PURCHASE PREFERRED STOCK AND COMMON STOCK
At August 30, 1997, the Company had outstanding warrants to purchase
183,755 shares of Series B Common Stock at an exercise price of approximately
$0.20 per share, warrants to purchase 100,000 shares of Series C Preferred Stock
at an exercise price of approximately $1.96 per share, warrants to purchase
714,303 shares of Series D Preferred Stock at an exercise price of approximately
$9.41 per share and a warrant to purchase 3,709,305 shares of Series E Preferred
Stock at an exercise price of $13.48 per share. The warrants to purchase shares
of Series B Common Stock, Series C Preferred Stock and Series E Preferred Stock
will expire on closing of the offering. The warrants to purchase shares of
Series D Preferred Stock expire on November 27, 1998 and, following the
offering, will be exercisable for an equivalent number of shares of Common
Stock. All of the Company's outstanding warrants currently are exercisable.
CERTAIN VOTING AND OTHER MATTERS
Holders of preferred stock or other capital stock hereafter issued by the
Company may be entitled to vote in connection with certain mergers and share
exchanges or certain proposals to sell substantially all of the Company's assets
and for certain other actions and separate approval may be required to the
extent class voting rights are accorded to the holders of other capital stock of
the Company.
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<PAGE> 65
Amendments to the Articles must be approved by the Board of Directors and the
holders of a majority of the outstanding shares of Common Stock in most
instances.
ARTICLES AND BYLAWS
Under the Articles, Mr. Glaser shall serve, or shall appoint another
officer of the Company to serve, as the Company's Policy Ombudsman, with the
exclusive authority to adopt or change the editorial policies of the Company as
reflected on the Company's Web sites or other communications or media where the
Company has a significant editorial or media voice. Upon the death, resignation
or removal of Mr. Glaser as the Policy Ombudsman, the Chief Executive Officer
shall serve or appoint another officer of the Company to serve as his or her
successor. The provisions delineating the authority of the Policy Ombudsman may
be amended only with the approval of 90% of the shares entitled to vote on an
amendment to the Articles.
In addition, the Articles provide for a Strategic Transactions Committee
comprised of three directors, who shall initially be Messrs. Glaser, Breyer and
Kapor. Without the prior approval of such committee, and subject to certain
limited exceptions, the Board of Directors shall not have the authority to (i)
adopt a plan of merger, (ii) authorize the sale, lease, exchange or mortgage of
(A) assets representing more than 50% of the book value of the Company's assets
prior to the transaction or (B) any other asset or assets on which the long-term
business strategy of the Company is substantially dependent, (iii) authorize the
Company's voluntary dissolution or (iv) take any action that has the effect of
clauses (i) through (iii). Any vacancy on the Committee shall be filled by the
remaining members of the Committee. If two members of the Committee remain and
they are unable to agree on an individual to fill the vacancy, such vacancy may
be filled by the member who holds or controls, directly or indirectly, the
larger percentage of the outstanding shares of the Company's capital stock. The
Committee, by vote of the Chairman of the Committee and one additional member,
may limit the powers of the Committee or may terminate the Committee. The
existence and powers of the Committee shall terminate when the members in the
aggregate cease to hold or control, directly or indirectly, at least 10% of the
outstanding shares of the Company's capital stock. The provisions with respect
to the authority of the Strategic Transactions Committee may be amended only
with the approval of 90% of the shares entitled to vote on an amendment to the
Articles.
Special meetings of the shareholders may be called only by the Board of
Directors, the Chairman of the Board, the President or the holders of at least
25% of all votes entitled to be cast on any issues proposed to be considered at
such special meeting. The Company's Bylaws provide that shareholders seeking to
bring business before, or to nominate directors at, any meeting of shareholders
must provide timely notice thereof in writing. To be timely, a shareholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than 70 days prior to the date of the meeting,
or the tenth day after notice of the meeting is first given to shareholders,
whichever is later, if the meeting is an annual meeting or a special meeting at
which directors are to be elected. The Bylaws also contain specific requirements
for the form of a shareholder's notice. These provisions may preclude or deter
some shareholders from bringing matters before the shareholders or from making
nominations for directors.
CONTRACTUAL AGREEMENTS
On July 21, 1997, the Company and Microsoft entered into a Limited Proxy
and Voting Agreement (the "Proxy Agreement") that gives Mr. Glaser, or Mr.
Jacobsen if Mr. Glaser is unable to act, an irrevocable proxy with respect to
the future voting of Microsoft's shares of the Company's nonvoting capital
stock. The Proxy Agreement does not apply to voting with respect to certain
matters, such as certain amendments to the Articles in which the class of shares
held by Microsoft is treated adversely or disproportionately relative to other
classes. The Proxy Agreement terminates upon the earliest of (i) the date on
which Microsoft no longer holds any nonvoting shares, (ii) the conversion of the
Series E Preferred Stock into Common Stock and (iii) July 21, 2007.
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Under the Voting Agreement entered into in September 1997 among the
Company, Accel IV and Messrs. Jacobsen, Kapor and Glaser, each of Accel IV and
Messrs. Jacobsen and Kapor have agreed, effective on closing of the offering, to
vote all shares of their or its stock of the Company owned by such shareholders
to elect Mr. Glaser to the Board of Directors of the Company in each election in
which he is a nominee. The obligations under the Voting Agreement terminate with
respect to shares transferred by the parties thereto. The Voting Agreement
terminates upon the death of Mr. Glaser.
The Company, Mr. Glaser and certain holders of Series B Common Stock and
Series C Common Stock (together, the "Shares") have entered into a Shareholders'
Buy-Sell Agreement dated March 31, 1995 (the "Buy-Sell Agreement") that
restricts the free transferability of Shares held by parties to the Buy-Sell
Agreement. The Buy-Sell Agreement gives the Company and the parties to the
Buy-Sell Agreement a right of first refusal with respect to another party's
proposed transfer of Shares, other than transfers to the Company, to certain
family members and to trusts that are created and administered for the exclusive
benefit of certain family members. The Buy-Sell Agreement is terminable upon the
written agreement of the Company and the holders of two-thirds of the Shares on
the dissolution, bankruptcy or insolvency of the Company, or at such time as
there is only one remaining party to the Buy-Sell Agreement.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Act prohibits the Company, with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. The Company may not exempt itself from coverage of this statute.
These statutory provisions may have the effect of delaying, deterring or
preventing a change in control of the Company.
SHAREHOLDER RIGHTS PLAN
The Company currently is contemplating entering into a Shareholder Rights
Plan (the "Rights Plan") by and between the Company and a rights agent to be
selected by the Company that would be adopted prior to the closing of the
offering. Under the proposed Rights Plan, the Board would declare and distribute
to the shareholders of record of the Company as of the date selected by the
Board a dividend of one right ("Right") for each outstanding share of Common
Stock and Special Common Stock, if any. Shares of Common Stock issued in the
offering (assuming no triggering event) would automatically receive the Rights.
The Rights would not be exercisable or transferable separately from shares of
Common Stock and Special Common Stock, if any, until the earlier of: (i) 10 days
following a public announcement that a person or group has acquired, or obtained
the right to acquire, beneficial ownership of a designated percentage of the
outstanding shares of the Common Stock and (ii) 10 days following the
commencement or announcement of an intention to make a tender or exchange offer
that would result in an acquiring person or group beneficially owning a
designated percentage of outstanding shares of Common Stock, unless the Board
sets a later date (the earlier of such dates, the "Distribution Date"). The
Board would have the option to redeem the Rights at a nominal cost or prevent
the Rights from being triggered by designating offers for all outstanding Common
Stock as a permitted offer. Prior to the Distribution Date, the Company would be
able to amend or supplement the Rights Plan without the consent of any of the
holders of the Rights. Following the Distribution Date, the Rights Plan could be
amended to cure any ambiguity, to correct or supplement any inconsistent
provision or any other provision so long as such amendment or supplement would
not adversely affect the holders of the Rights (other than an acquiring person
or group). The Rights would expire 10 years after the date of adoption of the
Rights Plan by the Board unless earlier redeemed by the Company.
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<PAGE> 67
The Rights, when exercisable, would entitle their holders (other than those
held by an acquiring person or group) to purchase a specified fraction of a
share of preferred stock (subject to adjustment) or, in certain instances, other
securities of the Company. In certain circumstances, if the Company, in a merger
or consolidation, is not the surviving entity or disposes of more than 50% of
the Company's assets or earnings power, the Rights would also entitle their
holders (other than an acquiring person or group) to purchase the highest
priority voting shares in the surviving entity or its affiliates having a market
value of two times the exercise price of the Rights.
The Rights Plan is intended to encourage a potential acquiring person or
group to negotiate directly with the Board, but may have certain antitakeover
effects. The Rights Plan, if adopted, could significantly dilute the interests
in the Company of an acquiring person or group. The Rights Plan could therefore
have the effect of delaying, deterring or preventing a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, Ridgefield Park, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after this offering. Sales of
substantial amounts of Common Stock in the public market after this offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
On closing of the offering, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment
option is exercised in full), of which shares offered hereby
( shares if the Underwriters' over-allotment option is exercised in
full) will be freely transferable in the public market without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act (an
"Affiliate"), which shares will be subjected to the resale limitations of Rule
144 adopted under the Securities Act. The remaining 26,935,621 shares
outstanding on completion of the offering (assuming no exercise of options or
warrants after September 24, 1997) and held by existing shareholders will be
"Restricted Securities" as that term is defined under Rule 144 (the "Restricted
Shares"). The Restricted Shares were issued in private transactions in reliance
on exemptions from registration under the Securities Act. Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act, which rules are summarized below.
Pursuant to the Lock-Up Agreements, persons who hold approximately
26,654,431 shares of Common Stock, including all officers and directors and
certain existing shareholders of the Company, have agreed with the
representatives of the Underwriters that, for a period of 180 days following the
date of this Prospectus, they will not sell, offer to sell or otherwise dispose
of any shares of Common Stock owned of record or beneficially by such persons as
of the date of this Prospectus, including securities convertible into or
exercisable or exchangeable for Common Stock as of said date, as well as any
shares of Common Stock later acquired by reason of the conversion, exercise or
exchange of such securities, except that persons other than officers, directors
and holders of 1% or more of the capital stock of the Company each will be free
to sell or otherwise dispose of up to 5,000 shares of Common Stock to the extent
permissible under Rule 144 or Rule 701. The Lock-Up Agreements may be released
at any time as to all or any portion of the shares subject to such agreements at
the sole discretion of Goldman, Sachs & Co. on behalf of the Underwriters.
Based on the provisions of the Lock-Up Agreements and the provisions of
Rules 144 and 701 of the Securities Act, additional shares will be available for
sale in the public market as follows:
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<PAGE> 68
(i) 11,947 shares will be available for immediate sale in the public market on
the date of this Prospectus, (ii)268,243 shares issued upon exercise of options
prior to September 24, 1997 not subject to Lock-Up Agreements will be eligible
for sale in the public market in accordance with Rules 144 and 701 as soon as 90
days after the date of this Prospectus, (iii) 4,707,363 shares issuable upon the
exercise of warrants (assuming all outstanding warrants are exercised) will not
be available for sale until various dates after 180 days following the date of
this Prospectus, (iv) 26,654,431 currently outstanding shares will be eligible
for sale upon expiration of Lock-Up Agreements (of which 23,909,137 shares will
be subject to certain volume, manner of sale and other limitations under Rule
144); and (v) 1,000 remaining shares will be eligible for sale pursuant to Rule
144 on the expiration of a one-year holding period. As of September 24, 1997,
options for 6,374,214 shares of Common Stock were outstanding, of which options
for 1,708,455 shares may be exercised during the 180 days following the date of
the Prospectus, which shares potentially will be eligible for public sale 90
days after the date of this Prospectus pursuant to Rule 701 under the Securities
Act; of these shares, 1,312,863 are subject to Lock-Up Agreements.
In general, Rule 144 provides that any person who has beneficially owned
shares for at least one year, including an "affiliate" (as defined in Rule 144),
is generally entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the shares of Common Stock then
outstanding (approximately shares immediately after the offering) or
the reported average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
sent to the Commission. Sales under Rule 144 are subject to certain manner of
sale restrictions, notice requirements and availability of current public
information concerning the Company. A person who is not an affiliate of the
Company, and who has not been an affiliate within three months prior to the
sale, generally may sell shares without regard to the limitations of Rule 144
provided that the person has held such shares for a period of at least two
years.
Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.
REGISTRATION RIGHTS
Pursuant to the Investors' Rights Agreement, which provides registration
rights to certain holders of shares of the Company's capital stock, holders of
16,390,753 shares of Common Stock or their permitted transferees (assuming (i)
exercise of all outstanding warrants to purchase shares of Common Stock, (ii)
conversion of the Series E Preferred Stock into Common Stock and (iii) exercise
of the Series E Warrant in its entirety for shares of Common Stock
(collectively, the "Registrable Shares") have certain rights with respect to the
registration of the Registrable Shares under the Securities Act. Under the terms
of the Investors' Rights Agreement, if the Company proposes to register any of
its securities under the Securities Act for its own account or for the account
of others, Registrable Shares may be included, subject to any limitation set by
the underwriters on the number of shares included in such registration. Holders
of not less than 30% of the Registrable Shares may also require the Company, not
more than twice, to file a registration statement under the Securities Act, at
the Company's expense, with respect to any Registrable Shares holders desire to
include. In addition, Holders of Registrable Shares may require the Company to
file up to three registration statements on Form S-3, at the expense of the
holders, for public offerings of Registrable Shares, provided that the aggregate
offering price for such registration is not less than $250,000. The Company is
required to use its best efforts to effect all such registrations, subject to
certain conditions and limitations.
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LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP/Riddell Williams P.S., Seattle,
Washington. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Perkins Coie, Seattle, Washington.
EXPERTS
The consolidated balance sheets at December 31, 1995 and 1996 and the
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the period from February 9, 1994 (inception) to December 31, 1994, and
for the years ended December 31, 1995 and 1996 included in this Prospectus and
in the Registration Statement of which this Prospectus forms a part have been
included herein in reliance on the report of KPMG Peat Marwick LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement or the exhibits thereto in accordance with the rules
and regulations of the Commission, and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or documents
and are not necessarily complete. Reference is made to each such exhibit for a
more complete description of the matters involved and such statements shall be
deemed qualified in their entirety by such reference. The Registration Statement
and the exhibits thereto filed with the Commission may be inspected, without
charge, and copies may be obtained at prescribed rates, at the public reference
facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. The Registration Statement and other information filed by the
Company with the Commission are also available at the Web site maintained by the
Commission on the World Wide Web at http://www.sec.gov. For further information
pertaining to the Company and the Common Stock offered by this Prospectus,
reference is made to the Registration Statement.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial statements.
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REALNETWORKS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Accountants.............................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the period from February 9, 1994 (inception)
to December 31, 1994, the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1996 and 1997 (unaudited)............................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period from February
9, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and
1996, and the six months ended June 30, 1997 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for the period from February 9, 1994 (inception)
to December 31, 1994, the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1996 and 1997 (unaudited)............................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RealNetworks, Inc.:
We have audited the accompanying consolidated balance sheets of RealNetworks,
Inc. (formerly Progressive Networks, Inc.) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the period from February 9,
1994 (inception) to December 31, 1994, and the years ended December 31, 1995 and
1996. 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 financial position of RealNetworks, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the period from February 9, 1994 (inception)
to December 31, 1994, and the years ended December 31, 1995 and 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
March 14, 1997
Seattle, Washington
F-2
<PAGE> 72
REALNETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 3,129,394 $14,737,806 $ 4,971,916
Short-term investments................................... 2,986,493 4,857,163 6,523,710
Trade accounts receivable, net of allowance for doubtful 667,847 3,275,518 4,352,334
accounts and sales returns of $129,869 in 1995,
$383,350 in 1996 and $581,219 in 1997..................
Other receivables........................................ 48,568 105,888 149,628
Inventory................................................ 3,218 60,543 80,270
Prepaid expenses and other current assets................ 143,328 491,348 457,428
----------- ----------- ------------
Total current assets.............................. 6,978,848 23,528,266 16,535,286
Property and equipment, net................................ 594,042 2,678,798 4,019,255
Investment in joint venture................................ -- -- 998,208
Other assets............................................... 836 261,094 595,105
----------- ----------- ------------
$ 7,573,726 $26,468,158 $ 22,147,854
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable......................................... $ 185,368 $ 2,405,490 $ 1,557,017
Accrued compensation..................................... 49,981 346,011 784,484
Other accrued expenses................................... 149,909 971,499 1,774,847
Deferred revenue......................................... 645,416 2,911,922 3,540,235
----------- ----------- ------------
Total current liabilities......................... 1,030,674 6,634,922 7,656,583
----------- ----------- ------------
Note payable............................................. -- -- 991,268
Redeemable, convertible preferred stock, no par value.
Authorized 9,344,306 shares; issued and outstanding 7,654,528 23,153,494 23,264,467
5,964,006 shares at December 31, 1995, and 8,345,016
shares at December 31, 1996 and June 30, 1997
(aggregate liquidation preference of $7,752,312 at
December 31, 1995 and $34,645,820 at December 31,
1996 and June 30, 1997 and aggregate redemption
value of $7,752,312 at December 31, 1995 and
$25,681,317 at December 31, 1996 and June 30,
1997)...............................................
SHAREHOLDERS' DEFICIT:
Convertible preferred stock, no par value.
Authorized, issued and outstanding; 13,713,439 shares 932,385 932,385 932,385
at December 31, 1995 and 1996, and June 30, 1997
(aggregate liquidation preference of $999,710 at
December 31, 1995 and 1996, and June 30, 1997)......
Preferred stock, undesignated series, no par value.
Authorized 6,942,255 shares; no shares issued and -- -- --
outstanding.........................................
Common stock, no par value.
Authorized 50,000,000 shares; issued and outstanding; 2,680 46,450 88,617
36,948 shares at December 31, 1995, 535,491 shares
at December 31, 1996 and 749,520 shares at
June 30, 1997.......................................
Additional paid-in capital............................... -- 1,579,000 1,579,000
Foreign currency translation adjustment.................. -- (11,307) 7,886
Accumulated deficit...................................... (2,046,541) (5,866,786) (12,372,352)
----------- ----------- ------------
Total shareholders' deficit....................... (1,111,476) (3,320,258) (9,764,464)
Commitments and contingencies
----------- ----------- ------------
$ 7,573,726 $26,468,158 $ 22,147,854
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
REALNETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9,
1994
(INCEPTION) TO YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, --------------------------- ---------------------------
1994 1995 1996 1996 1997
-------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Software license fees.......... $ -- $ 1,781,763 $11,875,945 $ 3,767,785 $10,070,075
Advertising.................... -- -- 1,015,964 170,102 1,106,582
Service revenues............... -- 29,835 1,120,479 306,055 2,189,520
--------- ---------- ---------- ---------- ----------
Total net revenues...... -- 1,811,598 14,012,388 4,243,942 13,366,177
COST OF REVENUES:
Software license fees.......... -- 29,194 1,342,942 142,984 1,134,446
Advertising.................... -- -- 288,024 104,752 307,751
Service revenues............... -- 32,940 554,558 146,913 1,612,080
--------- ---------- ---------- ---------- ----------
Total cost of -- 62,134 2,185,524 394,649 3,054,277
revenues..............
--------- ---------- ---------- ---------- ----------
Gross profit................. -- 1,749,464 11,826,864 3,849,293 10,311,900
OPERATING EXPENSES:
Research and development....... 201,847 1,379,727 4,812,188 1,738,867 5,462,851
Selling and marketing.......... 47,181 1,217,900 7,539,924 2,264,285 9,160,905
General and administrative..... 296,211 746,645 3,491,296 1,412,120 2,495,695
--------- ---------- ---------- ---------- ----------
Total operating 545,239 3,344,272 15,843,408 5,415,272 17,119,451
expenses..............
--------- ---------- ---------- ---------- ----------
Operating loss............... (545,239) (1,594,808) (4,016,544) (1,565,979) (6,807,551)
OTHER INCOME (EXPENSE):
Interest income, net........... -- 93,506 296,427 147,505 437,249
Other expense.................. -- -- (69,128) (30,620) (1,484)
--------- ---------- ---------- ---------- ----------
Net other income............. -- 93,506 227,299 116,885 435,765
--------- ---------- ---------- ---------- ----------
Net loss..................... $ (545,239) $(1,501,302) $(3,789,245) $(1,449,094) $(6,371,786)
========= ========== ========== ========== ==========
Pro forma net loss per share...
Shares used to compute pro
forma net loss per share.....
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
REALNETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE SHAREHOLDERS'
--------------------- ------------------- PAID-IN TRANSLATION ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT (DEFICIT)
---------- -------- ------- --------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock..... -- $ -- 10,000 $ 72,838 $ -- $ -- $ -- $ 72,838
Contribution of capital
by founder............. -- -- -- 487,357 -- -- -- 487,357
Net loss............... -- -- -- -- -- -- (545,239) (545,239)
---------- -------- -------- --------- --------- -------- ----------- -----------
Balances at December 31,
1994................... -- -- 10,000 560,195 -- -- (545,239) 14,956
Contribution of capital
by
founder................ -- -- -- 372,283 -- -- -- 372,283
Exchange of common stock
for Series A preferred
stock.................. 13,713,439 932,385 (9,999) (932,385) -- -- -- --
Exercise of common stock
options................ -- -- 30,750 2,153 -- -- -- 2,153
Issuance of common stock
in exchange for
services............... -- -- 6,197 434 -- -- -- 434
Net loss............... -- -- -- -- -- -- (1,501,302) (1,501,302)
---------- -------- -------- --------- --------- -------- ----------- -----------
Balances at December 31,
1995................... 13,713,439 932,385 36,948 2,680 -- -- (2,046,541) (1,111,476)
Exercise of common stock
options................ -- -- 498,543 43,770 -- -- -- 43,770
Issuance of preferred
stock warrants......... -- -- -- -- 1,579,000 -- -- 1,579,000
Translation adjustment... -- -- -- -- (11,307) -- (11,307)
Accretion of redemption
value of redeemable,
convertible preferred
stock.................. -- -- -- -- -- -- (31,000) (31,000)
Net loss............... -- -- -- -- -- -- (3,789,245) (3,789,245)
---------- -------- -------- --------- --------- -------- ----------- -----------
Balances at December 31,
1996................... 13,713,439 932,385 535,491 46,450 1,579,000 (11,307) (5,866,786) (3,320,258)
Exercise of common stock
options (unaudited).... -- -- 213,029 40,167 -- -- -- 40,167
Issuance of common stock
in exchange for
services (unaudited)... -- -- 1,000 2,000 -- -- -- 2,000
Accretion of redemption
value of redeemable,
convertible preferred
stock (unaudited)...... -- -- -- -- -- -- (133,780) (133,780)
Translation adjustment
(unaudited)............ -- -- -- -- -- 19,193 -- 19,193
Net loss (unaudited)... -- -- -- -- -- -- (6,371,786) (6,371,786)
---------- -------- -------- --------- --------- -------- ----------- -----------
Balances at June 30, 1997
(unaudited)............ 13,713,439 $932,385 749,520 $ 88,617 $1,579,000 $ 7,886 $ (12,372,352) $(9,764,464)
========== ======== ======== ========= ========= ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
REALNETWORKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1994 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------------- ----------------------------
1994 1995 1996 1996 1997
---------------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (545,239) $(1,501,302) $ (3,789,245) $ (1,449,094) $ (6,371,786)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 5,295 93,265 699,087 162,468 841,432
Common stock issued in exchange for
services............................. -- 434 -- -- 2,000
Change in certain assets and
liabilities:
Trade accounts receivable............ -- (667,847) (2,607,671) (1,122,513) (1,049,378)
Other receivables.................... -- -- (57,320) 31,274 (43,740)
Inventory............................ -- (3,218) (57,325) (17,114) (19,727)
Prepaid expenses and other current
assets............................ -- (143,328) (348,723) (234,271) 33,600
Other assets......................... -- -- (78,298) 137 (44,881)
Accounts payable..................... -- 185,368 2,220,292 641,150 (861,716)
Accrued compensation................. 15,817 34,164 296,030 123,752 435,002
Other accrued expenses............... 33,217 116,692 821,590 224,338 801,381
Deferred revenue..................... -- 645,416 2,266,506 972,875 620,148
-------- ---------- ---------- ---------- ----------
Net cash used in operating
activities...................... (490,910) (1,240,356) (635,077) (666,998) (5,657,665)
-------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment...... (67,542) (624,503) (2,783,994) (1,300,315) (2,162,479)
Purchases of short-term investments...... -- (3,035,061) (30,514,885) (11,077,977) (10,614,439)
Proceeds from sales and maturities of
short-term investments................. -- -- 28,644,215 10,952,121 8,947,892
Investment in joint venture.............. -- -- -- -- (998,208)
Increase in other assets................. (1,393) -- (181,960) (215,550) (279,267)
-------- ---------- ---------- ---------- ----------
Net cash used in investing
activities...................... (68,935) (3,659,564) (4,836,624) (1,641,721) (5,106,501)
-------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable... -- -- -- -- 991,268
Proceeds from sale of preferred stock and
stock warrants, net.................... -- 7,404,528 17,046,966 -- --
Offering costs........................... -- -- -- -- (22,807)
Proceeds from exercise of preferred stock
warrant................................ -- 250,000 -- -- --
Proceeds from exercise of common stock
options................................ -- 2,153 43,770 20,410 40,167
Proceeds from sale of common stock....... 72,838 -- -- -- --
Contribution of capital by founder....... 487,357 372,283 -- -- --
-------- ---------- ---------- ---------- ----------
Net cash provided by financing
activities...................... 560,195 8,028,964 17,090,736 20,410 1,008,628
-------- ---------- ---------- ---------- ----------
Effect of exchange rate changes on cash.... -- -- (10,623) -- (10,352)
-------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents............ 350 3,129,044 11,608,412 (2,288,309) (9,765,890)
Cash and cash equivalents at beginning of
period................................... -- 350 3,129,394 3,129,394 14,737,806
-------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of
period................................... $ 350 $ 3,129,394 $ 14,737,806 $ 841,085 $ 4,971,916
======== ========== ========== ========== ==========
Supplemental disclosure of cash flow
information -- cash paid during the
period for interest...................... $ -- $ 1,853 $ 4,430 $ -- $ 26,633
Supplemental disclosure of noncash
financing and investing activities:
Exchange of common stock for Series A
preferred stock........................ $ -- $ 932,385 $ -- $ -- $ --
Accretion of redemption value of
redeemable, convertible preferred
stock.................................. $ -- $ -- $ 31,000 $ -- $ 133,780
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996, AND JUNE 30, 1996 AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
RealNetworks, Inc. (formerly Progressive Networks, Inc.) and subsidiaries
(Company) is a leading provider of branded software products and services that
enable the delivery of streaming media content over the Internet and intranets.
Streaming technology enables the transmission and playback of continuous
"streams" of multimedia content, such as audio and video, over the Internet and
intranets. The Company's products and services include its RealAudio and
RealVideo software system, an electronic commerce Web site and a network of
advertising-supported content aggregation Web sites.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of commerce on
the Internet. The Company's success may depend in part upon the emergence of the
Internet as a communication medium, the acceptance of the Company's technology
by the marketplace and the Company's ability to generate license and advertising
revenues from the use of its technology on the Internet.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all short-term investments with a remaining
contractual maturity at date of purchase of three months or less to be cash
equivalents.
(d) Short-Term Investments
Short-term investments consist principally of short-term investment-grade,
interest-bearing debt securities.
The Company classifies its short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximated cost, and there were no unrealized holding gains or
losses at December 31, 1995 and 1996, and June 30, 1997. All short-term
investments have contractual maturities of less than one year at December 31,
1996 and June 30, 1997.
(e) Inventory
Inventory is stated at the lower of cost or market, with cost determined on
the first-in, first-out basis.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the asset.
F-7
<PAGE> 77
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(g) Investment in Joint Venture
The Company accounts for its investment in joint venture using the equity
method. Accordingly, the initial investment is recorded at cost. Subsequently,
the carrying amount of the investment is increased or decreased to reflect the
Company's share of income or losses of the joint venture and is reduced to
reflect dividends received from the joint venture. The Company's share of income
or losses of the joint venture is included in the Company's statements of
operations.
(h) Research and Development
Research and development costs are charged to operations as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.
(i) Revenue Recognition
The Company recognizes revenue from software license fees upon delivery,
net of an allowance for estimated returns, provided that no significant
obligations remain on the Company's behalf and collection of the resulting
receivable is deemed probable.
Revenue from software license agreements with original equipment
manufacturers (OEM) is recognized when the OEM delivers its product
incorporating the Company's software to the end user. In the case of prepayments
received from an OEM, the Company generally recognizes revenue based on the
actual products sold by the OEM. If the Company anticipates providing ongoing
support to the OEM in the form of future upgrades, enhancements or other
services over the term of the contract, revenue is generally recognized on the
straight-line method over the term of the contract.
The Company recognizes revenue from software license agreements with
value-added resellers (VAR) upon delivery to the VAR, provided necessary
conditions are met. If these conditions are not met, revenue is recognized upon
redistribution by the VAR to the end user.
Revenues from advertising appearing on the Company's World Wide Web (Web)
sites are recognized on the straight-line method over the terms of the
advertising contracts. The Company guarantees to certain advertising customers a
minimum number of page impressions to be delivered to users of its Web sites for
a specified period. To the extent guaranteed minimum page impression deliveries
are not met, the Company defers recognition of the corresponding revenues until
guaranteed page impression delivery levels are achieved. As of December 31, 1996
and June 30, 1997, no revenues had been deferred as a result of these
guarantees.
Service revenue includes revenue from upgrade and support agreements,
consulting, content hosting, and fees from user conferences. Service revenue
from upgrade and support agreements is recognized ratably over the term of the
related agreements. Other service revenue is recognized when the service is
performed.
(j) Financial Instruments and Concentrations of Risk
The Company's financial instruments consist of cash and cash equivalents,
short-term investments, trade accounts receivable, accounts payable, accrued
expenses, and note payable. The fair value of
F-8
<PAGE> 78
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these instruments approximates their financial statement carrying amount. The
Company maintains substantially all of its cash and cash equivalents and
short-term investments with two financial institutions. Management believes that
the financial risks associated with such deposits are minimal. Credit is
extended to customers based on an evaluation of their financial condition, and
collateral is not required. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses.
Substantially all of the Company's accounts receivable are derived from domestic
sales.
The Company's customers consist primarily of resellers and end users
located in the United States and various foreign countries. Revenues in the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1996
and 1997 by geographic region, as a percent of total net revenues, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- -------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States and Canada....................... 85% 81% 81% 73%
Europe......................................... 5% 7% 7% 12%
Asia........................................... 8% 7% 4% 10%
Other.......................................... 2% 5% 8% 5%
</TABLE>
One customer accounted for approximately 14% of total net revenues in 1995.
No one customer accounted for more than 10% of total net revenues in 1996 and
the six months ended June 30, 1996 and 1997.
(k) Advertising Expenses
The Company expenses the cost of advertising and promoting its products as
incurred. Such costs are included in selling and marketing expense and totaled
approximately $68,000 and $665,000 during the years ended December 31, 1995 and
1996, respectively, and $96,000 and $560,000 during the six months ended June
30, 1996 and 1997, respectively.
(l) Income Taxes
The Company was an S corporation for federal income tax purposes from
inception through April 8, 1995. Consequently, taxable income or loss of the
Company through April 8, 1995 was attributed to the Company's shareholders.
Effective April 8, 1995, the Company changed its election to utilize the
provisions of subchapter S of the Internal Revenue Code of 1986, as amended, and
elected to be taxed as a subchapter C corporation.
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
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. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in results of
operations in the period that includes the enactment date.
Pro forma income tax information has not been provided for the period from
inception to April 8, 1995. As a result of the operating losses recognized prior
to April 8, 1995, any income tax benefit would
F-9
<PAGE> 79
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have been fully offset by the establishment of a valuation allowance for
deferred tax assets had the Company been taxed as a subchapter C corporation.
(m) Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is incorporated. Assets and
liabilities of foreign operations are translated into U.S. dollars using rates
of exchange in effect at the end of the reporting period. Income and expense
accounts are translated into U.S. dollars using average rates of exchange. The
net gain or loss resulting from translation is shown as a cumulative translation
adjustment in shareholders' equity.
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(o) Stock-Based Compensation
The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense related to employee stock options would be recorded only
if, on the date of grant, the fair value of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted the disclosure-only
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which
allows entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method of accounting in SFAS No. 123 had
been applied to these transactions.
(p) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
(q) Reclassifications
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation.
(r) Unaudited Interim Financial Statements
In the opinion of the Company's management, the June 30, 1996 and 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation.
F-10
<PAGE> 80
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(s) Pro Forma Net Loss Per Share
Pro forma net loss per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable, convertible preferred stock by
the weighted average number of shares of common stock and common stock
equivalents outstanding during each period and the shares resulting from the
conversion of all outstanding shares of preferred stock, including Series E
preferred stock, which was issued in July 1997. Common stock equivalents include
all warrants and stock options which would have a dilutive effect, applying the
treasury stock method. Additionally, common and common equivalent shares issued
during the twelve months immediately preceding the initial filing of the
Company's initial public offering (IPO) have been included in the calculation of
common and common equivalent shares as if they were outstanding for all periods
presented, including loss years where the impact of the incremental shares is
antidilutive, using the treasury stock method and an assumed initial public
offering price of $ per share. Due to the significant impact of the
assumed conversion of the preferred stock upon closing of the IPO, historical
net loss per share is not meaningful and, therefore, is not presented.
The Company has not calculated pro forma net loss per share because
information regarding the pricing of the shares of Common Stock under the
contemplated IPO has not yet been determined.
(t) New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share (Statement 128). Statement 128 establishes
standards for the computation, presentation and disclosure of earnings per share
(EPS), replacing the presentation of currently required Primary EPS with a
presentation of Basic EPS. It also requires dual presentation of Basic EPS and
Diluted EPS on the face of the income statement for entities with complex
capital structures. Basic EPS is based on the weighted average number of common
shares outstanding during the period. Diluted EPS is based on the potential
dilution that would occur upon exercise or conversion of securities into common
stock using the treasury stock method. Statement 128 is effective for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. When adopted, the Company will be required to restate its EPS
data for all prior periods presented. The Company does not expect the impact of
the adoption of Statement 128 to be material to its reported EPS amounts.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company has not determined the manner in
which it will present the information required by Statement 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. The
Company has not determined the manner in which it will present the information
required by Statement 131.
F-11
<PAGE> 81
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software...... $ 529,705 $ 2,210,799 $ 3,630,964
Furniture, fixtures and leasehold
improvements....................... 162,340 1,251,354 2,013,870
-------- ---------- ----------
692,045 3,462,153 5,644,834
Less accumulated depreciation and
amortization....................... 98,003 783,355 1,625,579
-------- ---------- ----------
$ 594,042 $ 2,678,798 $ 4,019,255
======== ========== ==========
</TABLE>
(3) COMMITMENTS
(a) Leases
The Company leases facilities under operating lease agreements expiring
through April 2001. Future minimum lease payments under these leases as of
December 31, 1996 are:
<TABLE>
<S> <C>
1997.................................................... $ 739,627
1998.................................................... 764,056
1999.................................................... 886,201
2000.................................................... 886,201
2001.................................................... 295,399
----------
Total minimum lease payments.................. $ 3,571,484
==========
</TABLE>
Rent expense totaled approximately $76,000 and $610,000 for the years ended
December 31, 1995 and 1996, respectively, and $257,000 and $826,000 for the six
months ended June 30, 1996 and 1997, respectively.
In April 1996, the Company entered into operating lease agreements for
additional corporate office space, with the lease term extending through April
2001. These leases can be terminated beginning October 1998 with nine months'
advance written notice and contain options for two five-year renewals.
(b) Royalties
The Company has arrangements with several Internet content providers
whereby it is committed to pay a percentage of certain advertising revenues
generated from its Web sites. As of December 31, 1996 and June 30, 1997,
royalties under these arrangements have not been significant.
(4) INCOME TAXES
The expected U.S. federal income tax benefit determined by applying the
statutory U.S. federal income tax rate of 34% to pretax loss for the period from
February 9, 1994 (inception) to December 31, 1994 and the years ended December
31, 1995 and 1996 differs from the U.S. federal income tax benefit in the
consolidated financial statements due primarily to the increase in the valuation
allowance for deferred tax assets.
F-12
<PAGE> 82
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences and tax loss and credit
carryforwards that give rise to significant portions of federal deferred tax
assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 216,000 $ 918,000 $ 2,641,000
Deferred revenue........................... 112,000 530,000 635,000
Allowances for doubtful accounts and
sales returns........................... 44,000 130,000 196,000
Start-up costs capitalized for tax
purposes................................ 84,000 70,000 53,000
Research and experimentation credit
carryforwards........................... 7,000 102,000 102,000
Other...................................... 30,000 78,000 269,000
-------- ---------- ----------
Gross deferred tax assets.................... 493,000 1,828,000 3,896,000
Less valuation allowance................... 493,000 1,828,000 3,896,000
-------- ---------- ----------
Net deferred tax assets...................... $ -- $ -- $ --
======== ========== ==========
</TABLE>
The valuation allowance for deferred tax assets increased $493,000,
$1,335,000, and $2,068,000 for the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, respectively.
At December 31, 1996 and June 30, 1997, the Company had available net
operating loss carryforwards of approximately $2,700,000 and $7,800,000,
respectively, expiring in 2010 through 2012 available to offset future U.S.
federal taxable income, if any. In addition, the Company has research and
experimentation tax credit carryforwards of approximately $102,000, expiring in
2010 and 2011, which are available to offset future income taxes, if any.
The utilization of tax net operating loss carryforwards may be limited
under Internal Revenue Code Section 382 due to ownership changes that occurred
during the year ended December 31, 1996 or changes in ownership that may occur
if the Company raises additional equity.
(5) 401(k) RETIREMENT SAVINGS PLAN
The Company has a 401(k) Retirement Savings Plan that covers all employees
who have met certain employment requirements. Employees can contribute a portion
of their salary to the maximum allowed by the federal tax guidelines.
(6) BANK LINE OF CREDIT AND TERM LOAN AND NOTE PAYABLE
At December 31, 1996, and June 30, 1997, the Company had available a
$1,000,000 domestic bank line of credit and a $1,500,000 bank term loan. The
line of credit and term loan bear interest at the prime rate plus 0.75% and 1.0%
per annum, respectively. There were no borrowings outstanding under the line of
credit or the term loan as of December 31, 1996 and June 30, 1997.
At June 30, 1997, the Company had outstanding a note payable to one of its
joint venture partners. The note is denominated in Japanese yen, bears interest
at a rate not to exceed the Japanese Short Term Prime Rate (1.75% at June 30,
1997) and is secured by the Company's shares in the joint venture. Interest on
the note is payable monthly and the principal is due in May 2000. The principal
amount of the
F-13
<PAGE> 83
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
note is 115,200,000 Japanese yen ($991,268 at June 30, 1997), and the Company
may, under certain circumstances, tender its shares in the joint venture as
repayment of the note.
(7) SHAREHOLDERS' EQUITY
(a) Preferred Stock
The Company has authorized and issued convertible preferred stock and
redeemable, convertible preferred stock as follows:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING SHARES
-----------------------------------------
DECEMBER 31,
AUTHORIZED -------------------------- JUNE 30,
SERIES SHARES 1995 1996 1997
------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred....... A 13,713,439 13,713,439 13,713,439 13,713,439
Redeemable, convertible
preferred................. B 3,059,701 3,059,701 3,059,701 3,059,701
Redeemable, convertible
preferred................. C 3,004,305 2,904,305 2,904,305 2,904,305
Redeemable, convertible
preferred................. D 3,280,300 -- 2,381,010 2,381,010
</TABLE>
The following table summarizes activity of the Company's redeemable,
convertible preferred stock for the years ended December 31, 1995 and 1996, and
the six months ended June 30, 1997:
<TABLE>
<CAPTION>
PRICE
DESCRIPTION PER SHARE SHARES AMOUNT
- ------------------------------------------------------ --------- --------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994......................... -- $ --
Sale of Series B preferred stock, net of issuance
costs of $40,000.................................... $0.6700 2,686,567 1,760,000
Sale of Series C preferred stock, net of issuance
costs of $57,784.................................... 1.9634 2,904,305 5,644,528
Exercise of warrants for Series B preferred stock..... 0.6700 373,134 250,000
--------- -----------
Balances at December 31, 1995......................... 5,964,006 7,654,528
Sale of Series D preferred stock, net of issuance
costs and warrant value of $889,186 and $1,579,000,
respectively........................................ 7.5300 2,381,010 15,467,966
Accretion of redemption value......................... -- 31,000
--------- -----------
Balances at December 31, 1996......................... 8,345,016 23,153,494
Issuance costs related to sale of Series D preferred
stock (unaudited)................................... -- (22,807)
Accretion of redemption value (unaudited)............. -- 133,780
--------- -----------
Balances at June 30, 1997 (unaudited)................. 8,345,016 $23,264,467
========= ===========
</TABLE>
The rights, preferences and restrictions of the Series A, B, C and D
preferred stock are as follows:
- Each of the Series B, C and D preferred stock are redeemable by the
holder, on, or at any time after, December 31, 2002 with the written
consent of at least two-thirds of the respective outstanding Series B, C
and D shareholders. The stated redemption price at date of issuance was
$0.67, $1.9634 and $7.53 per share for the Series B, C and D preferred
stock, respectively, and is to be adjusted for inflation from the
issuance date to the redemption date. Redemption payments would be made
in three equal installments commencing on the initial redemption request
date, and each year thereafter, for a period of two years. The Company
accounts for the difference
F-14
<PAGE> 84
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
between the carrying amount of redeemable preferred stock and the
redemption amount by increasing the carrying amount for periodic
accretion against accumulated deficit using the interest method, so that
the carrying amount will equal the redemption amount at the redemption
date.
- Each share of Series A, B, C and D preferred stock is convertible at the
option of the holder at any time into one share of Series A common stock,
subject to certain antidilution provisions. The holders of Series A
preferred stock have the right, under certain circumstances, to convert
one share of Series A preferred stock to one share of Series D common
stock.
- Conversion of all Series A, B, C and D preferred stock is automatic upon
the earlier of the closing of a public offering of the Company's common
stock at a purchase price of not less than $13.554 per share with
aggregate proceeds of not less than $20,000,000, or the affirmative vote
or written consent of the holders of at least two-thirds of the then
outstanding shares of Series D preferred stock.
- Series A, B, C and D preferred stock have a liquidation preference of
$0.0729, $0.67, $1.9634 and $11.295 per share, respectively, plus all
declared but unpaid dividends, if any. No dividends have been declared
through December 31, 1996 and June 30, 1997.
- Series A, B, C and D preferred stock have the same voting rights as
Series A common stock based upon the number of shares of Series A common
stock into which they are convertible; however, Series A, B, C and D
preferred stock have preferential treatment over all common stock with
respect to any payment of dividends when and if declared by the board of
directors and any distributions of assets upon liquidation.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Company has classified redeemable, convertible preferred stock
outside of shareholders' deficit.
(b) Common Stock
Common stock at December 31, 1995 and 1996, and June 30, 1997, consists of
the following:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING SHARES
-----------------------------------
DECEMBER 31,
------------------ JUNE 30,
AUTHORIZED SHARES 1995 1996 1997
----------------- ------ ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Series A................................. 30,000,000 1 1 1
Series B................................. 10,000,000 2,400 463,018 297,727
Series C................................. 9,999,999 34,547 72,472 451,792
Series D................................. 1 -- -- --
</TABLE>
At January 1, 1995, 10,000 shares of common stock were issued and
outstanding. In April 1995, these 10,000 shares of common stock were exchanged
for 13,713,439 shares of Series A preferred stock and one share of Series A
common stock.
Series A and B common stock entitle the holder to fifteen votes for each
share held. Series C common stock entitles the holder to one vote for each share
held. Series B common stock is reserved for issuance to employees, directors or
affiliates of directors. Each share of Series B common stock automatically
converts to one share of Series C common stock upon termination of the holder's
employment, or status as a director or an affiliate of a director.
F-15
<PAGE> 85
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series D common stock shall have the right to elect one member of the board
of directors, the "Policy Director." Such director shall have the authority to
adopt or change editorial policies relating to the Company's Internet Web site
publishing.
(c) Stock Warrants
In connection with the sale of Series B preferred stock, the Company issued
a warrant to purchase 373,134 additional shares of Series B preferred stock at
an exercise price of $0.67 per share. No separate value was assigned to the
warrant as the value was not significant at the date of issuance. This warrant
was exercised in 1995.
In connection with the sale of Series C preferred stock, the Company issued
warrants to purchase up to 100,000 additional shares of Series C preferred stock
at an exercise price of $1.9634 per share, and warrants to purchase up to
183,755 shares of Series B common stock at an exercise price of $0.20 per share.
No separate value has been assigned to the warrants as the values were not
significant at the date of issuance. These warrants vest on the earlier of
January 26, 1997 or, if certain conditions are met, upon the closing of an IPO
of the Company's common stock. These warrants expire on the earlier of the
closing of an IPO by the Company with aggregate proceeds of not less than
$10,000,000 and at not less than $4.00 per share or October 26, 2000. No
warrants to purchase Series C preferred stock or Series B common stock have been
exercised as of December 31, 1996 and June 30, 1997.
In connection with the sale of Series D preferred stock, the Company issued
warrants to purchase up to 714,303 additional shares of Series D preferred stock
at an exercise price of $9.4125 per share. The value of the warrants,
$1,579,000, was recorded as additional paid-in capital. These warrants are
exercisable at December 31, 1996, and expire on November 27, 1998. Upon a merger
or consolidation in which the Company is not the survivor, the warrants are
canceled and all rights granted shall terminate. If an event causing conversion
of the Company's Series D preferred stock shall have occurred prior to the
exercise of the warrants, then all warrants shall be exercisable for the number
of shares of common stock of the Company into which the Series D preferred stock
not purchased upon any prior exercise of the warrants would have been so
converted.
(d) Stock Option Plans
Under the Company's 1995 Stock Option Plan (1995 Plan), 3,600,000 shares of
common stock are reserved for the issuance of stock options. Options generally
vest over a period of one to five years from the date of grant, expire 20 years
from the date of grant and terminate, to the extent not exercised, three months
after the termination of employment. In 1996, the Company adopted the 1996 Stock
Option Plan (1996 Plan). A total of 3,000,000 shares of common stock were
reserved for issuance of stock options under the 1996 Plan as of December 31,
1996. In January 1997, the Company reserved an additional 2,800,000 shares of
common stock for issuance under the 1996 Plan. The terms of the 1996 Plan are
substantially similar to the terms of the 1995 Plan.
F-16
<PAGE> 86
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity under the 1995 Plan and the 1996 Plan is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------- --------- --------------
<S> <C> <C> <C>
Balances at December 31, 1994....... -- -- $ --
Plan introduction................... 3,600,000 -- --
Options granted..................... (3,313,214) 3,313,214 0.07
Options exercised................... -- (30,750) 0.07
Options canceled.................... 450,000 (450,000) 0.07
---------- ---------
Balances at December 31, 1995....... 736,786 2,832,464 0.07
Plan introduction................... 3,000,000 -- --
Options granted..................... (3,766,364) 3,766,364 0.34
Options exercised................... -- (498,543) 0.09
Options canceled.................... 765,250 (765,250) 0.10
---------- ---------
Balances at December 31, 1996....... 735,672 5,335,035 0.27
Plan amendment (unaudited).......... 2,800,000 -- --
Options granted (unaudited)......... (1,581,430) 1,581,430 1.94
Options exercised (unaudited)....... -- (213,029) 0.19
Options canceled (unaudited)........ 366,950 (366,950) 0.39
---------- ---------
Balances at June 30, 1997
(unaudited)....................... 2,321,192 6,336,486 $ 0.67
</TABLE>
The Company applies APB Opinion No. 25 in accounting for the 1995 Plan and
the 1996 Plan, and no compensation cost has been recognized for its employee
stock options in the consolidated financial statements. Had the Company
determined compensation cost of employee stock options based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net loss:
As reported.................................. $(1,501,302) $(3,789,245)
Pro forma.................................... (1,510,513) (3,865,415)
Net loss per share:
As reported.................................. $
Pro forma....................................
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss and net loss per share
amounts presented above because compensation cost is recognized over the
options' vesting period. The Company has not calculated pro forma net loss per
share because information regarding the pricing of the shares of Common Stock
under the contemplated IPO has not yet been determined.
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $.01 and $.07, respectively, on the date of grant using the
minimum value method with the following weighted average assumptions:
1995 -- expected dividend yield of 0%, risk-free interest rate of 5.9%, and an
expected life of 3.5 years; 1996 -- expected dividend yield of 0%, risk-free
interest rate of 6.1%, and an expected life of 4.5 years.
F-17
<PAGE> 87
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1995 Plan and the 1996 Plan at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.07 1,786,695 18.33 years $0.07 493,845 $0.07
0.20 2,825,995 19.25 years 0.20 58,543 0.20
0.85 322,000 19.66 years 0.85 3,750 0.85
1.00 400,345 19.82 years 1.00 5,045 1.00
--------- -------
5,335,035 18.96 years $0.27 561,183 $0.09
--------- -------
</TABLE>
(8) SUBSEQUENT EVENTS (UNAUDITED)
In July 1997, the Company amended its articles of incorporation to
designate 7,047,679 shares of common stock as Series E common stock, designate
7,047,679 shares of preferred stock as Series E preferred stock, and reduce the
number of shares designated as Series D preferred stock to 3,095,313.
In June 1997, the Company entered into a strategic agreement with Microsoft
Corporation (Microsoft) pursuant to which the Company granted Microsoft a
nonexclusive license to certain substantial elements of the source code of the
Company's RealAudio/RealVideo Version 4.0 technology, including its basic
RealPlayer and substantial elements of its EasyStart Server products, and
related Company trademarks. Under the agreement, Microsoft may sublicense its
rights to the RealAudio/RealVideo Version 4.0 technology to third parties under
certain conditions. The agreement also provides for substantial refunds to
Microsoft under prescribed circumstances that are solely within the Company's
control. The amount of these refunds diminishes over time. The Company may not
assign its obligations under the agreement without Microsoft's consent.
Microsoft is obligated to distribute the Company's RealPlayer Version 4.0 for a
defined term as long as the Company's player supports certain Microsoft
architectures. The Company also agreed to work with Microsoft and several other
companies to author and promote the Active Streaming Format as a standard file
format for streaming media. The agreement also requires the Company to provide
Microsoft with engineering consultation services, certain error corrections, and
certain technical support over a defined term. In July 1997, the Company
delivered the specified source code in exchange for a license fee of
$30,000,000. The Company will recognize revenue, commencing with delivery of the
source code, over the three-year term of its ongoing obligations.
In connection with the agreement, Microsoft purchased a minority interest
in the Company in the form of 3,338,374 shares of Series E preferred stock at a
price of $8.99 per share. The Series E preferred stock is redeemable, at the
option of the holder, on or at any time after December 31, 2002 at a redemption
price of $8.99 per share and also has a liquidation preference of $8.99 per
share plus any declared but unpaid dividends. Each share of Series E preferred
stock is also convertible at the option of the holder at any time into either
one share of Series A common stock or one share of Series E nonvoting common
stock. Conversion of Series E preferred stock is automatic upon either the
closing of a public offering of the Company's common stock at a purchase price
of not less than $13.554 per share with aggregate proceeds of not less than
$20,000,000, or the affirmative vote or written consent of the holders of at
least two-thirds of the then outstanding shares of Series D preferred stock. The
conversion rate is subject to certain antidilution provisions. In connection
with the offering, the Company also issued warrants to purchase up to 3,709,305
shares of Series E preferred stock at an exercise price of $13.48
F-18
<PAGE> 88
REALNETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
per share. The warrants are exercisable at any time through January 21, 2000 and
will terminate automatically upon either completion of an IPO by the Company, or
completion of a merger in which the Company is not a survivor.
In September 1997, the Company amended its articles of incorporation as
follows:
- increased the number of authorized shares of common stock and preferred
stock to 300,000,000 and 60,000,000, respectively;
- established par value of $0.001 per share for both common stock and
preferred stock;
- changed the designation of series of common stock to:
<TABLE>
<CAPTION>
COMMON
SERIES STOCK
---------------------------------------------- -----------
<S> <C>
A........................................... 207,047,679
B........................................... 30,000,000
C........................................... 30,000,000
D........................................... 1
E........................................... 7,047,679
</TABLE>
- provided an alternative automatic conversion provision for all series of
preferred stock such that conversion is automatic on the closing of a
public offering of the Company's common stock with aggregate proceeds of
not less than $20,000,000, provided that holders of at least two-thirds
of the then outstanding Series D preferred stock have consented to such
conversion;
- provided that on the closing of an offering as described above, the
designations of Series A through D common stock terminate and Series A
through D common stock convert into one class of common stock, with each
share entitled to one vote;
- provided that on the closing of an offering as described above, the
designation of Series E common stock terminates and Series E common stock
converts into either common stock, with each share entitled to one vote,
or Special Common Stock, with no voting rights except as required by
applicable law; shares of Special Common Stock convert into shares of
common stock solely with the prior written approval of the Company's
Board of Directors; and
- created, upon the closing of an offering as described above, a Strategic
Transactions Committee of the Board of Directors, consisting of three
members of the Board of Directors; without the prior approval of this
committee, the Board of Directors is prohibited from (i) adopting a plan
of merger; (ii) authorizing sales of (A) assets representing more than
50% of the Company's assets, or (B) any asset on which the long-term
business strategy of the Company is substantially dependent; or (iii)
authorizing the voluntary dissolution of the Company.
In September 1997, the Company adopted the 1998 Employee Stock Purchase
Plan which will become effective January 1, 1998. The Company has reserved
1,000,000 shares of common stock for issuance under the plan.
In September 1997, the Company adopted the Amended and Restated 1996 Stock
Option Plan which provides for the grant of incentive and nonqualified options
to purchase up to an aggregate of 9,692,736 shares of common stock to employees,
officers, directors, consultants and independent contractors of the Company. The
amount of shares reserved can be increased up to 11,233,209 after taking into
account 1,540,473 shares subject to options outstanding under the 1995 Plan to
the extent such options terminate without having been exercised in full.
In September 1997, the Company terminated its line of credit and bank term
loan.
F-19
<PAGE> 89
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co., Montgomery Securities and
Robertson, Stephens & Company are acting as representatives, has severally
agreed to purchase from the Company, the respective number of shares of Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
--------------------------------------------------------------------- ----------
<S> <C>
Goldman, Sachs & Co..................................................
Montgomery Securities................................................
Robertson, Stephens & Company........................................
--------
Total..............................................................
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the shares of Common
Stock offered.
As of the date of this Prospectus, The Goldman Sachs Group, L.P., an
affiliate of Goldman, Sachs & Co., beneficially owns 66,401 shares, and a
warrant to purchase 19,920 shares, of Series D Preferred Stock. These shares and
the warrant were purchased on November 27, 1996 in reliance on the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving a public offering.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the Common Stock
without the prior written consent of the representatives, except for the shares
of Common Stock offered in connection with the offering.
In addition, the officers, directors and certain persons who prior to
closing of the offering hold shares of capital stock of the Company (including
but not limited to all holders of 1% or more of the Company's capital stock)
have agreed that they will not offer, sell or otherwise dispose of any shares of
Common Stock owned of record or beneficially as of the date of the Prospectus,
including securities convertible into or exercisable or exchangeable for shares
of Common Stock as of said date, as well as any shares of
U-1
<PAGE> 90
Common Stock later acquired by reason of the conversion, exercise or exchange of
such securities, or enter into any swap or other transaction with respect to the
shares that would transfer the economic consequences of ownership of the Common
Stock to another person, for a period of 180 days following the date of this
Prospectus, except that persons other than officers, directors and holders of 1%
or more of the capital stock of the Company each will be free to sell or
otherwise dispose of up to 5,000 shares of Common Stock to the extent
permissible under Rule 144 or Rule 701.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale, at the initial public offering
price, to employees of the Company and to certain distributors. The number of
shares of Common Stock available for sale to the general public in the public
offering will be reduced to the extent such persons purchase such reserved
shares.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered by them.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market in the
over-the-counter market or otherwise.
The Common Stock will be available for quotation on the Nasdaq National
Market under the symbol "RNWK." The Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
U-2
<PAGE> 91
[SCREEN-SHOTS OF
WEB PAGES SUPERIMPOSED
OVER COMPANY LOGO]
<PAGE> 92
============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 20
Dividend Policy........................... 20
Capitalization............................ 21
Dilution.................................. 22
Selected Consolidated Financial Data...... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 24
Business.................................. 34
Management................................ 49
Certain Transactions...................... 57
Principal Shareholders.................... 60
Description of Capital Stock.............. 62
Shares Eligible for Future Sale........... 65
Legal Matters............................. 67
Experts................................... 67
Additional Information.................... 67
Index to Consolidated Financial
Statements.............................. F-1
Underwriting.............................. U-1
THROUGH AND INCLUDING , 1997 (THE
25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=================================================
</TABLE>
============================================================
SHARES
REALNETWORKS, INC.
(FORMERLY "PROGRESSIVE NETWORKS, INC.")
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
[REALNETWORKS LOGO]
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
============================================================
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 10,455
NASD Filing Fee.................................................. 3,950
Nasdaq National Market Listing Fee............................... 50,000
Legal Fees and Expenses.......................................... **
Accountants' Fees and Expenses................................... 225,000
Blue Sky Filing and Counsel Fees and Expenses.................... 5,000
Printing and Engraving Expenses.................................. 150,000
Transfer Agent and Registrar Fees................................ 10,000
Directors' and Officers' Liability Insurance..................... 200,000
Miscellaneous Expenses........................................... **
--------
Total.................................................. $ **
========
</TABLE>
- ---------------
* All expenses other than the Securities and Exchange Commission Registration
Fee, the NASD Filing Fee and the Nasdaq National Market Fee are estimated.
** To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "Washington Act") authorize a court to award, or a
corporation's board of directors to grant, indemnification to directors and
officers on terms sufficiently broad to permit indemnification under certain
circumstances for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article VI, Section 6.4, of the Registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) and Article
X of the Registrant' Restated Bylaws (Exhibit 3.2 hereto) provide for
indemnification of the Registrant's directors, officers, employees and agents to
the maximum extent permitted by Washington law. The Registrant has entered into
agreements with all officers and directors to indemnify them against certain
liabilities arising out of their service as officers and directors, as
applicable, and to advance expenses to defend claims subject to indemnification.
The directors and officers of the Registrant also may be indemnified against
liability they may incur for serving in that capacity pursuant to a liability
insurance policy maintained by the Registrant for such purpose.
Section 23B.08.320 of the Washington Act authorizes a corporation to limit
a director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, self-dealing or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article VI, Section 6.5, of the Registrant's Amended and Restated
Articles of Incorporation contains provisions implementing, to the fullest
extent permitted by Washington law, such limitations on a director's liability
to the Registrant and its shareholders.
Reference is also made to the Form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors of the Registrant by the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 1, 1994, the Registrant has issued and sold unregistered
securities as follows:
(1) An aggregate of 2,686,567 shares of Series B Preferred Stock
issued in April 1995 to investors. The aggregate consideration received
for such shares was $1,800,000.
II-1
<PAGE> 94
(2) An aggregate of 2,600 shares of Series B Common Stock issued in
September 1995 to 26 employees in exchange for services, and 100 shares of
Series C Common Stock issued in September 1995 to one individual in
exchange for services.
(3) An aggregate of 2,904,305 shares of Series C Preferred Stock
issued in October 1995 to investors. The aggregate consideration received
for such shares was $5,702,312.
(4) An aggregate of 3,497 shares of Series C Common Stock issued in
October 1995 to one individual in exchange for services.
(5) An aggregate of 2,381,010 shares of Series D Preferred Stock
issued in November 1996 to investors. The aggregate consideration
received for such shares was $17,929,005.
(6) An aggregate of 1,000 shares of Series C Common Stock issued in
March 1997 to one individual in exchange for services.
(7) An aggregate of 3,338,374 shares of Series E Preferred Stock
issued in July 1997 to one investor. The aggregate consideration received
for such shares was $30,000,000.
(8) An aggregate of 1,531,594 shares of Series B Common Stock and
Series C Common Stock issued to employees and consultants upon the exercise
of options. The aggregate consideration received for such shares was
$187,914.
(9) An aggregate of 373,134 shares of Series B Preferred Stock issued
to an investor upon the exercise of warrants. The aggregate consideration
received for such shares was $250,000.
No underwriters were engaged in connection with these issuances and sales,
which were made in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act, relating to sales by an issuer not involving
a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation filed September 19, 1997
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation
filed September 25, 1997
3.3 Form of Amended and Restated Articles of Incorporation
3.4 Bylaws
4.1* Specimen Stock Certificate
5.1* Opinion of Graham & James LLP/Riddell Williams P.S.
10.1 RealNetworks, Inc. 1995 Stock Option Plan
10.2 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
10.3 Form of Stock Option Agreement
10.4 1998 Employee Stock Purchase Plan
10.5 Form of Warrant to Purchase Series D Preferred Stock
10.6 Warrant to Purchase Series E Preferred Stock dated July 21, 1997 between the
Registrant and Microsoft Corporation
10.7 Lease Agreement dated March 4, 1996 by and between the Registrant as Lessee and
Wright Runstad Properties L.P. as Lessor
</TABLE>
II-2
<PAGE> 95
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
10.8 Sublease Agreement dated March, 1996 by and between the Registrant as Sublessee
and Legent Corporation as Sublessor
10.9 Antenna Site License Agreement dated August 12, 1997 by and between the
Registrant and Wright Runstad & Company
10.10** Agreement between Microsoft Corporation and the Registrant on Media Streaming
Technology dated June 17, 1997
10.11 Offer letter dated February 16, 1996 between the Registrant and Bruce Jacobsen
10.12 Offer letter dated May 2, 1995 between the Registrant and James Wells
10.13 Offer letter dated May 24, 1994 between the Registrant and Andrew Sharpless
10.14 Form of Director and Officer Indemnification Agreement
10.15 Limited Proxy and Voting Agreement dated July 21, 1997 by and between the
Registrant and Microsoft Corporation
10.16 Shareholders' Buy-Sell Agreement dated March 31, 1995 by and among the
Registrant, Robert Glaser and certain shareholders of the Registrant
10.17 Voting Agreement dated September 25, 1997 by and among the Registrant, Robert
Glaser, Accel IV L.P., Mitchell Kapor and Bruce Jacobsen
10.18 Agreement dated September 26, 1997 by and between the Registrant and Robert
Glaser
10.19 Second Amended and Restated Investors' Rights Agreement dated July 21, 1997 by
and among the Registrant and certain shareholders of the Registrant
11.1* Statement re: Computation of Pro Forma Net Loss Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Graham & James LLP/Riddell Williams P.S. (included in its opinion to
be filed as Exhibit 5.1 hereto)
23.2 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment requested.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts
II-3
<PAGE> 96
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on September 26, 1997.
REALNETWORKS, INC.
By: /s/ ROBERT GLASER
------------------------------------
Robert Glaser
Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes and
appoints Robert Glaser and Bruce Jacobsen, and each of them, as his true and
lawful attorney-in-fact, with full power of substitution, to execute in the name
and on behalf of such person, individually and in each capacity stated below,
and to file, any and all amendments to this Registration Statement, including
any and all post-effective amendments, and any related registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- -------------------
<C> <S> <C>
/s/ ROBERT GLASER Chairman of the Board, September 26, 1997
- --------------------------------------------- Chief Executive
Robert Glaser Officer, Secretary and
Treasurer (Principal
Executive Officer)
/s/ BRUCE JACOBSEN President, Chief September 26, 1997
- --------------------------------------------- Operating Officer and
Bruce Jacobsen Director
/s/ MARK KLEBANOFF Chief Financial Officer September 26, 1997
- --------------------------------------------- (Principal Financial
Mark Klebanoff and Accounting Officer)
/s/ JIM BREYER Director September 25, 1997
- ---------------------------------------------
James Breyer
/s/ MITCHELL KAPOR Director September 22, 1997
- ---------------------------------------------
Mitchell Kapor
</TABLE>
II-5
<PAGE> 98
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
REALNETWORKS, INC. AND SUBSIDIARIES
PERIOD FROM FEBRUARY 9, 1994 (INCEPTION) TO DECEMBER 31, 1994
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
- ------------------------------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Valuation accounts deducted from
assets:
Allowance for doubtful accounts
receivable and sales
returns...................... $ 129,869 $ 563,046 $(309,565) $ 383,350
Valuation allowance for
deferred tax assets.......... 493,000 1,335,000 -- 1,828,000
======= ========= ======== =========
Year ended December 31, 1995:
Valuation accounts deducted from
assets:
Allowance for doubtful accounts
receivable and sales
returns...................... -- 129,869 -- 129,869
Valuation allowance for
deferred tax assets.......... -- 493,000 -- 493,000
======= ========= ======== =========
Period from February 9, 1994
(inception) to December 31, 1994:
Valuation accounts deducted from
assets:
Allowance for doubtful accounts
receivable and sales
returns...................... -- -- -- --
Valuation allowance for
deferred tax assets.......... -- -- -- --
======= ========= ======== =========
</TABLE>
- ---------------
(1) Represents amounts written off.
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement........................................
3.1 Amended and Restated Articles of Incorporation filed September 19,
1997..................................................................
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation filed September 25, 1997................................
3.3 Form of Amended and Restated Articles of Incorporation................
3.4 Bylaws................................................................
4.1* Specimen Stock Certificate............................................
5.1* Opinion of Graham & James LLP/Riddell Williams P.S....................
10.1 RealNetworks, Inc. 1995 Stock Option Plan.............................
10.2 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan........
10.3 Form of Stock Option Agreement........................................
10.4 1998 Employee Stock Purchase Plan.....................................
10.5 Form of Warrant to Purchase Series D Preferred Stock..................
10.6 Warrant to Purchase Series E Preferred Stock dated July 21, 1997
between the Registrant and Microsoft Corporation......................
10.7 Lease Agreement dated March 4, 1996 by and between the Registrant as
Lessee and Wright Runstad Properties L.P. as Lessor...................
10.8 Sublease Agreement dated March, 1996 by and between the Registrant as
Sublessee and Legent Corporation as Sublessor.........................
10.9 Antenna Site License Agreement dated August 12, 1997 by and between
the Registrant and Wright Runstad & Company...........................
10.10** Agreement between Microsoft Corporation and the Registrant on Media
Streaming Technology dated June 17, 1997..............................
10.11 Offer letter dated February 16, 1996 between the Registrant and Bruce
Jacobsen..............................................................
10.12 Offer letter dated May 2, 1995 between the Registrant and James
Wells.................................................................
10.13 Offer letter dated May 24, 1994 between the Registrant and Andrew
Sharpless.............................................................
10.14 Form of Director and Officer Indemnification Agreement................
10.15 Limited Proxy and Voting Agreement dated July 21, 1997 by and between
the Registrant and Microsoft Corporation..............................
10.16 Shareholders' Buy-Sell Agreement dated March 31, 1995 by and among the
Registrant, Robert Glaser and certain shareholders of the
Registrant............................................................
10.17 Voting Agreement dated September 25, 1997 by and among the Registrant,
Robert Glaser, Accel IV L.P., Mitchell Kapor and Bruce Jacobsen.......
10.18 Agreement dated September 26, 1997 by and between the Registrant and
Robert Glaser.........................................................
10.19 Second Amended and Restated Investors' Rights Agreement dated July 21,
1997 by and among the Registrant and certain shareholders of the
Registrant............................................................
11.1* Statement re: Computation of Pro Forma Net Loss Per Share.............
21.1 Subsidiaries of the Registrant........................................
23.1 Consent of Graham & James LLP/Riddell Williams P.S. (included in its
opinion to be filed as Exhibit 5.1 hereto)............................
23.2 Consent of KPMG Peat Marwick LLP......................................
24.1 Power of Attorney (included on signature page)........................
27.1 Financial Data Schedule...............................................
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment requested.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROGRESSIVE NETWORKS, INC.
Progressive Networks, Inc., a Washington corporation, by its
President, hereby submits the following Amended and Restated Articles of
Incorporation of said Corporation pursuant to the provisions of RCW 23B.10.070,
and resolutions duly adopted by the Board of Directors on July 25, 1997. These
Amended and Restated Articles of Incorporation were duly approved by the
shareholders in accordance with the provisions of RCW 23B.10.030 and RCW
23B.10.040, and supersede the original Articles of Incorporation and all
amendments and prior restatements thereto as of the date of their adoption.
ARTICLE I
NAME
The name of this corporation is Progressive Networks, Inc.
ARTICLE II
DURATION
This Corporation is organized under the Washington Business
Corporation Act (the "Act") and shall have perpetual existence.
ARTICLE III
PURPOSE AND POWERS
The purpose and powers of this Corporation are as follows: (a) to
engage in any lawful business; (b) to engage in any and all activities that, in
the judgment of the Board of Directors, may at any time be incidental or
conducive to the attainment of the foregoing purpose; and (c) to exercise any
and all powers that a corporation formed under the Act, or any amendment
thereto or substitute therefor, is entitled at the time to exercise.
ARTICLE IV
CAPITAL STOCK
4.1 AUTHORIZED CAPITAL. The aggregate number of shares of capital
stock which this Corporation shall be authorized to issue shall be Three
Hundred Sixty Million (360,000,000), divided into two classes as follows:
Three Hundred Million (300,000,000) shares of common stock (the "Common
Stock"), and Sixty Million (60,000,000) shares of preferred stock (the
"Preferred Stock").
<PAGE> 2
4.2 ISSUANCE OF COMMON STOCK IN SERIES.
4.2.1 AUTHORITY VESTED IN BOARD OF DIRECTORS. The Common
Stock may be divided into and issued in series from time to time. Authority is
vested in the Board of Directors, subject to the limitations and procedures
prescribed by law, to divide any part or all of such Common Stock into any
number of series, to fix and determine the relative rights and preferences of
the shares of any series to be established, and to amend the rights and
preferences of the shares of any series that has been established but is wholly
unissued.
4.2.2 AMENDMENT TO SERIES DECREASING SHARES. Within any
limits stated in these Articles of Incorporation or in the resolution of the
Board of Directors establishing a series, the Board of Directors, after the
issuance of shares of a series, may amend the resolution establishing the
series to decrease (but not below the number of shares of such series then
outstanding) the number of shares of that series, and the number of shares
constituting the decrease shall thereafter constitute authorized but
undesignated shares.
4.2.3 AUTHORITY LIMITED TO UNISSUED SHARES. The authority
herein granted to the Board of Directors to determine the relative rights and
preferences of the Common Stock shall be limited to unissued shares, and no
power shall exist to alter or change the rights and preferences of any shares
that have been issued.
4.3 DESIGNATION OF SERIES A COMMON STOCK, SERIES B COMMON STOCK,
SERIES C COMMON STOCK, SERIES D COMMON STOCK AND SERIES E
COMMON STOCK.
The following series of Common Stock are hereby designated,
and each such series shall have the following rights, preferences and
limitations:
4.3.1 DESIGNATION. Two Hundred Seven Million Forty-Seven
Thousand Six Hundred Seventy-Nine (207,047,679) shares of Common Stock shall be
designated and known as "Series A Common Stock"; Thirty Million (30,000,000)
shares of Common Stock shall be designated and known as "Series B Common
Stock"; Thirty Million (30,000,000) shares of Common Stock shall be designated
and known as "Series C Common Stock"; one (1) share shall be designated and
known as "Series D Common Stock" and Seven Million Forty-Seven Thousand Six
Hundred Seventy-Nine (7,047,679) shares of Common Stock shall be designated and
known as "Series E Common Stock." Except as otherwise provided in these
Articles of Incorporation, all shares of Series A Common Stock, Series B Common
Stock, Series C Common Stock, Series D Common Stock and Series E Common Stock
shall be identical and shall entitle the holders thereof to the same rights and
privileges. The designations of the Series A Common Stock, Series B Common
Stock, Series C Common Stock, Series D Common Stock and Series E Common Stock
in this Article are expressly subject to the provisions of Section 4.3.6,
Section 4.3.7, and Section 4.3.8.
4.3.2 ISSUANCE. Shares of Series A Common Stock, Series B
Common Stock, Series C Common Stock, Series D Common Stock and Series E Common
Stock may be issued, upon authorization by the Board of Directors, to such
persons and entities, and for such consideration permitted by the Act, as the
Board of Directors shall determine; provided, that shares of Series B Common
Stock shall be issued only to persons or entities who, at the time of issuance,
are either (a) employees of the Corporation, or (b) directors, or affiliates of
directors, of the Corporation. For purposes of this section, an "affiliate"
shall be a person or
-2-
<PAGE> 3
entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, a director; and
provided further, that shares of Series D Common Stock shall be issued only in
compliance with Section 4.3.7.
4.3.3 VOTING RIGHTS. Except as otherwise required by law
and except as otherwise provided in these Articles of Incorporation, on all
matters submitted to the Corporation's shareholders, each share of Series A
Common Stock shall entitle the holder to fifteen (15) votes, each share of
Series B Common Stock shall entitle the holder to fifteen (15) votes, each
share of Series D Common Stock shall entitle the holder to fifteen (15) votes,
each share of Series C Common Stock shall entitle the holder to one (1) vote,
and each share of Series E Common Stock shall not be entitled to vote, except
as required by law, in which case it shall entitle the holder to one (1) vote.
Except with regard to those matters required by law to be voted on by one or
more voting groups and except as otherwise provided in these Articles of
Incorporation, all shares of Series A Common Stock, Series B Common Stock,
Series C Common Stock and Series D Common Stock shall vote and be counted
together and not separately as a voting group upon all matters submitted to a
vote of shareholders. Where the Series E Common Stock is entitled to voting
rights by law, all shares of Series E Common Stock shall vote and be counted
together with the Series A Common Stock, the Series B Common Stock, the Series
C Common Stock and the Series D Common Stock and not separately as a voting
group, except as required by law.
4.3.4 DIVIDENDS.
(a) IN CASH OR SECURITIES. Subject to any
preferential rights granted for any series of Common Stock or Preferred Stock,
the holders of Series A Common Stock, the holders of Series B Common Stock, the
holders of Series C Common Stock, the holders of the Series D Common Stock and
the holders of Series E Common Stock shall be entitled to receive dividends
equally, share for share, if, when and as declared by the Board of Directors
out of funds of this Corporation legally available for that purpose; provided,
that if such dividends are declared, they will be payable at the same rate on
each other series of Common Stock and payable in Common Stock of the series
with respect to which it is declared or in Common Stock of one or more newly
designated series with substantially similar rights to the series with respect
to which it is declared, as determined by the Board of Directors in its sole
discretion.
(b) SUBDIVISIONS AND COMBINATIONS OF SHARES. Any
increase or decrease in the number of shares of any series of Common Stock
resulting from a subdivision or combination of shares or other capital
reclassification shall not be permitted unless parallel action is taken with
respect to each other series of Common Stock, so that the number of shares of
each series of Common Stock outstanding shall be increased or decreased
proportionately.
4.3.5 AUTOMATIC CONVERSION OF SERIES B COMMON STOCK.
(a) CONVERSION EVENT/CONVERSION DATE FOR EMPLOYEE
HOLDERS. Each share of Series B Common Stock held by a holder who was an
employee at the time of issuance shall automatically convert into one (1) share
of Series C Common Stock upon the termination of the holder's employment with
the Corporation for any reason, including but not limited to death, disability,
retirement, resignation or involuntary termination by the Corporation. In
addition, if any such holder, while an employee, makes or attempts to make any
transfer of shares of Series B Common Stock to any person or entity, whether
voluntary or involuntary, each such
-3-
<PAGE> 4
share that the holder has transferred or attempted to transfer shall
automatically convert into one (1) share of Series C Common Stock
simultaneously with such transfer or attempted transfer. If it is necessary
for any reason to determine whether the holder's employment has terminated or
the time thereof, or whether the holder has made or attempted to make any
transfer of any shares of Series B Common Stock or the time thereof, the Board
of Directors shall make such determination and it shall be binding on the
holder and any other person having any interest therein.
(b) CONVERSION EVENT/CONVERSION DATE FOR DIRECTOR
OR AFFILIATE HOLDERS. Each share of Series B Common Stock held by a holder who
was a director or an affiliate of a director (as defined above) at the time of
issuance shall automatically convert into one (1) share of Series C Common
Stock upon the termination of the holder's status as a director or an affiliate
of a director for any reason, including but not limited to death, resignation
or removal by the shareholders. In addition, if any such holder, while a
director or an affiliate of a director, makes or attempts to make any transfer
of shares of Series B Common Stock, whether voluntary or involuntary, each such
share that the holder has transferred or attempted to transfer shall
automatically convert into one (1) share of Series C Common Stock
simultaneously with such transfer or attempted transfer. If it is necessary
for any reason to determine whether the holder has made or attempted to make
any transfer of any shares of Series B Common Stock or the time thereof, the
Board of Directors shall make such determination and it shall be binding on the
holder and any other person having any interest therein.
(c) STATUS OF CERTIFICATES. If one or more
shares of Series B Common Stock are so converted, the certificate(s)
representing such share or shares shall, by virtue of the conversion and
without any action on the part of the holder, thereafter represent, to the
extent of the number of shares so converted, the corresponding number of shares
of Series C Common Stock, and the share or shares of Series B Common Stock
previously represented by such certificate(s) shall be canceled and revert to
the status of authorized but unissued share(s) of Series B Common Stock. Upon
surrender of any such certificate to the Corporation, the Corporation shall
issue and deliver to the person entitled thereto a new certificate or
certificates to represent the shares of Series C Common Stock (and, if
applicable, any remaining shares of Series B Common Stock) represented by the
surrendered certificate.
(d) RESERVATION AND ISSUANCE OF SERIES C COMMON
STOCK. The Corporation shall reserve at all times, for so long as any shares
of Series B Common Stock remain outstanding, free from preemptive rights, out
of its authorized but unissued shares of Series C Common Stock, solely for the
purpose of effecting the conversion of the shares of Series B Common Stock,
sufficient shares of Series C Common Stock to provide for the conversion of all
outstanding shares of Series B Common Stock. All shares of Series C Common
Stock issued upon conversion of the shares of Series B Common Stock will be
duly and validly issued, fully paid and nonassessable to the same extent as the
shares of Series B Common Stock from which they were converted.
-4-
<PAGE> 5
4.3.6 TERMINATION OF DESIGNATION OF SERIES A COMMON STOCK,
SERIES B COMMON STOCK AND SERIES C COMMON STOCK. Upon the earlier of:
(a) the written election delivered to the
Corporation at any time by the holders of a majority of: (i) the then
outstanding shares of Series A Preferred Stock, or (ii) the then outstanding
shares of Series A Common Stock issued upon the conversion of Series A
Preferred as provided in Article V; or
(b) the closing of a Public Offering (as defined
in Section 5.4(b)), provided: (i) immediately following the closing of the
Public Offering, the persons who held shares of Series A Preferred prior to the
Public Offering, or prior to the conversion of the Series A Preferred into
Common Stock as provided in Article V, hold more than fifty percent (50%) of
all of the outstanding shares of the Corporation, assuming the issuance and
exercise of all options under the Corporation's 1995 Stock Option Plan, 1996
Stock Option Plan or any other stock option, employee stock bonus or restricted
stock plan designated and approved by the Board of Directors, and (ii) in the
opinion of the underwriters, delivered to the Corporation prior to the closing
of the Public Offering, the existence of multiple classes of Common Stock will
lower the price in the public offering by more than twenty-five percent (25%);
the designation of the Series A Common Stock, Series B Common Stock and Series
C Common Stock as separate series of Common Stock having the respective rights,
preferences and limitations set forth in this Section 4.3, and the authority of
the Board of Directors under Section 4.2 to divide the Common Stock into series
and to fix and determine the relative rights and preferences therefor, shall
automatically terminate. Effective immediately upon such termination (A) the
number of authorized shares of Common Stock of the Corporation shall be
increased by the number of authorized shares of Series A Common Stock, Series B
Common Stock, and Series C Common Stock, without any distinctions between any
of such shares (except as provided in Section 4.3.7); (B) each share of Series
A Common Stock, Series B Common Stock and Series C Common Stock then
outstanding shall thereafter constitute one (1) share of Common Stock, the
holder of which shall be entitled to one (1) vote upon all matters submitted to
a vote of shareholders; and (C) each certificate representing shares of Series
A Common Stock, Series B Common Stock or Series C Common Stock that were
outstanding immediately prior to the termination shall, by virtue of the
termination and without any action on the part of the holder, thereafter
represent the corresponding number of shares of Common Stock. Upon surrender
of any such certificate to the Corporation, the Corporation shall issue and
deliver to the person entitled thereto a new certificate to represent the
shares of Common Stock represented by the surrendered certificate.
4.3.7 SERIES D COMMON STOCK. Notwithstanding anything in
Section 4.3.6 to the contrary, one (1) share of Common Stock shall remain
designated a share of Series D Common Stock, and, as provided in Section
5.4(a), the holders of Series A Preferred shall have the nontransferable right
to convert one (1) share of Series A Preferred into one (1) share of Series D
Common Stock provided the Corporation has received, in connection with a Public
Offering (as defined in Section 5.4(b)), an opinion of a recognized investment
banking firm that the existence of this class of stock will not impair the
value of the Series A Common Stock. Upon the transfer of that one (1) share of
Series D Common Stock, the one (1) share of Series D Common Stock shall
automatically convert into one (1) share of Series A Common Stock or Conversion
Stock (as defined in Section 5.4(a)). The one (1) share of Series D Common
Stock,
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which shall be issued as described in Section 5.4(a), shall have the right (in
addition to its right to vote with the Common Stock) to elect one (1) member of
the Board of Directors of the Corporation (the "Policy Director") who shall
have the rights and authority set forth in Section 7.1.
4.3.8 TERMINATION OF DESIGNATION OF SERIES E COMMON STOCK.
If a holder of Series E Preferred elects to convert such shares into shares of
Series A Common Stock, then, at any time following such conversion, the Board
of Directors may amend the resolution establishing the Series E Common Stock to
decrease (but not below the number of Series E Preferred then outstanding) the
number of shares of Series E Common Stock, and the number of shares
constituting the decrease shall thereafter constitute authorized but
undesignated shares of Common Stock. In addition, if all of the Series E
Preferred are converted into shares of Series A Common Stock, the designation
of the Series E Common Stock as a separate series of Common Stock shall
automatically terminate. Effective immediately upon such termination, the
number of authorized, but undesignated shares of Common Stock of the
Corporation shall be increased by the number of authorized shares of Series E
Common Stock.
4.4 ISSUANCE OF PREFERRED STOCK IN SERIES.
4.4.1 AUTHORITY VESTED IN BOARD OF DIRECTORS. The
Preferred Stock may be divided into and issued in series from time to time.
Authority is vested in the Board of Directors, subject to the limitations and
procedures set forth in these Articles of Incorporation or prescribed by law,
to divide any part or all of such Preferred Stock into any number of series, to
fix and determine the relative rights and preferences of the shares of any
series to be established, and to amend the rights and preferences of the shares
of any series that has been established but is wholly unissued.
4.4.2 DESIGNATION OF SERIES A PREFERRED STOCK, SERIES B
PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D
PREFERRED STOCK AND SERIES E PREFERRED STOCK.
The following series of Preferred Stock are hereby designated,
and each such series shall have the following rights, preferences and
limitations:
4.4.3 DESIGNATION. Thirteen Million Seven Hundred Thirteen
Thousand Four Hundred Thirty Nine (13,713,439) shares of Preferred Stock shall
be designated and known as "Series A Preferred Stock" or "Series A Preferred";
Three Million Fifty-Nine Thousand Seven Hundred One (3,059,701) shares of
Preferred Stock shall be designated and known as "Series B Preferred Stock" or
"Series B Preferred"; Three Million Four Thousand Three Hundred Five
(3,004,305) shares of Preferred Stock shall be designated and known as "Series
C Preferred Stock" or "Series C Preferred"; Three Million Ninety-Five Thousand
Three Hundred Thirteen (3,095,313) shares of Preferred Stock shall be
designated and known as "Series D Preferred Stock" or "Series D Preferred"; and
Seven Million Forty-Seven Thousand Six Hundred Seventy-Nine (7,047,679) shares
of Preferred Stock shall be designated as "Series E Preferred Stock" or "Series
E Preferred." Except as otherwise provided in these Articles of Incorporation,
all shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
identical and shall entitle the holders thereof to the same rights and
privileges.
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4.4.4 AMENDMENT TO SERIES DECREASING SHARES. Within any
limits stated in these Articles of Incorporation or in the resolution of the
Board of Directors establishing a series, the Board of Directors, after the
issuance of shares of a series, may amend the resolution establishing the
series to decrease (but not below the number of shares of such series then
outstanding or reserved for issuance pursuant to the exercise of any
outstanding warrants) the number of shares of that series, and the number of
shares constituting the decrease shall thereafter constitute authorized but
undesignated shares.
4.4.5 AUTHORITY LIMITED TO UNISSUED SHARES. The authority
herein granted to the Board of Directors to determine the relative rights and
preferences of the Preferred Stock shall be limited to unissued shares, and no
power shall exist to alter or change the rights and preferences of any shares
that have been issued.
4.5 ISSUANCE OF CERTIFICATES. The Board of Directors shall have
the authority to issue shares of the capital stock of this Corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose.
4.6 NO CUMULATIVE RIGHTS. Shareholders of this Corporation shall
not have the right to cumulate votes for the election of directors.
4.7 NO PREEMPTIVE RIGHTS. No shareholder of this Corporation
shall have, solely by reason of being a shareholder, any preemptive or
preferential right or subscription right to any stock of this Corporation or to
any obligations convertible into stock of this Corporation, or to any warrant
or option for the purchase thereof, except to the extent provided by written
agreement with this Corporation.
4.8 QUORUM FOR MEETING OF SHAREHOLDERS. A quorum shall exist at
any meeting of shareholders if a majority of the votes entitled to be cast is
represented in person or by proxy. In the case of any meeting of shareholders
that is adjourned more than once because of the failure of a quorum to attend,
those who attend the third convening of such meeting, although less than a
quorum, shall nevertheless constitute a quorum for the purpose of electing
directors, provided that the percentage of shares represented at the third
convening of such meeting shall not be less than one-third of the shares
entitled to vote.
4.9 CONTRACTS WITH INTERESTED SHAREHOLDERS. Subject to the
limitations set forth in RCW 23B.19.040, to the extent applicable:
4.9.1 The Corporation may enter into contracts and
otherwise transact business as vendor, purchaser, lender, borrower, or
otherwise with its shareholders and with corporations, associations, firms, and
entities in which they are or may be or become interested as directors,
officers, shareholders, members, or otherwise.
4.9.2 Any such contract or transaction shall not be
affected or invalidated or give rise to liability by reason of the
shareholder's having an interest in the contract or transaction.
4.10 SHAREHOLDER VOTING REQUIREMENTS. Subject to the requirements
of RCW 23B.08.730, and 23B.19.040, any contract, transaction, or act of the
Corporation or of
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any director or officer of the Corporation that shall be authorized, approved,
or ratified by a majority of the votes entitled to be cast at a meeting at
which a quorum is present shall, insofar as permitted by law, be as valid and
as binding as though ratified by every shareholder of the Corporation.
4.11 EXECUTION OF CONSENT OF SHAREHOLDERS BY LESS THAN UNANIMOUS
CONSENT. To the extent that the Act may at any time be amended to authorize
the taking of action by shareholders without a meeting by less than unanimous
written consent of all shareholders entitled to vote on the action, the taking
of such action by the shareholders of the Corporation shall be permitted.
Before the date on which the action becomes effective, notice of the taking of
such action shall be given to each shareholder of record, in writing,
describing with reasonable clarity and specifying the general nature of the
action approved, stating the effective date and time of the approved action,
and accompanied by the same material that, under the Act, would have been
required to be sent to nonconsenting or nonvoting shareholders in a notice of
meeting at which the proposed action would have been submitted for shareholder
action. Such notice shall be given as follows: (i) if mailed, by deposit in
the U.S. mail at least seventy-two (72) hours prior to the specified effective
time of such action, with first-class postage thereon prepaid, correctly
addressed to each shareholder of record at the shareholder's address as it
appears on the current record of shareholders of the Corporation; or (ii) if
delivered by personal delivery, by courier service, by wire or wireless
equipment, by telegraphic or other facsimile transmission, or by any other
electronic means which transmits a facsimile of such communication correctly
addressed to each shareholder of record at the shareholder's physical address,
electronic mail address, or facsimile number, as it appears on the current
record of shareholders of the corporation, at least twenty-four (24) hours
prior to the specified effective time of such action.
ARTICLE V
ADDITIONAL TERMS OF CAPITAL STOCK
In addition to the relative rights, preferences, privileges and
restrictions granted to or imposed on the respective classes of the shares of
capital stock or the holders thereof as set forth in Article IV, the relative
rights, preferences, privileges and restrictions granted to or imposed on the
respective classes of the shares of capital stock or the holders thereof are as
follows:
5.1 DIVIDENDS. No dividends or other distributions shall be made
with respect to the Common Stock, other than dividends payable solely in Common
Stock, unless at the same time an equivalent dividend with respect to the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred has been paid or set apart or such equivalent dividend
has been waived by the affirmative vote or written consent of the holders of
not less than Sixty-Six and Two-Thirds Percent (66-2/3%) of the outstanding
shares of each of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred. Any declared but unpaid dividends
on the shares of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shall be paid upon the conversion of
such shares into Common Stock either (at the option of the Corporation) by
payment of cash or by the issuance of additional shares of Common Stock based
upon the fair market value of the Common Stock at the time of conversion, as
determined by the Corporation's Board of Directors.
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5.2 LIQUIDATION PREFERENCES. In the event of any liquidation,
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of the Corporation shall be made in the
following manner:
(a) The holders of each of the Series D Preferred and the
Series E Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Series A Preferred, the Series B Preferred, the Series C
Preferred or the Common Stock by reason of their ownership of such stock, an
amount equal to the greater of: (1) $11.295 per share, in the case of Series D
Preferred, and $8.99 per share, in the case of Series E Preferred, adjusted for
any combinations, consolidations, subdivisions, or stock dividends with respect
to such shares and, in addition, an amount equal to all declared but unpaid
dividends on such shares; or (2) the amount per share the holder would have
received if he/she/it had converted his/her/its shares into Common Stock as
provided in these Articles of Incorporation, provided, that the holders of
Series D Preferred and the Series E Preferred shall receive such amounts
simultaneously with the receipt by the holders of Common Stock of the amounts
to which they are entitled, as described in Section 5.2(c). If the assets and
funds thus distributed among the holders of the Series D Preferred and Series E
Preferred shall be insufficient to permit the payment to such holders of the
full aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed, first, pro
rata among the holders of the Series E Preferred in proportion to the full
preferential amount each such holder is otherwise entitled to receive under
clause (1) above, and among the holders of the Series D Preferred in proportion
to Sixty-Six and Two-Thirds Percent (66-2/3%) of the full preferential amount
each such holder is otherwise entitled to receive under clause (1) above, and,
second, among the holders of the Series D Preferred in proportion to the
remaining full preferential amount each such holder is otherwise entitled to
receive under clause (1) above.
(b) After payment has thus been made to the holders of
each of the Series D Preferred and the Series E Preferred of the full amounts
to which they shall be entitled as aforesaid, the holders of each of the Series
A Preferred, the Series B Preferred and the Series C Preferred shall be
entitled to receive prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of the Common Stock
by reason of their ownership of such stock, an amount equal to the greater of:
(1) $0.0729 per share, in the case of Series A Preferred, $0.67 per share, in
the case of Series B Preferred, and $1.9634 per share, in the case of Series C
Preferred, adjusted for any combinations, consolidations, subdivisions, or
stock dividends with respect to such shares and, in addition, an amount equal
to all declared but unpaid dividends on such shares; or (2) the amount per
share the holder would have received if he/she/it had converted his/her/its
shares into Common Stock as provided in these Articles of Incorporation,
provided, that the holders of the Series A Preferred, the Series B Preferred
and the Series C Preferred shall receive such amounts simultaneously with the
receipt by the holders of Common Stock of the amounts to which they are
entitled, as described in Section 5.2(c). If the assets and funds thus
distributed among the holders of the Series A Preferred, the Series B Preferred
and the Series C Preferred shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then the entire assets and
funds of the Corporation legally available for distribution shall be
distributed among the holders of the Series A Preferred, the Series B Preferred
and the Series C Preferred in proportion to the full preferential amount each
such holder is otherwise entitled to receive under clause (1) above.
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(c) After payment has thus been made to the holders of
each of the Series A Preferred, the Series B Preferred, the Series C Preferred,
the Series D Preferred and the Series E Preferred of the full amounts to which
they shall be entitled as aforesaid, the holders of the Common Stock shall be
entitled to receive ratably on a per-share basis all the remaining assets.
(d) For purposes of this Section 5.2, a merger or
consolidation of the Corporation with or into any other corporation or
corporations, or the merger of any other corporation or corporations into the
Corporation, in which the shareholders of the Corporation receive distributions
in cash or securities of another corporation or corporations as a result of
such consolidation or merger, or a sale of all or substantially all of the
assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation unless the Corporation's stockholders immediately
prior to such an event hold, immediately after such event, at least 50% of the
general voting power of the surviving or acquiring entity by virtue of their
ownership of the Corporation's equity securities.
5.3 VOTING RIGHTS. Except as otherwise required by law or by
Section 5.6, the holder of each share of Common Stock issued and outstanding
shall have the votes set forth in Section 4.3.3, and the holder of each share
of Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shall be entitled to the number of votes equal to the number of votes
entitled to be cast by the number of shares of Common Stock into which such
share of Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred could be converted at the record date for determination of the
shareholders entitled to vote on such matters, such votes to be counted
together with all other shares of the Corporation having general voting power
and not separately as a class. Fractional votes by the holders of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
not, however, be permitted and any fractional voting right shall (after
aggregating all shares into which shares of Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred held by each holder could
be converted) be rounded to the nearest whole number. Except as otherwise
required by law, in which case the holder of each share of Series E Preferred
shall be entitled to one (1) vote, the holders of Series E Preferred shall not
be entitled to vote. Where the Series E Preferred is entitled to voting rights
by law, all shares of Series E Preferred shall vote and be counted together
with the Series A Preferred, the Series B Preferred, the Series C Preferred and
Series D Preferred and not separately as a voting group, except as otherwise
required by law. Holders of Common Stock and Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
be entitled to notice of any shareholders' meeting in accordance with the
Bylaws of the Corporation.
5.4 CONVERSION. The holders of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share (including immediately prior to
any liquidation, dissolution or winding up of the Corporation as set forth in
Section 5.2 above) at the office of the Corporation or any transfer agent for
each of the Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred or Series E Preferred (whichever is appropriate), into such number
of fully paid and nonassessable shares of Series A Common
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Stock, or if, pursuant to Section 4.3.6, the Articles of Incorporation as
amended from time to time do not, at the time of conversion, provide for Series
A Common Stock, into shares of Common Stock, or if applicable pursuant to
Section 5.4(i), into shares of Series E Common Stock, (such Series A Common
Stock, Series E Common Stock or Common Stock, as the case may be, the
"Conversion Stock"), as is determined by dividing $8.99, in the case of the
Series E Preferred, $7.53, in the case of the Series D Preferred, $1.9634, in
the case of the Series C Preferred, $0.67, in the case of the Series B
Preferred, and $0.0729, in the case of the Series A Preferred, by the
Conversion Price (determined as hereinafter provided) for such series in effect
at the time of the conversion (the "Conversion Rate"). The price at which
shares of Conversion Stock shall be deliverable upon conversion (the
"Conversion Price") shall initially be $8.99, in the case of the Series E
Preferred, $7.53, in the case of the Series D Preferred, $1.9634, in the case
of the Series C Preferred, $0.67, in the case of the Series B Preferred, and
$0.0729, in the case of the Series A Preferred. Such initial Conversion Price
shall be subject to adjustment as hereinafter provided. Notwithstanding
anything in this Section 5.4(a) to the contrary, in the event of a Public
Offering (as defined in Section 5.4(b)), the holders of the Series A Preferred
(including for this purpose any shares of Conversion Stock issued upon
conversion of the Series A Preferred prior to a Public Offering) will have the
non-transferable right to convert one (1) such share, unless otherwise provided
in Section 4.3.7, into one (1) share of Series D Common Stock with the rights
provided in Section 4.3.7.
(b) AUTOMATIC CONVERSION. Each share of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred shall automatically be converted into shares of the
appropriate Conversion Stock at the then effective Conversion Price upon the
earlier to occur of: (x) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Corporation to the public at a price of at least $13.554 per
share (as adjusted to reflect subsequent stock dividends, stock splits and
recapitalizations) with aggregate proceeds of not less than $20,000,000 (prior
to deduction of underwriter commissions and offering expenses) (a "Public
Offering"); or (y) the affirmative vote or written consent of the holders of
not less than Sixty-Six and Two/Thirds Percent (66-2/3%) of the then
outstanding shares of Series D Preferred.
(c) MECHANICS OF CONVERSION. No fractional shares of
Conversion Stock shall be issued upon conversion of Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall
be entitled to convert the same into full shares of Conversion Stock and to
receive certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred (whichever is appropriate),
and shall give written notice to the Corporation at such office that such
holder elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to Section 5.4(b), the outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred shall be converted automatically without any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the
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Corporation or its transfer agent, and provided further, that the Corporation
shall not be obligated to issue certificates evidencing the shares of
Conversion Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as
practicable after delivery of such certificate, or such agreement of
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred, a certificate or
certificates for the number of shares of Conversion Stock to which such holder
shall be entitled as aforesaid and a check payable to the holder in the amount
of any cash amounts payable as the result of a conversion into fractional
shares of Conversion Stock. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred to be converted, or in the case of automatic
conversion under Section 5.4(b), on the date of closing of the Public Offering,
and the person or persons entitled to receive the shares of Conversion Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Conversion Stock on such date.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTIVE ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this
Section 5.4(d), the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options
or warrants to subscribe for, purchase or otherwise acquire either Common Stock
or Convertible Securities.
(2) "ORIGINAL ISSUE DATE" shall mean the
date on which the first share of Series E Preferred was first issued.
(3) "CONVERTIBLE SECURITIES" shall mean
any evidence of indebtedness, shares of capital stock (other than the Common
Stock) or other securities convertible into or exchangeable for Common Stock.
(4) "ADDITIONAL SHARES OF COMMON STOCK"
shall mean all shares of Common Stock issued (or, pursuant to Section
5.4(d)(ii), deemed to be issued) by the Corporation after the Original Issue
Date, other than:
(A) shares of Common Stock issued
or issuable at any time upon conversion of the shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred authorized herein;
(B) shares of Common Stock issued
or issuable at any time to officers, directors, and employees of, and
consultants to, the Corporation pursuant to the Corporation's 1995 Stock Option
Plan, 1996 Stock Option Plan or any other stock option, restricted stock plan
or employee stock bonus program or grant designated and approved by the
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Board of Directors by unanimous vote if there are three or fewer directors then
serving or, if there are greater than three directors then serving, by a
two-thirds majority vote thereof (provided that any shares repurchased by the
Corporation from employees, officers, directors and consultants pursuant to the
terms of stock repurchase agreements approved by the Board of Directors shall
not, unless reissued, be counted as issued for purposes of this calculation)
other than shares issued to Rob Glaser, the Corporation's Founder, without the
written consent of the holders of a majority of the Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred (provided, for purposes
of calculating the majority for purposes of this clause (B), the shares of
Series E Preferred to be issued upon exercise, if ever, of the Series E
Preferred Stock Purchase Warrant issued pursuant to the Series E Preferred
Stock Purchase Agreement dated July 21, 1997, shall not be deemed to be
outstanding, regardless of whether such Series E Preferred Stock Purchase
Warrant has been exercised);
(C) shares of Common Stock issued
or issuable at any time as a dividend or distribution on Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred or any other event for which adjustment is made pursuant to Section
5.4(e)(i) hereof;
(D) shares of Common Stock issued
upon conversion of Series B Common Stock to Series C Common Stock pursuant to
Section 4.3.5 of these Articles;
(E) shares of Common Stock issued
upon exercise of the Series B Common Stock Warrants which were issued pursuant
to the Series C Preferred Stock Purchase Agreement by and among the Corporation
and certain purchasers dated October 26, 1995; and
(F) shares of Common Stock issued
or issuable at any time by way of dividend or other distribution on shares of
Common Stock (x) excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (A), (B), (C), (D), (E), or this clause (F) or
(y) on shares of Common Stock so excluded under Subsection (x).
(ii) DEEMED ISSUANCE OF ADDITIONAL SHARES OF
COMMON STOCK.
(1) OPTIONS AND CONVERTIBLE SECURITIES.
In the event the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall, except as otherwise provided in
Section 5.4(d)(i)(4), be deemed to be Additional Shares of Common Stock issued
as of the time of such issuance, provided that, with respect to a particular
series of Preferred Stock, Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 5.4(d)(iv) hereof) of such Additional Shares of Common
Stock would be less than the Conversion Price in effect for such series on the
date of and immediately prior to such issuance, and, provided further that in
any such case in which Additional Shares of Common Stock are deemed to be
issued (notwithstanding the foregoing):
(A) no further adjustment in the
Conversion Price for such series shall be made upon the subsequent issuance of
Convertible Securities or shares of Common
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Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise,
except as provided in this Section 5.4(d), for any increase or decrease in the
consideration payable to the Corporation, or in the number of shares of Common
Stock issuable, upon the exercise, conversion or exchange thereof (a "Change
Event"), the Conversion Price for any series of Preferred Stock recomputed upon
the original issuance thereof, and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, again be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities; provided, however, that anything to the contrary notwithstanding,
if the Change Event is triggered or caused by a Dilutive Issue (as defined in
Section 5.4(d)(iii)), this Section 5.4(d)(ii)(B) shall be inapplicable and no
adjustment shall be made to any Conversion Price as a result of the Change
Event;
(C) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion Price computed
upon the original issuance thereof, and any subsequent adjustments based
thereon, shall, upon such expiration, be recomputed as if,
(I) in the case of
Convertible Securities or Options for Common Stock, only the shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities were issued at the time of
the issuance of such Convertible Securities or Options and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options or Convertible Securities, whether or not
exercised, converted, or exchanged, plus the consideration actually received by
the Corporation upon such exercise, conversion or exchange, and
(II) in the case of
Options for Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options, and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to
clause (B) or (C) above shall have the effect of increasing the Conversion
Price to an amount which exceeds the lower of (i) the Conversion Price on the
original adjustment date, or (ii) the Conversion Price that would have resulted
from any other issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date; and
(E) in the case of any options
which expire by their terms not more than 90 days after the date of issuance
thereof, no adjustment of the Conversion Price shall be made until all such
Options have either expired or been exercised.
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In the event that a record date is established for the purpose of
determining the holders of the Corporation's securities who shall be entitled
to receive Options or Convertible Securities as a dividend or a distribution,
the Options or Convertible Securities to be so distributed or issued shall, for
purposes of this Section 5.4(d), be deemed to have been issued as of such
record date (provided that the Conversion Price so computed shall be recomputed
if such Options or Convertible Securities are not so distributed or issued).
(2) STOCK DIVIDENDS. In the event the
Corporation at any time or from time to time after the Original Issue Date
shall declare or pay any dividend on the Common Stock payable in Common Stock,
then and in any such event, Additional Shares of Common Stock shall be deemed
to have been issued immediately after the close of business on the record date
for the determination of holders of any class of securities entitled to receive
such dividend; provided, however, that if such record date is fixed and such
dividend is not fully paid, the only Additional Shares of Common Stock deemed
to have been issued will be the number of shares of Common Stock actually
issued in such dividend, and such shares will be deemed to have been issued as
of the close of business on such record date, and the Conversion Price shall be
recomputed accordingly.
(iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK.
(1) If at any time or from time to time
after the Original Issue Date this Corporation shall issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 5.4(d)(ii)) without consideration or for a consideration
(as determined in Section 5.4(d)(iv)) per share issued or deemed to have been
issued under Section 5.4(d)(ii), less than: (I) in the case of the Series A
Preferred, the Conversion Price for the Series A Preferred in effect on the
date of and immediately prior to such issuance, (II) in the case of the Series
B Preferred, the Conversion Price for the Series B Preferred in effect on the
date of and immediately prior to such issuance, (III) in the case of the Series
C Preferred, the Conversion Price for the Series C Preferred in effect on the
date of and immediately prior to such issuance, (IV) in the case of the Series
D Preferred, the Conversion Price for the Series D Preferred in effect on the
date of and immediately prior to such issuance, or (V) in the case of the
Series E Preferred, the Conversion Price for the Series E Preferred in effect
on the date of and immediately prior to such issuance, then and in such event
(a "Dilutive Issue"), any one or all of such Conversion Prices shall be
reduced, concurrently with such issuance, to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issuance on a
fully diluted basis (including for such purpose Convertible Securities the
conversion rights of which, are then exercisable but excluding all Options)
plus the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Shares of Common
Stock so issued would purchase at such Conversion Price; and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance on a fully-diluted basis (including for such purpose
Convertible Securities the conversion rights of which, are then exercisable but
excluding all Options) plus the number of such Additional Shares of Common
Stock so issued.
(2) In addition to any adjustments to
the Conversion Price for the Series E Preferred made pursuant to Section
5.4(d)(iii)(1), if this Corporation sells shares of
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Common Stock to the public in a public offering pursuant to Section 5.4(b)(y)
at a price per share less than $8.99, (as adjusted to reflect subsequent stock
dividends, stock splits and recapitalizations), the Conversion Price for the
Series E Preferred in effect on the date of and immediately prior to such
public offering, shall be reduced, immediately prior to but contingent upon the
effectiveness of the public offering, to $7.53 (as adjusted to reflect
subsequent stock dividends, stock splits and recapitalizations).
(iv) DETERMINATION OF CONSIDERATION. For purposes
of this Section 5.4(d), the consideration received by the Corporation for the
issuance of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY: Such
consideration shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issuance, as determined in good faith by the Corporation's Board of
Directors; and
(C) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Corporation's Board of
Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES.
The consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to Section 5.4(d)(ii)(1),
relating to Options and Convertible Securities, shall be determined by
dividing: (x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities; by (y) the maximum
number of shares of Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(3) STOCK DIVIDENDS. Any Additional
Shares of Common Stock relating to stock dividends shall be deemed to have been
issued for no consideration.
(e) ADDITIONAL ADJUSTMENTS TO CONVERSION PRICE.
(i) ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR
CONSOLIDATION OF COMMON STOCK. In the event the outstanding shares of Common
Stock (whether Series A Common Stock, Series E Common Stock or Common Stock)
shall be subdivided, by stock split,
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<PAGE> 17
or otherwise (but other than by stock dividend, which is addressed in Section
5.4(d)(ii)(2) of these Articles of Incorporation), into a greater number of
shares of Common Stock, the Conversion Price for each series of Preferred Stock
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, the Conversion Price for each series
of Preferred Stock then in effect shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(ii) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the
event the Corporation at any time or from time to time makes, or fixes a record
date for the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 5.4, then and
in each such event provision shall be made so that the holders of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred shall receive upon conversion thereof, in addition to the
number of shares of Common Stock (whether Series A Common Stock, Series E
Common Stock or Common Stock) receivable thereupon, the amount of securities of
the Corporation which they would have received had their Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred been converted into Common Stock on the date of such event and had
then thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for
during such period under this Section 5.4 with respect to the rights of the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred.
(iii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE
AND SUBSTITUTION. If the Common Stock (whether Series A Common Stock, Series E
Common Stock or Common Stock) issuable upon conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the terms of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall, concurrently with the effectiveness of such reorganization or
reclassification, be modified such that the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred, as
the case may be, shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred immediately before that
change.
(f) NO IMPAIRMENT. Except as provided in Section 5.6,
the Corporation will not, by amendment of its Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issuance or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in
good faith assist in the carrying
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<PAGE> 18
out of all the provisions of this Section 5.4 and in the taking of all such
actions as may be necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred against impairment.
(g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence
of each adjustment or readjustment of the Conversion Price for the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred pursuant to this Section 5.4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred, furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Conversion Price
in effect at the time for such series, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such series of Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event that this
Corporation shall propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription, pro rata to the
holders of any class or series of its stock, any additional shares of stock of
any class or series or any other similar rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding which results in a change in
the Common Stock; or
(iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all its
property or business, or to liquidate, dissolve or wind up; then, in connection
with each such event;
this Corporation shall send to the holders of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred:
(1) at least twenty (20) days prior
written notice of (x) the record date for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or (y) the record date at which the rights to
vote on the matters referred to in (iii) and (iv) above will be determined; and
(2) in the case of the matters referred
to in (iii) and (iv) above, at least twenty (20) days prior written notice of
the date when the same shall take place and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event or
the record date for the determination of such holders if such record date is
earlier.
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<PAGE> 19
Each such written notice shall (x) be delivered personally; (y) given
by certified or registered mail, postage prepaid; or (z) to the extent receipt
is confirmed, by telecopy, telefax or other electronic transmission service;
addressed to the holders of the Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred at the address for each
such holder as shown on the books of this Corporation.
(i) ELECTION UPON CONVERSION OF SERIES E PREFERRED STOCK.
In the event that a holder of Series E Preferred elects to convert its shares
of Series E Preferred pursuant to Section 5.4(a) or there occurs an event
requiring automatic conversion of the Series E Preferred pursuant to Section
5.4(b), such holder may elect to convert all of such shares into Series E
Common Stock with the rights provided in these Articles of Incorporation.
5.5 REDEMPTION.
(a) NO CALL. The Corporation shall not have the right to
call for redemption all or any part of the Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred.
(b) OPTION TO REQUIRE REDEMPTION. On or at any time
after December 31, 2002, within sixty (60) days after the receipt by the
Corporation of the written request (a "Redemption Notice") by one or more
holders of shares of Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred (the "Requesting Holders"), together with the written
approval of the holders of not less than two-thirds of the Series B Preferred
then outstanding if any shares of Series B Preferred are to be redeemed, and
with the written approval of not less than two-thirds of the Series C Preferred
then outstanding if any shares of Series C Preferred are to be redeemed, and
with the written approval of not less than two-thirds of the Series D Preferred
then outstanding if any shares of Series D Preferred are to be redeemed, and
with the written approval of not less than two-thirds of the Series E Preferred
then outstanding if any shares of Series E Preferred are to be redeemed (each
series for which such approval is granted being hereinafter referred to as an
"Approved Series"), the Corporation shall, to the extent it may lawfully do so,
redeem the number of whole shares of each Approved Series most nearly equal to
one-third of the shares specified in the Redemption Notice by paying therefor
in cash the Series B Redemption Price, Series C Redemption Price, Series D
Redemption Price, or Series E Redemption Price (each as defined below), as
appropriate. The date of this payment shall be referred to as an "Initial
Redemption Date." The remaining shares of each Approved Series specified in
the Redemption Notice shall be redeemed in two (2) additional equal
installments (or, if such number of shares is not evenly divisible by two, then
the first such installment shall be rounded to the nearest whole number of
shares) on an annual basis in a similar manner, beginning one (1) year from the
Initial Redemption Date, with all remaining shares of each Approved Series
specified in the Redemption Notice being purchased on the second anniversary of
the Initial Redemption Date (the "Initial Redemption Date" and each of the two
following redemption dates shall be referred to as a "Redemption Date"). The
Corporation shall effect any redemption pursuant to this Section 5.5 on a pro
rata basis according to the aggregate amounts which would be received upon
redemption by each Requesting Holder.
(c) REDEMPTION PRICE. The redemption price to be paid by
the Corporation shall be $0.67 per share, in the case of the Series B Preferred
(as adjusted to reflect subsequent stock
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<PAGE> 20
dividends, stock splits or recapitalizations), $1.9634, in the case of the
Series C Preferred (as adjusted to reflect subsequent stock dividends, stock
splits or recapitalizations), $7.53 in the case of the Series D Preferred (as
adjusted to reflect subsequent stock dividends, stock splits or
recapitalizations) and $8.99, in the case of the Series E Preferred (as
adjusted to reflect subsequent stock dividends, stock splits or
recapitalizations) (in each case, the "Issue Price"), in each case plus: (i)
all declared but unpaid dividends thereon as of the Initial Redemption Date,
and (ii) an amount per share equal to the percentage increase (if any) in the
Implicit Price Deflator for Gross Domestic Product, as published by the United
States Department of Commerce, Economics and Statistics Administration, Bureau
of Economic Analysis, or any successor thereto (1987 = 100), from the date of
the original issuance of the share to the date of the Corporation's receipt of
the Redemption Notice multiplied by the applicable Issue Price (such totals are
referred to as the "Series B Redemption Price," the "Series C Redemption
Price," the "Series D Redemption Price," and the "Series E Redemption Price,"
respectively).
(d) NOTICE OF REDEMPTION. Within ten (10) days of the
Corporation's receipt of a Redemption Notice and the related written approval
of the holders of two-thirds of the then outstanding shares of each Approved
Series, the Corporation shall deliver (by (i) personal delivery; (ii) certified
or registered mail, postage prepaid; or (iii) to the extent receipt is
confirmed, by telecopy, telefax or other electronic transmission service)
written notice to each holder of Series B Preferred, Series C Preferred, Series
D Preferred or Series E Preferred who did not approve the Redemption Notice, at
the address of such holder last shown on the records of the Corporation for the
purpose of notice or, if no such address appears or is given, at the place
where the principal executive office of the Corporation is located, identifying
each Requesting Holder and specifying the number of shares to be redeemed by
such holder. If, within ten (10) days of receiving such notice, the holders of
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred who did not approve the Redemption Notice give written notice to the
Corporation of their wish to have any of their shares of Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred redeemed
simultaneously with the redemption of the Requesting Holders, such holders
shall become Requesting Holders for purposes of such redemption.
(e) SURRENDER OF CERTIFICATES. On the Initial Redemption
Date, each Requesting Holder shall surrender to the Corporation the certificate
or certificates representing the number of shares of Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred specified in the
Redemption Notice or pursuant to Section 5.5(d). Simultaneously, the
Corporation shall pay one-third of the Series B Redemption Price, the Series C
Redemption Price, the Series D Redemption Price or the Series E Redemption
Price (as applicable) of such shares to be redeemed on that date to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. In the event
that less than all the shares represented by any such certificate are to be
redeemed pursuant to the Redemption Notice, a new certificate shall be issued
representing the shares not subject to redemption and delivered to the
Requesting Holder. In the event that less than all the shares represented by
any such certificate have been redeemed on a Redemption Date, a new certificate
shall be issued representing the shares not redeemed and such certificate shall
be retained by the Corporation for cancellation on the next Redemption Date(s).
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<PAGE> 21
(f) STATUS OF SHARES SPECIFIED IN THE REDEMPTION NOTICE.
From and after the Initial Redemption Date, unless there has been a default in
payment of the Series B Redemption Price, the Series C Redemption Price, the
Series D Redemption Price or the Series E Redemption Price, all rights of the
Requesting Holders with respect to the shares of Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred specified in the Redemption
Notice (except the right to receive the Series B Redemption Price, the Series C
Redemption Price, the Series D Redemption Price or the Series E Redemption
Price) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation
legally available for redemption of such shares on any Redemption Date are
insufficient to redeem the total number of shares of Series B Preferred, Series
C Preferred, Series D Preferred or Series E Preferred to be redeemed on such
date, those funds which are legally available shall be used to redeem the
maximum possible number of such shares, and the shares of Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred not redeemed
shall be deemed to be outstanding and shall be entitled to all the rights and
preferences provided herein. At any time thereafter when additional funds of
the Corporation are legally available for the redemption of such shares, such
funds will immediately be used to redeem the balance of the shares that the
Corporation has become obligated to redeem on any Redemption Date but that it
has not redeemed.
(g) PARTIAL REVOCATION OF REDEMPTION NOTICE.
Notwithstanding any provision in this Section 5.5 to the contrary, if, after
the Initial Redemption Date, while a Requesting Holder has not yet received in
full the Series B Redemption Price, the Series C Redemption Price, the Series D
Redemption Price or the Series E Redemption Price, as applicable, for all
shares specified in his/her/its Redemption Notice (the shares for which the
applicable redemption price has not been received shall be referred to as the
"Shares Being Redeemed"), the Corporation enters into any transaction described
in Section 5.2(d) in which the Requesting Holder would have received an amount
per share, in cash or securities of another corporation or corporations,
greater than the Series B Redemption Price, the Series C Redemption Price, the
Series D Redemption Price or the Series E Redemption Price, as applicable, for
the Shares Being Redeemed had the shares not been the subject of the Redemption
Notice, the Corporation shall notify the Requesting Holder in writing of such
transaction, in accordance with Section 5.4(h), as if his/her/its rights with
respect to the Shares Being Redeemed had not terminated in accordance with
Section 5.5, and if, within seven (7) days of receipt of such notice, the
Requesting Holder delivers written notice to the Corporation of his/her/its
election to convert the Shares Being Redeemed into Common Stock, such shares
shall be converted to Common Stock in accordance with Section 5.4 and
simultaneously the Requesting Holder's right to receive the applicable
redemption price for the Shares Being Redeemed shall terminate.
5.6 COVENANTS.
(a) SERIES A PREFERRED, SERIES B PREFERRED, SERIES C
PREFERRED AND SERIES D PREFERRED. In addition to any other rights provided by
law, this Corporation shall not, without first obtaining the affirmative vote
or written consent of the holders of not less than a majority of the
outstanding shares of Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred, voting as a single voting group:
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<PAGE> 22
(i) amend or repeal any provision of, or add any
provision to, the Corporation's Articles of Incorporation if such action would
alter or change the preferences, rights, or privileges of the Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred;
(ii) increase or decrease the authorized number of
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Common Stock;
(iii) authorize, create or issue any shares of (A)
Preferred Stock or securities convertible into Common Stock equal or senior to
the Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred as to dividends, conversion rights, redemption rights or liquidation
preference or (B) Common Stock equal or senior to the Series D Preferred as to
redemption rights or liquidation preference or senior to the Series D Preferred
as to dividends or voting rights (other than shares issuable upon exercise of
the Series C Preferred Stock Warrants issued pursuant to the Series C Preferred
Stock Purchase Agreement dated October 25, 1995 or the Series D Preferred Stock
Purchase Warrants issued pursuant to the Series D Preferred Stock Purchase
Agreement dated November 19, 1996);
(iv) merge or consolidate with one or more other
corporations if, after such merger or consolidation, the stockholders of the
Corporation would hold stock representing less than a majority of the voting
power of the outstanding stock of the surviving corporation; or
(v) declare or pay any dividend on the Common
Stock.
(b) SERIES D PREFERRED. In addition to any other rights
provided by law, this Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than Sixty-Six
and Two/Thirds Percent (66-2/3%) of the outstanding shares of Series D
Preferred:
(i) amend or repeal any provision of, or add any
provision to, the Corporation's Articles of Incorporation if such action would
adversely alter or change the preferences, rights, or privileges of the Series
D Preferred;
(ii) increase the authorized number of shares of
Series D Preferred;
(iii) authorize, create or issue any shares of (A)
Preferred Stock or securities convertible into Common Stock equal or senior to
the Series D Preferred as to dividends, conversion rights, redemption rights or
liquidation preference or (B) Common Stock equal or senior to the Series D
Preferred as to redemption rights or liquidation preference or senior to the
Series D Preferred as to dividends or voting rights (other than shares issuable
upon exercise of the Series C Preferred Stock Warrants issued pursuant to the
Series C Preferred Stock Purchase Agreement dated October 25, 1995 or the
Series D Preferred Stock Purchase Warrants issued pursuant to the Series D
Preferred Stock Purchase Agreement dated November 19, 1996); or
(iv) declare or pay any dividend.
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ARTICLE VI
DIRECTORS
6.1 NUMBER OF DIRECTORS. The number of directors of the
Corporation shall be fixed as provided in the Bylaws and may be changed from
time to time by amending the Bylaws.
6.2 AUTHORITY OF BOARD OF DIRECTORS TO AMEND BYLAWS. Subject to
the limitation(s) of RCW 23B.10.210, and subject to the power of the
shareholders of the Corporation to change or repeal the Bylaws, the Board of
Directors is expressly authorized to make, amend, or repeal the Bylaws of the
Corporation unless the shareholders in amending or repealing a particular bylaw
provide expressly that the Board of Directors may not amend or repeal that
bylaw.
6.3 CONTRACTS WITH INTERESTED DIRECTORS. Subject to the
limitations set forth in RCW 23B.08.700 through 23B.08.730:
6.3.1 The Corporation may enter into contracts and
otherwise transact business as vendor, purchaser, lender, borrower, or
otherwise with its directors and with corporations, associations, firms, and
entities in which they are or may be or become interested as directors,
officers, shareholders, members, or otherwise.
6.3.2 Any such contract or transaction shall not be
affected or invalidated or give rise to liability by reason of the director's
having an interest in the contract or transaction.
6.4 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
6.4.1 The capitalized terms in this Section 6.4 shall have
the meanings set forth in RCW 23B.08.500.
6.4.2 The Corporation shall indemnify and hold harmless
each individual who is or was serving as a Director or officer of the
Corporation or who, while serving as a Director or officer of the Corporation,
is or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against any and all Liability incurred with respect to any
Proceeding to which the individual is or is threatened to be made a Party
because of such service, and shall make advances of reasonable Expenses with
respect to such Proceeding, to the fullest extent permitted by law, without
regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided that
no such indemnity shall indemnify any Director or officer from or on account of
(1) acts or omissions of the Director or officer finally adjudged to be
intentional misconduct or a knowing violation of law; (2) conduct of the
Director or officer finally adjudged to be in violation of RCW 23B.08.310; or
(3) any transaction with respect to which it was finally adjudged that such
Director or officer personally received a benefit in money, property, or
services to which the Director or officer was not legally entitled.
6.4.3 The Corporation may purchase and maintain insurance
on behalf of an individual who is or was a Director, officer, employee, or
agent of the Corporation or, who, while a Director, officer, employee, or agent
of the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other
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<PAGE> 24
enterprise against Liability asserted against or incurred by the individual in
that capacity or arising from the individual's status as a Director, officer,
employee, or agent, whether or not the Corporation would have power to
indemnify the individual against such Liability under RCW 23B.08.510 or
23B.08.520.
6.4.4 If, after the effective date of this Section 6.4, the
Act is amended to authorize further indemnification of Directors or officers,
then Directors and officers of the Corporation shall be indemnified to the
fullest extent permitted by the Act as so amended.
6.4.5 To the extent permitted by law, the rights to
indemnification and advance of reasonable Expenses conferred in this Section
6.4 shall not be exclusive of any other right which any individual may have or
hereafter acquire under any statute, provision of the Bylaws, agreement, vote
of shareholders or disinterested Directors, or otherwise. The right to
indemnification conferred in this Section 6.4 shall be a contract right upon
which each Director or officer shall be presumed to have relied in determining
to serve or to continue to serve as such. Any amendment to or repeal of this
Section 6.4 shall not adversely affect any right or protection of a Director or
officer of the Corporation for or with respect to any acts or omissions of such
Director or officer occurring prior to such amendment or repeal.
6.4.6 If any provision of this Section 6.4 or any
application thereof shall be invalid, unenforceable, or contrary to applicable
law, the remainder of this Section 6.4, and the application of such provisions
to individuals or circumstances other than those as to which it is held
invalid, unenforceable, or contrary to applicable law, shall not be affected
thereby.
6.5 LIMITATION OF DIRECTORS' LIABILITY. To the fullest extent
permitted by the Act, as it exists on the date hereof or may hereafter be
amended, a director of this Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director.
Any amendment to or repeal of this Section 6.5 shall not adversely affect a
director of this Corporation with respect to any conduct of such director
occurring prior to such amendment or repeal.
ARTICLE VII
OTHER MATTERS
7.1 DELEGATION OF DUTIES OF DIRECTORS. The power and authority of
the Board of Directors of the Corporation to adopt or change the editorial
policies of the Corporation shall vest solely in the Policy Director, when such
director is elected to and serving on the Board of Directors of the
Corporation.
7.2 AMENDMENTS TO ARTICLES OF INCORPORATION. Except as otherwise
provided in these Articles of Incorporation, as amended from time to time, the
Corporation reserves the right to amend, alter, change, or repeal any
provisions contained in these Articles of Incorporation in any manner now or
hereafter prescribed or permitted by statute. All rights of shareholders of
the Corporation are subject to this reservation. A shareholder of the
Corporation does not have a vested property right resulting from any provision
of these Articles of Incorporation.
7.3 CORRECTION OF CLERICAL ERRORS. The Corporation shall have
authority to correct clerical errors in any documents filed with the Secretary
of State of Washington, including these
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Articles of Incorporation or any amendments hereto, without the necessity of
special shareholder approval of such corrections.
Executed this 19th day of September, 1997.
------ ---------
/s/ Bruce Jacobsen
-----------------------------
Its: Bruce Jacobsen, President
--------------------------
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<PAGE> 1
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
PROGRESSIVE NETWORKS, INC.
Pursuant to RCW 23B.10.060 of the Washington Business Corporation Act,
the undersigned corporation hereby submits the following amendment to the
corporation's Amended and Restated Articles of Incorporation.
1. The name of the corporation is Progressive Networks, Inc.
2. The text of the amendment to Article I as adopted is as follows:
The name of this corporation is RealNetworks, Inc.
3. The date of adoption of such amendment was September 24, 1997.
4. The amendment was adopted by the Board of Directors without
shareholder action pursuant to the provisions of RCW 23B.10.020, and shareholder
action was not required.
5. These Articles of Amendment will be effective upon filing with
the Secretary of State of the State of Washington.
DATED: September 26, 1997.
PROGRESSIVE NETWORKS, INC.
By /s/ Bruce Jacobsen
---------------------------------
Bruce Jacobsen, President
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
REALNETWORKS, INC.
RealNetworks, Inc., a Washington corporation, by its Chief Executive
Officer, hereby submits the following Amended and Restated Articles of
Incorporation of said Corporation pursuant to the provisions of RCW 23B.10.070,
and resolutions duly adopted by the Board of Directors on September 24, 1997.
These Amended and Restated Articles of Incorporation were duly approved by the
shareholders in accordance with the provisions of RCW 23B.10.030 and RCW
23B.10.040, and supersede the original Articles of Incorporation and all
amendments and prior restatements thereto as of the date of their adoption.
ARTICLE I
NAME
The name of this Corporation is RealNetworks, Inc.
ARTICLE II
DURATION
This Corporation is organized under the Washington Business Corporation
Act (the "Act") and shall have perpetual existence.
ARTICLE III
PURPOSE AND POWERS
The purpose and powers of this Corporation are as follows: (a) to engage
in any lawful business; (b) to engage in any and all activities that, in the
judgment of the Board of Directors, may at any time be incidental or conducive
to the attainment of the foregoing purpose; and (c) to exercise any and all
powers that a corporation formed under the Act, or any amendment thereto or
substitute therefor, is entitled at the time to exercise.
ARTICLE IV
CAPITAL STOCK
4.1 AUTHORIZED CAPITAL. The aggregate number of shares of capital stock
which this Corporation shall be authorized to issue shall be Three Hundred Sixty
Million (360,000,000), divided into two classes as follows: Three Hundred
Million (300,000,000) shares of common stock, $.001 par value per share (the
"Common Stock"), and Sixty Million (60,000,000) shares of preferred stock, $.001
par value per share (the "Preferred Stock").
<PAGE> 2
4.2 ISSUANCE OF COMMON STOCK IN SERIES.
4.2.1 AUTHORITY VESTED IN BOARD OF DIRECTORS. The Common Stock may
be divided into and issued in series from time to time. Authority is vested in
the Board of Directors, subject to the limitations and procedures prescribed by
law, to divide any part or all of such Common Stock into any number of series,
to fix and determine the relative rights and preferences of the shares of any
series to be established, and to amend the rights and preferences of the shares
of any series that has been established but is wholly unissued.
4.2.2 AMENDMENT TO SERIES DECREASING SHARES. Within any limits
stated in these Articles of Incorporation or in the resolution of the Board of
Directors establishing a series, the Board of Directors, after the issuance of
shares of a series, may amend the resolution establishing the series to decrease
(but not below the number of shares of such series then outstanding) the number
of shares of that series, and the number of shares constituting the decrease
shall thereafter constitute authorized but undesignated shares.
4.2.3 AUTHORITY LIMITED TO UNISSUED SHARES. The authority herein
granted to the Board of Directors to determine the relative rights and
preferences of the Common Stock shall be limited to unissued shares, and no
power shall exist to alter or change the rights and preferences of any shares
that have been issued.
4.3 DESIGNATION OF SERIES A COMMON STOCK, SERIES B COMMON STOCK, SERIES
C COMMON STOCK, SERIES D COMMON STOCK AND SERIES E COMMON STOCK.
The following series of Common Stock are hereby designated, and each
such series shall have the following rights, preferences and limitations:
4.3.1 DESIGNATION. Two Hundred Seven Million Forty-Seven Thousand
Six Hundred Seventy-Nine (207,047,679) shares of Common Stock shall be
designated and known as "Series A Common Stock"; Thirty Million (30,000,000)
shares of Common Stock shall be designated and known as "Series B Common Stock";
Thirty Million (30,000,000) shares of Common Stock shall be designated and known
as "Series C Common Stock"; one (1) share shall be designated and known as
"Series D Common Stock" and Seven Million Forty-Seven Thousand Six Hundred
Seventy-Nine (7,047,679) shares of Common Stock shall be designated and known as
"Series E Common Stock." Except as otherwise provided in these Articles of
Incorporation, all shares of Series A Common Stock, Series B Common Stock,
Series C Common Stock, Series D Common Stock and Series E Common Stock shall be
identical and shall entitle the holders thereof to the same rights and
privileges. The designations of the Series A Common Stock, Series B Common
Stock, Series C Common Stock, Series D Common Stock and Series E Common Stock in
this Article are expressly subject to the provisions of Section 4.3.6, Section
4.3.7, Section 4.3.8 and 4.3.9.
4.3.2 ISSUANCE. Shares of Series A Common Stock, Series B Common
Stock, Series C Common Stock, Series D Common Stock and Series E Common Stock
may be issued, upon authorization by the Board of Directors, to such persons and
entities, and for such consideration permitted by the Act, as the Board of
Directors shall determine; provided, that shares of Series B Common Stock shall
be issued only to persons or entities who, at the time of issuance, are either
(a) employees of the Corporation, or (b) directors, or affiliates of directors,
of the Corporation. For purposes of this section, an "affiliate" shall be a
person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled
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by, or is under common control with, a director; and provided further, that
shares of Series D Common Stock shall be issued only in compliance with Section
4.3.7.
4.3.3 VOTING RIGHTS. Except as otherwise required by law and except
as otherwise provided in these Articles of Incorporation, on all matters
submitted to the Corporation's shareholders, each share of Series A Common Stock
shall entitle the holder to fifteen (15) votes, each share of Series B Common
Stock shall entitle the holder to fifteen (15) votes, each share of Series D
Common Stock shall entitle the holder to fifteen (15) votes, each share of
Series C Common Stock shall entitle the holder to one (1) vote, and each share
of Series E Common Stock shall not be entitled to vote, except as required by
law, in which case it shall entitle the holder to one (1) vote. Except with
regard to those matters required by law to be voted on by one or more voting
groups and except as otherwise provided in these Articles of Incorporation, all
shares of Series A Common Stock, Series B Common Stock, Series C Common Stock
and Series D Common Stock shall vote and be counted together and not separately
as a voting group upon all matters submitted to a vote of shareholders. Where
the Series E Common Stock is entitled to voting rights by law, all shares of
Series E Common Stock shall vote and be counted together with the Series A
Common Stock, the Series B Common Stock, the Series C Common Stock and the
Series D Common Stock and not separately as a voting group, except as required
by law.
4.3.4 DIVIDENDS.
(a) IN CASH OR SECURITIES. Subject to any preferential rights
granted for any series of Common Stock or Preferred Stock, the holders of Series
A Common Stock, the holders of Series B Common Stock, the holders of Series C
Common Stock, the holders of the Series D Common Stock and the holders of Series
E Common Stock shall be entitled to receive dividends equally, share for share,
if, when and as declared by the Board of Directors out of funds of this
Corporation legally available for that purpose; provided, that if such dividends
are declared, they will be payable at the same rate on each other series of
Common Stock and payable in Common Stock of the series with respect to which it
is declared or in Common Stock of one or more newly designated series with
substantially similar rights to the series with respect to which it is declared,
as determined by the Board of Directors in its sole discretion.
(b) SUBDIVISIONS AND COMBINATIONS OF SHARES. Any increase or
decrease in the number of shares of any series of Common Stock resulting from a
subdivision or combination of shares or other capital reclassification shall not
be permitted unless parallel action is taken with respect to each other series
of Common Stock, so that the number of shares of each series of Common Stock
outstanding shall be increased or decreased proportionately.
4.3.5 AUTOMATIC CONVERSION OF SERIES B COMMON STOCK.
(a) CONVERSION EVENT/CONVERSION DATE FOR EMPLOYEE HOLDERS.
Each share of Series B Common Stock held by a holder who was an employee at the
time of issuance shall automatically convert into one (1) share of Series C
Common Stock upon the termination of the holder's employment with the
Corporation for any reason, including but not limited to death, disability,
retirement, resignation or involuntary termination by the Corporation. In
addition, if any such holder, while an employee, makes or attempts to make any
transfer of shares of Series B Common Stock to any person or entity, whether
voluntary or involuntary, each such share that the holder has transferred or
attempted to transfer shall automatically convert into one (1) share of Series C
Common Stock simultaneously with such transfer or attempted transfer.
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<PAGE> 4
If it is necessary for any reason to determine whether the holder's employment
has terminated or the time thereof, or whether the holder has made or attempted
to make any transfer of any shares of Series B Common Stock or the time thereof,
the Board of Directors shall make such determination and it shall be binding on
the holder and any other person having any interest therein.
(b) CONVERSION EVENT/CONVERSION DATE FOR DIRECTOR OR AFFILIATE
HOLDERS. Each share of Series B Common Stock held by a holder who was a director
or an affiliate of a director (as defined above) at the time of issuance shall
automatically convert into one (1) share of Series C Common Stock upon the
termination of the holder's status as a director or an affiliate of a director
for any reason, including but not limited to death, resignation or removal by
the shareholders. In addition, if any such holder, while a director or an
affiliate of a director, makes or attempts to make any transfer of shares of
Series B Common Stock, whether voluntary or involuntary, each such share that
the holder has transferred or attempted to transfer shall automatically convert
into one (1) share of Series C Common Stock simultaneously with such transfer or
attempted transfer. If it is necessary for any reason to determine whether the
holder has made or attempted to make any transfer of any shares of Series B
Common Stock or the time thereof, the Board of Directors shall make such
determination and it shall be binding on the holder and any other person having
any interest therein.
(c) STATUS OF CERTIFICATES. If one or more shares of Series B
Common Stock are so converted, the certificate(s) representing such share or
shares shall, by virtue of the conversion and without any action on the part of
the holder, thereafter represent, to the extent of the number of shares so
converted, the corresponding number of shares of Series C Common Stock, and the
share or shares of Series B Common Stock previously represented by such
certificate(s) shall be canceled and revert to the status of authorized but
unissued share(s) of Series B Common Stock. Upon surrender of any such
certificate to the Corporation, the Corporation shall issue and deliver to the
person entitled thereto a new certificate or certificates to represent the
shares of Series C Common Stock (and, if applicable, any remaining shares of
Series B Common Stock) represented by the surrendered certificate.
(d) RESERVATION AND ISSUANCE OF SERIES C COMMON STOCK. The
Corporation shall reserve at all times, for so long as any shares of Series B
Common Stock remain outstanding, free from preemptive rights, out of its
authorized but unissued shares of Series C Common Stock, solely for the purpose
of effecting the conversion of the shares of Series B Common Stock, sufficient
shares of Series C Common Stock to provide for the conversion of all outstanding
shares of Series B Common Stock. All shares of Series C Common Stock issued upon
conversion of the shares of Series B Common Stock will be duly and validly
issued, fully paid and nonassessable to the same extent as the shares of Series
B Common Stock from which they were converted.
4.3.6 TERMINATION OF DESIGNATION OF SERIES A COMMON STOCK, SERIES B
COMMON STOCK AND SERIES C COMMON STOCK. Upon the earlier of the following events
(a "Designated Event"):
(a) the written election delivered to the Corporation at any
time by the holders of a majority of: (i) the then outstanding shares of Series
A Preferred Stock, or (ii) the then outstanding shares of Series A Common Stock
issued upon the conversion of Series A Preferred as provided in Article V; or
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<PAGE> 5
(b) the closing of a Public Offering (as defined in Section
5.4(b)), provided: (i) immediately following the closing of the Public Offering,
the persons who held shares of Series A Preferred prior to the Public Offering,
or prior to the conversion of the Series A Preferred into Common Stock as
provided in Article V, hold more than fifty percent (50%) of all of the
outstanding shares of the Corporation, assuming the issuance and exercise of all
options under the Corporation's 1995 Stock Option Plan, 1996 Stock Option Plan
or any other stock option, employee stock bonus or restricted stock plan
designated and approved by the Board of Directors, (ii) in the opinion of the
underwriters, delivered to the Corporation prior to the closing of the Public
Offering, the existence of multiple classes of Common Stock will lower the price
in the Public Offering by more than twenty-five percent (25%), and (iii) the
Public Offering does not constitute a Qualified Public Offering (as defined in
Section 4.3.9);
the designation of the Series A Common Stock, Series B Common Stock and Series C
Common Stock as separate series of Common Stock having the respective rights,
preferences and limitations set forth in this Section 4.3, and the authority of
the Board of Directors under Section 4.2 to divide the Common Stock into series
and to fix and determine the relative rights and preferences therefor, shall
automatically terminate. Effective immediately upon such termination (A) the
number of authorized but undesignated shares of Common Stock of the Corporation
shall be increased by the number of authorized shares of Series A Common Stock,
Series B Common Stock, and Series C Common Stock, without any distinctions
between any of such shares (except as provided in Section 4.3.7); (B) each share
of Series A Common Stock, Series B Common Stock and Series C Common Stock then
outstanding shall thereafter constitute one (1) share of Common Stock, the
holder of which shall be entitled to one (1) vote upon all matters submitted to
a vote of shareholders; and (C) each certificate representing shares of Series A
Common Stock, Series B Common Stock or Series C Common Stock that were
outstanding immediately prior to the termination shall, by virtue of the
termination and without any action on the part of the holder, thereafter
represent the corresponding number of shares of Common Stock. Upon surrender of
any such certificate to the Corporation, the Corporation shall issue and deliver
to the person entitled thereto a new certificate to represent the shares of
Common Stock represented by the surrendered certificate.
4.3.7 SERIES D COMMON STOCK. Following a Designated Event,
notwithstanding anything in Section 4.3.6 to the contrary, one (1) share of
Common Stock shall remain designated a share of Series D Common Stock, and, as
provided in Section 5.4(a), the holders of Series A Preferred shall have the
nontransferable right to convert one (1) share of Series A Preferred into one
(1) share of Series D Common Stock provided the Corporation has received, in
connection with the Designated Event, an opinion of a recognized investment
banking firm that the existence of this class of stock will not impair the value
of the Series A Common Stock. Upon the transfer of that one (1) share of Series
D Common Stock, the one (1) share of Series D Common Stock shall automatically
convert into one (1) share of Series A Common Stock or Conversion Stock (as
defined in Section 5.4(a)). The one (1) share of Series D Common Stock, which
shall be issued as described in Section 5.4(a), shall have the right (in
addition to its right to vote with the Common Stock) to elect one (1) member of
the Board of Directors of the Corporation (the "Policy Director") who shall have
the rights and authority to adopt or change the editorial policies of the
Corporation.
4.3.8 TERMINATION OF DESIGNATION OF SERIES E COMMON STOCK. If a
holder of Series E Preferred elects to convert such shares into shares of Series
A Common Stock, then, at any time following such conversion, the Board of
Directors may amend the
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<PAGE> 6
resolution establishing the Series E Common Stock to decrease (but not below the
number of Series E Preferred then outstanding) the number of shares of Series E
Common Stock, and the number of shares constituting the decrease shall
thereafter constitute authorized but undesignated shares of Common Stock. In
addition, if all of the Series E Preferred are converted into shares of Series A
Common Stock, the designation of the Series E Common Stock as a separate series
of Common Stock shall automatically terminate. Effective immediately upon such
termination, the number of authorized but undesignated shares of Common Stock of
the Corporation shall be increased by the number of authorized shares of Series
E Common Stock.
4.3.9 QUALIFIED PUBLIC OFFERING. The provisions of this Section
4.3.9 shall apply in the event of the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), covering the offer
and sale of Common Stock for the account of the Corporation to the public with
aggregate proceeds to the Corporation of not less than $20,000,000 (prior to
deduction of underwriter commissions and offering expenses), provided, the
holders of not less than Sixty-Six and Two-Thirds Percent (662/3%) of the then
outstanding shares of Series D Preferred, by affirmative vote or written
consent, have consented to such offering ("Qualified Public Offering").
(a) TERMINATION OF DESIGNATION OF SERIES A COMMON STOCK,
SERIES B COMMON STOCK, SERIES C COMMON STOCK AND SERIES D COMMON STOCK.
Effective upon closing of a Qualified Public Offering, the designation of the
Series A Common Stock, Series B Common Stock, Series C Common Stock and Series D
Common Stock as separate series of Common Stock having the respective rights,
preferences and limitations set forth in this Section 4.3, and the authority of
the Board of Directors under Section 4.2 to divide the Common Stock into series
and to fix and determine the relative rights and preferences therefor, shall
automatically terminate. Effective immediately upon such termination (i) the
number of authorized but undesignated shares of Common Stock of the Corporation
shall be increased by the number of authorized shares of Series A Common Stock,
Series B Common Stock, Series C Common Stock and Series D Common Stock without
any distinctions between any of such shares; (ii) each share of Series A Common
Stock, Series B Common Stock, Series C Common Stock and Series D Common Stock
then outstanding shall thereafter constitute one (1) share of Common Stock, the
holder of which shall be entitled to one (1) vote upon all matters submitted to
a vote of shareholders; and (iii) each certificate representing shares of Series
A Common Stock, Series B Common Stock, Series C Common Stock or Series D Common
Stock that were outstanding immediately prior to the termination shall, by
virtue of the termination and without any action on the part of the holder,
thereafter represent the corresponding number of shares of Common Stock. Upon
surrender of any such certificate to the Corporation, the Corporation shall
issue and deliver to the person entitled thereto a new certificate to represent
the shares of Common Stock represented by the surrendered certificate.
(b) DESIGNATION OF SPECIAL COMMON STOCK; RECLASSIFICATION OF
SERIES E COMMON STOCK. Effective upon closing of a Qualified Public Offering (i)
the designation of the Seven Million Forty-Seven Thousand Six Hundred
Seventy-Nine (7,047,679) shares of Series E Common Stock shall automatically
terminate and be replaced by the designation of a new series of Common Stock to
be known as "Special Common Stock," consisting of the same number of shares,
which series shall have the rights described in this Section 4.3.9, and (ii)
each share of Series E Common Stock then outstanding shall automatically be
reclassified as one (1) share of Special Common Stock; and (iii) each
certificate representing shares of Series E
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Common Stock that were outstanding immediately prior to the reclassification
shall, by virtue of the reclassification and without any action on the part of
the holder, thereafter represent the corresponding number of shares of Special
Common Stock. Upon surrender of any such certificate to the Corporation, the
Corporation shall issue and deliver to the person entitled thereto a new
certificate to represent the shares of Special Common Stock represented by the
surrendered certificate.
(c) CONVERSION SUBJECT TO PRIOR APPROVAL OF BOARD OF
DIRECTORS. At any time after the closing of a Qualified Public Offering, at the
option of the holder except as provided in this Section 4.3.9, the holder of
such shares may request, only upon delivery to the Corporation of a written
conversion request, that the shares be converted into an equal number of shares
of Common Stock (with the same rights and preferences as shares of Common
Stock); provided, however, that such optional conversion can only occur with the
prior written consent of the Board of Directors, which consent may be withheld
in the sole discretion of the Board of Directors.
(d) VOTING RIGHTS. Each share of Common Stock shall be
entitled to one (1) vote on all matters submitted to the shareholders of the
Corporation and each share of Special Common Stock shall not be entitled to
vote, except as required by law, in which case each share of Special Common
Stock shall be entitled to one (1) vote.
(e) RANKING. The rights and preferences of the Common Stock
and the Special Common Stock shall be in all respects identical, except as
otherwise required by law or expressly provided in these Articles of
Incorporation.
4.4 ISSUANCE OF PREFERRED STOCK IN SERIES.
4.4.1 Authority Vested in Board of Directors. The Preferred Stock
may be divided into and issued in series from time to time. Authority is vested
in the Board of Directors, subject to the limitations and procedures set forth
in these Articles of Incorporation or prescribed by law, to divide any part or
all of such Preferred Stock into any number of series, to fix and determine the
relative rights and preferences of the shares of any series to be established,
and to amend the rights and preferences of the shares of any series that has
been established but is wholly unissued.
4.4.2 DESIGNATION OF SERIES A PREFERRED STOCK, SERIES B PREFERRED
STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK
AND SERIES E PREFERRED STOCK.
The following series of Preferred Stock are hereby designated, and
each such series shall have the following rights, preferences and limitations:
4.4.3 DESIGNATION. Thirteen Million Seven Hundred Thirteen Thousand
Four Hundred Thirty Nine (13,713,439) shares of Preferred Stock shall be
designated and known as "Series A Preferred Stock" or "Series A Preferred";
Three Million Fifty-Nine Thousand Seven Hundred One (3,059,701) shares of
Preferred Stock shall be designated and known as "Series B Preferred Stock" or
"Series B Preferred"; Three Million Four Thousand Three Hundred Five (3,004,305)
shares of Preferred Stock shall be designated and known as "Series C Preferred
Stock" or "Series C Preferred"; Three Million Ninety-Five Thousand Three Hundred
Thirteen (3,095,313) shares of Preferred Stock shall be designated and known as
"Series D Preferred Stock" or "Series D Preferred"; and Seven Million
Forty-Seven Thousand Six
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Hundred Seventy-Nine (7,047,679) shares of Preferred Stock shall be designated
as "Series E Preferred Stock" or "Series E Preferred." Except as otherwise
provided in these Articles of Incorporation, all shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall be identical and shall entitle the
holders thereof to the same rights and privileges.
4.4.4 AMENDMENT TO SERIES DECREASING SHARES. Within any limits
stated in these Articles of Incorporation or in the resolution of the Board of
Directors establishing a series, the Board of Directors, after the issuance of
shares of a series, may amend the resolution establishing the series to decrease
(but not below the number of shares of such series then outstanding or reserved
for issuance pursuant to the exercise of any outstanding warrants) the number of
shares of that series, and the number of shares constituting the decrease shall
thereafter constitute authorized but undesignated shares.
4.4.5 AUTHORITY LIMITED TO UNISSUED SHARES. The authority herein
granted to the Board of Directors to determine the relative rights and
preferences of the Preferred Stock shall be limited to unissued shares, and no
power shall exist to alter or change the rights and preferences of any shares
that have been issued.
4.5 ISSUANCE OF CERTIFICATES. The Board of Directors shall have the
authority to issue shares of the capital stock of this Corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose.
4.6 NO CUMULATIVE RIGHTS. Shareholders of this Corporation shall not have
the right to cumulate votes for the election of directors.
4.7 NO PREEMPTIVE RIGHTS. No shareholder of this Corporation shall have,
solely by reason of being a shareholder, any preemptive or preferential right or
subscription right to any stock of this Corporation or to any obligations
convertible into stock of this Corporation, or to any warrant or option for the
purchase thereof, except to the extent provided by written agreement with this
Corporation.
4.8 QUORUM FOR MEETING OF SHAREHOLDERS. A quorum shall exist at any
meeting of shareholders if a majority of the votes entitled to be cast is
represented in person or by proxy. In the case of any meeting of shareholders
that is adjourned more than once because of the failure of a quorum to attend,
those who attend the third convening of such meeting, although less than a
quorum, shall nevertheless constitute a quorum for the purpose of electing
directors, provided that the percentage of shares represented at the third
convening of such meeting shall not be less than one-third of the shares
entitled to vote.
4.9 CONTRACTS WITH INTERESTED SHAREHOLDERS. Subject to the limitations set
forth in RCW 23B.19.040, to the extent applicable:
4.9.1 The Corporation may enter into contracts and otherwise
transact business as vendor, purchaser, lender, borrower, or otherwise with its
shareholders and with corporations, associations, firms, and entities in which
they are or may be or become interested as directors, officers, shareholders,
members, or otherwise.
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4.9.2 Any such contract or transaction shall not be affected or
invalidated or give rise to liability by reason of the shareholder's having an
interest in the contract or transaction.
4.10 SHAREHOLDER VOTING REQUIREMENTS. Subject to the requirements of RCW
23B.08.730, and 23B.19.040, any contract, transaction, or act of the Corporation
or of any director or officer of the Corporation that shall be authorized,
approved, or ratified by a majority of the votes entitled to be cast at a
meeting at which a quorum is present shall, insofar as permitted by law, be as
valid and as binding as though ratified by every shareholder of the Corporation.
4.11 EXECUTION OF CONSENT OF SHAREHOLDERS BY LESS THAN UNANIMOUS CONSENT.
To the extent permitted by the Act, the taking of action by shareholders without
a meeting by less than unanimous written consent of all shareholders entitled to
vote on the action shall be permitted. Before the date on which the action
becomes effective, notice of the taking of such action shall be given to those
shareholders entitled to vote on the action who have not consented in writing
(and, if the Act would otherwise require that notice of a meeting of
shareholders to consider the action be given to nonvoting shareholders, to all
nonvoting shareholders), in writing, describing with reasonable clarity and
specifying the general nature of the action taken or to be taken, stating the
effective date and time of the action, and accompanied by the same material
that, under the Act, would have been required to be sent to nonconsenting (or
nonvoting) shareholders in a notice of meeting at which the action would have
been submitted for shareholder action. Such notice shall be given as follows:
(i) if mailed, by deposit in the U.S. mail at least seventy- two (72) hours
prior to the specified effective time of such action, with first-class postage
thereon prepaid, correctly addressed to each shareholder entitled thereto at the
shareholder's address as it appears on the current record of shareholders of the
Corporation; or (ii) if delivered by personal delivery, by courier service, by
wire or wireless equipment, by telegraphic or other facsimile transmission, or
by any other electronic means which transmits a facsimile of such communication
correctly addressed to each shareholder entitled thereto at the shareholder's
physical address, electronic mail address, or facsimile number, as it appears on
the current record of shareholders of the Corporation, at least twenty-four (24)
hours prior to the specified effective time of such action.
4.12 SPECIAL MEETINGS OF SHAREHOLDERS. Subsequent to the date of closing
of a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act covering the offer and sale of
Common Stock for the account of the Corporation to the public, special meetings
of the shareholders for any purpose or purposes may be called at any time only
by a majority of the Board of Directors or the Chairman of the Board of
Directors (if one be appointed) or the President or one or more shareholders
holding not less than twenty-five percent (25%) of all the shares entitled to be
cast on any issue proposed to be considered at that meeting.
4.13 MAJORITY VOTE REQUIRED. Unless otherwise provided in these Articles
of Incorporation, subsequent to the date of closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of Common Stock for the
account of the Corporation to the public, pursuant to authority granted under
Sections 23B.10.030, 23B.11.030, 23B.12.020, and 23B.14.020 of the Act, the vote
of shareholders of the Corporation required in order to approve amendments to
the Articles of Incorporation, a plan of merger or share exchange, the sale,
lease, exchange, or other
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disposition of all or substantially all of the property of the Corporation not
in the usual and regular course of business, or dissolution of the Corporation
shall be a majority of all of the votes entitled to be cast by each voting group
entitled to vote thereon, regardless of whether or not the Corporation is a
"public company," as that term is defined in Section 23B.01.400 of the Act.
ARTICLE V
ADDITIONAL TERMS OF CAPITAL STOCK
In addition to the relative rights, preferences, privileges and
restrictions granted to or imposed on the respective classes of the shares of
capital stock or the holders thereof as set forth in Article IV, the relative
rights, preferences, privileges and restrictions granted to or imposed on the
respective classes of the shares of capital stock or the holders thereof are as
follows:
5.1 DIVIDENDS. No dividends or other distributions shall be made with
respect to the Common Stock, other than dividends payable solely in Common
Stock, unless at the same time an equivalent dividend with respect to the Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred has been paid or set apart or such equivalent dividend has
been waived by the affirmative vote or written consent of the holders of not
less than Sixty-Six and Two-Thirds Percent (662/3%) of the outstanding shares of
each of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred. Any declared but unpaid dividends on the
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred shall be paid upon the conversion of such
shares into Common Stock either (at the option of the Corporation) by payment of
cash or by the issuance of additional shares of Common Stock based upon the fair
market value of the Common Stock at the time of conversion, as determined by the
Corporation's Board of Directors.
5.2 LIQUIDATION PREFERENCES. In the event of any liquidation, dissolution,
or winding up of the Corporation, either voluntary or involuntary, distributions
to the shareholders of the Corporation shall be made in the following manner:
(a) The holders of each of the Series D Preferred and the Series E
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Series A Preferred, the Series B Preferred, the Series C
Preferred or the Common Stock by reason of their ownership of such stock, an
amount equal to the greater of: (1) $11.295 per share, in the case of Series D
Preferred, and $8.99 per share, in the case of Series E Preferred, adjusted for
any combinations, consolidations, subdivisions, or stock dividends with respect
to such shares and, in addition, an amount equal to all declared but unpaid
dividends on such shares; or (2) the amount per share the holder would have
received if he/she/it had converted his/her/its shares into Common Stock as
provided in these Articles of Incorporation, provided, that the holders of
Series D Preferred and the Series E Preferred shall receive such amounts
simultaneously with the receipt by the holders of Common Stock of the amounts to
which they are entitled, as described in Section 5.2(c). If the assets and funds
thus distributed among the holders of the Series D Preferred and Series E
Preferred shall be insufficient to permit the payment to such holders of the
full aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed, first, pro
rata among the holders of the Series E Preferred in proportion to the full
preferential amount each such holder is otherwise entitled to
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<PAGE> 11
receive under clause (1) above, and among the holders of the Series D Preferred
in proportion to Sixty-Six and Two-Thirds Percent (662/3%) of the full
preferential amount each such holder is otherwise entitled to receive under
clause (1) above, and, second, among the holders of the Series D Preferred in
proportion to the remaining full preferential amount each such holder is
otherwise entitled to receive under clause (1) above.
(b) After payment has thus been made to the holders of each of the
Series D Preferred and the Series E Preferred of the full amounts to which they
shall be entitled as aforesaid, the holders of each of the Series A Preferred,
the Series B Preferred and the Series C Preferred shall be entitled to receive
prior and in preference to any distribution of any of the assets or surplus
funds of the Corporation to the holders of the Common Stock by reason of their
ownership of such stock, an amount equal to the greater of: (1) $0.0729 per
share, in the case of Series A Preferred, $0.67 per share, in the case of Series
B Preferred, and $1.9634 per share, in the case of Series C Preferred, adjusted
for any combinations, consolidations, subdivisions, or stock dividends with
respect to such shares and, in addition, an amount equal to all declared but
unpaid dividends on such shares; or (2) the amount per share the holder would
have received if he/she/it had converted his/her/its shares into Common Stock as
provided in these Articles of Incorporation, provided, that the holders of the
Series A Preferred, the Series B Preferred and the Series C Preferred shall
receive such amounts simultaneously with the receipt by the holders of Common
Stock of the amounts to which they are entitled, as described in Section 5.2(c).
If the assets and funds thus distributed among the holders of the Series A
Preferred, the Series B Preferred and the Series C Preferred shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed among the holders of the Series
A Preferred, the Series B Preferred and the Series C Preferred in proportion to
the full preferential amount each such holder is otherwise entitled to receive
under clause (1) above.
(c) After payment has thus been made to the holders of each of the
Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred and the Series E Preferred of the full amounts to which they shall be
entitled as aforesaid, the holders of the Common Stock shall be entitled to
receive ratably on a per-share basis all the remaining assets.
(d) For purposes of this Section 5.2, a merger or consolidation of
the Corporation with or into any other corporation or corporations, or the
merger of any other corporation or corporations into the Corporation, in which
the shareholders of the Corporation receive distributions in cash or securities
of another corporation or corporations as a result of such consolidation or
merger, or a sale of all or substantially all of the assets of the Corporation,
shall be treated as a liquidation, dissolution or winding up of the Corporation
unless the Corporation's stockholders immediately prior to such an event hold,
immediately after such event, at least 50% of the general voting power of the
surviving or acquiring entity by virtue of their ownership of the Corporation's
equity securities.
5.3 VOTING RIGHTS. Except as otherwise required by law or by Section 5.6,
the holder of each share of Common Stock issued and outstanding shall have the
votes set forth in Section 4.3.3, and the holder of each share of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
be entitled to the number of votes equal to the number of votes entitled to be
cast by the number of shares of Common Stock into which such share of Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred could be
converted at the record date for determination of the shareholders entitled to
vote on such
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matters, such votes to be counted together with all other shares of the
Corporation having general voting power and not separately as a class.
Fractional votes by the holders of Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred shall not, however, be permitted and
any fractional voting right shall (after aggregating all shares into which
shares of Series A Preferred, Series B Preferred, Series C Preferred and Series
D Preferred held by each holder could be converted) be rounded to the nearest
whole number. Except as otherwise required by law, in which case the holder of
each share of Series E Preferred shall be entitled to one (1) vote, the holders
of Series E Preferred shall not be entitled to vote. Where the Series E
Preferred is entitled to voting rights by law, all shares of Series E Preferred
shall vote and be counted together with the Series A Preferred, the Series B
Preferred, the Series C Preferred and Series D Preferred and not separately as a
voting group, except as otherwise required by law. Holders of Common Stock and
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred shall be entitled to notice of any shareholders' meeting
in accordance with the Bylaws of the Corporation.
5.4 CONVERSION. The holders of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share (including immediately prior to any liquidation,
dissolution or winding up of the Corporation as set forth in Section 5.2 above)
at the office of the Corporation or any transfer agent for each of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred (whichever is appropriate), into such number of fully paid and
nonassessable shares of Series A Common Stock, or if, pursuant to Section 4.3.6
or Section 4.3.9, the Articles of Incorporation as amended from time to time do
not, at the time of conversion, provide for Series A Common Stock, into shares
of Common Stock, or for the Series E Preferred, into shares of Series E Common
Stock, or if, pursuant to Section 4.3.9, the Articles of Incorporation as
amended from time to time do not, at the time of conversion, provide for Series
E Common Stock, into shares of Special Common Stock (such Series A Common Stock,
Series E Common Stock, Common Stock or Special Common Stock, as the case may be,
the "Conversion Stock"), as is determined by dividing $8.99, in the case of the
Series E Preferred, $7.53, in the case of the Series D Preferred, $1.9634, in
the case of the Series C Preferred, $0.67, in the case of the Series B
Preferred, and $0.0729, in the case of the Series A Preferred, by the Conversion
Price (determined as hereinafter provided) for such series in effect at the time
of the conversion (the "Conversion Rate"). The price at which shares of
Conversion Stock shall be deliverable upon conversion (the "Conversion Price")
shall initially be $8.99, in the case of the Series E Preferred, $7.53, in the
case of the Series D Preferred, $1.9634, in the case of the Series C Preferred,
$0.67, in the case of the Series B Preferred, and $0.0729, in the case of the
Series A Preferred. Such initial Conversion Price shall be subject to adjustment
as hereinafter provided. Notwithstanding anything in this Section 5.4(a) to the
contrary, in the event of a Public Offering that is not a Qualified Public
Offering, the holders of the Series A Preferred (including for this purpose any
shares of Conversion Stock issued upon conversion of the Series A Preferred
prior to a Public Offering) will have the-non-transferable right to convert one
(1) such share, unless otherwise provided in Section 4.3.7, into one (1) share
of Series D Common Stock with the rights provided in Section 4.3.7.
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(b) AUTOMATIC CONVERSION. Each share of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
automatically be converted into the number and class of fully paid and
nonassessable shares of Conversion Stock into which such share would then
convert upon voluntary conversion under Section 5.4(a), effective upon the
closing of a firm commitment underwritten public offering (a "Public Offering")
pursuant to an effective registration statement under the Securities Act
covering the offer and sale of Common Stock for the account of the Corporation
to the public, if either (x) the price to the public in the offering is at least
$13.554 per share (as adjusted to reflect subsequent stock dividends, stock
splits, combinations and recapitalizations) and the aggregate proceeds of the
offering are not less than $20,000,000 (prior to deduction of underwriter
commissions and offering expenses), or (y) the holders of not less than
Sixty-Six and Two-Thirds Percent (662/3%) of the then outstanding shares of
Series D Preferred, by affirmative vote or written consent, have consented to
the automatic conversion.
(c) MECHANICS OF CONVERSION. No fractional shares of Conversion
Stock shall be issued upon conversion of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall be
entitled to convert the same into full shares of Conversion Stock and to receive
certificates therefor, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred (whichever is appropriate),
and shall give written notice to the Corporation at such office that such holder
elects to convert the same; provided, however, that in the event of an automatic
conversion pursuant to Section 5.4(b), the outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent, and provided
further, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Conversion Stock issuable upon such automatic
conversion unless the certificates evidencing such shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
are either delivered to the Corporation or its transfer agent as provided above,
or the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. The Corporation shall, as
soon as practicable after delivery of such certificate, or such agreement of
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred, a certificate or
certificates for the number of shares of Conversion Stock to which such holder
shall be entitled as aforesaid and a check payable to the holder in the amount
of any cash amounts payable as the result of a conversion into fractional shares
of Conversion Stock. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred to be converted, or in the case of automatic
conversion under Section 5.4(b), on the date of closing of the Public Offering,
and the person or persons entitled to receive the shares of Conversion Stock
issuable upon such conversion shall
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be treated for all purposes as the record holder or holders of such shares of
Conversion Stock on such date.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTIVE ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section
5.4(d), the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "ORIGINAL ISSUE DATE" shall mean the date on which
the first share of Series E Preferred was first issued.
(3) "CONVERTIBLE SECURITIES" shall mean any evidence of
indebtedness, shares of capital stock (other than the Common Stock) or other
securities convertible into or exchangeable for Common Stock.
(4) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to Section 5.4(d)(ii), deemed to be
issued) by the Corporation after the Original Issue Date, other than:
(A) shares of Common Stock issued or issuable at
any time upon conversion of the shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred
authorized herein;
(B) shares of Common Stock issued or issuable at
any time to officers, directors, and employees of, and consultants to, the
Corporation pursuant to the Corporation's 1995 Stock Option Plan, 1996 Stock
Option Plan or any other stock option, restricted stock plan or employee stock
bonus program or grant designated and approved by the Board of Directors by
unanimous vote if there are three or fewer directors then serving or, if there
are greater than three directors then serving, by a two-thirds majority vote
thereof (provided that any shares repurchased by the Corporation from employees,
officers, directors and consultants pursuant to the terms of stock repurchase
agreements approved by the Board of Directors shall not, unless reissued, be
counted as issued for purposes of this calculation) other than shares issued to
Rob Glaser, the Corporation's Founder, without the written consent of the
holders of a majority of the Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred (provided, for purposes of calculating the
majority for purposes of this clause (B), the shares of Series E Preferred to be
issued upon exercise, if ever, of the Series E Preferred Stock Purchase Warrant
issued pursuant to the Series E Preferred Stock Purchase Agreement dated July
21, 1997, shall not be deemed to be outstanding, regardless of whether such
Series E Preferred Stock Purchase Warrant has been exercised);
(C) shares of Common Stock issued or issuable at
any time as a dividend or distribution on Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred or any
other event for which adjustment is made pursuant to Section 5.4(e)(i) hereof;
(D) shares of Common Stock issued upon conversion
of Series B Common Stock to Series C Common Stock pursuant to Section 4.3.5 of
these Articles;
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(E) shares of Common Stock issued upon exercise of
the Series B Common Stock Warrants which were issued pursuant to the Series C
Preferred Stock Purchase Agreement by and among the Corporation and certain
purchasers dated October 26, 1995; and
(F) shares of Common Stock issued or issuable at
any time by way of dividend or other distribution on shares of Common Stock (x)
excluded from the definition of Additional Shares of Common Stock by the
foregoing clauses (A), (B), (C), (D), (E), or this clause (F) or (y) on shares
of Common Stock so excluded under Subsection (x).
(ii) DEEMED ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
(1) OPTIONS AND CONVERTIBLE SECURITIES. In the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall, except as otherwise provided in Section
5.4(d)(i)(4), be deemed to be Additional Shares of Common Stock issued as of the
time of such issuance, provided that, with respect to a particular series of
Preferred Stock, Additional Shares of Common Stock shall not be deemed to have
been issued unless the consideration per share (determined pursuant to Section
5.4(d)(iv) hereof) of such Additional Shares of Common Stock would be less than
the Conversion Price in effect for such series on the date of and immediately
prior to such issuance, and, provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued (notwithstanding the
foregoing):
(A) no further adjustment in the Conversion Price
for such series shall be made upon the subsequent issuance of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, except as provided
in this Section 5.4(d), for any increase or decrease in the consideration
payable to the Corporation, or in the number of shares of Common Stock issuable,
upon the exercise, conversion or exchange thereof (a "Change Event"), the
Conversion Price for any series of Preferred Stock recomputed upon the original
issuance thereof, and any subsequent adjustments based thereon, shall, upon any
such increase or decrease becoming effective, again be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; provided, however,
that anything to the contrary notwithstanding, if the Change Event is triggered
or caused by a Dilutive Issue (as defined in Section 5.4(d)(iii)), this Section
5.4(d)(ii)(B) shall be inapplicable and no adjustment shall be made to any
Conversion Price as a result of the Change Event;
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original
issuance thereof, and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if,
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(I) in the case of Convertible Securities or
Options for Common Stock, only the shares of Common Stock, if any, actually
issued upon the exercise of such Options or the conversion or exchange of such
Convertible Securities were issued at the time of the issuance of such
Convertible Securities or Options and the consideration received therefor was
the consideration actually received by the Corporation for the issue of all such
Options or Convertible Securities, whether or not exercised, converted, or
exchanged, plus the consideration actually received by the Corporation upon such
exercise, conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
date, or (ii) the Conversion Price that would have resulted from any other
issuance of Additional Shares of Common Stock between the original adjustment
date and such readjustment date; and
(E) in the case of any options which expire by
their terms not more than 90 days after the date of issuance thereof, no
adjustment of the Conversion Price shall be made until all such Options have
either expired or been exercised.
In the event that a record date is established for the purpose of
determining the holders of the Corporation's securities who shall be entitled to
receive Options or Convertible Securities as a dividend or a distribution, the
Options or Convertible Securities to be so distributed or issued shall, for
purposes of this Section 5.4(d), be deemed to have been issued as of such record
date (provided that the Conversion Price so computed shall be recomputed if such
Options or Convertible Securities are not so distributed or issued).
(2) STOCK DIVIDENDS. In the event the Corporation at any
time or from time to time after the Original Issue Date shall declare or pay any
dividend on the Common Stock payable in Common Stock, then and in any such
event, Additional Shares of Common Stock shall be deemed to have been issued
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend;
provided, however, that if such record date is fixed and such dividend is not
fully paid, the only Additional Shares of Common Stock deemed to have been
issued will be the number of shares of Common Stock actually issued in such
dividend, and such shares will be deemed to have been issued as of the close of
business on such record date, and the Conversion Price shall be recomputed
accordingly.
(iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK.
(1) If at any time or from time to time after the
Original Issue Date this Corporation shall issue Additional Shares of Common
Stock (including Additional Shares of
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Common Stock deemed to be issued pursuant to Section 5.4(d)(ii)) without
consideration or for a consideration (as determined in Section 5.4(d)(iv)) per
share issued or deemed to have been issued under Section 5.4(d)(ii), less than:
(I) in the case of the Series A Preferred, the Conversion Price for the Series A
Preferred in effect on the date of and immediately prior to such issuance, (II)
in the case of the Series B Preferred, the Conversion Price for the Series B
Preferred in effect on the date of and immediately prior to such issuance, (III)
in the case of the Series C Preferred, the Conversion Price for the Series C
Preferred in effect on the date of and immediately prior to such issuance, (IV)
in the case of the Series D Preferred, the Conversion Price for the Series D
Preferred in effect on the date of and immediately prior to such issuance, or
(V) in the case of the Series E Preferred, the Conversion Price for the Series E
Preferred in effect on the date of and immediately prior to such issuance, then
and in such event (a "Dilutive Issue"), any one or all of such Conversion Prices
shall be reduced, concurrently with such issuance, to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance on a fully diluted basis (including for such purpose Convertible
Securities the conversion rights of which, are then exercisable but excluding
all Options) plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price; and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance on a fully-diluted basis
(including for such purpose Convertible Securities the conversion rights of
which, are then exercisable but excluding all Options) plus the number of such
Additional Shares of Common Stock so issued.
(2) In addition to any adjustments to the Conversion
Price for the Series E Preferred made pursuant to Section 5.4(d)(iii)(1), if
this Corporation sells shares of Common Stock to the public in a Public Offering
pursuant to Section 5.4(b)(y) at a price per share less than $8.99, (as adjusted
to reflect subsequent stock dividends, stock splits and recapitalizations), the
Conversion Price for the Series E Preferred in effect on the date of and
immediately prior to such Public Offering, shall be reduced, immediately prior
to but contingent upon the effectiveness of the Public Offering, to $7.53 (as
adjusted to reflect subsequent stock dividends, stock splits and
recapitalizations).
(iv) DETERMINATION OF CONSIDERATION. For purposes of this Section
5.4(d), the consideration received by the Corporation for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY: Such consideration shall:
(A) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding amounts paid
or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the Corporation's Board of Directors; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Corporation's Board of Directors.
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(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 5.4(d)(ii)(1), relating to
Options and Convertible Securities, shall be determined by dividing: (x) the
total amount, if any, received or receivable by the Corporation as consideration
for the issue of such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the Corporation upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities; by (y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) STOCK DIVIDENDS. Any Additional Shares of Common
Stock relating to stock dividends shall be deemed to have been issued for no
consideration.
(e) ADDITIONAL ADJUSTMENTS TO CONVERSION PRICE.
(i) ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR
CONSOLIDATION OF COMMON STOCK. In the event the outstanding shares of Common
Stock (whether Series A Common Stock, Series E Common Stock or Common Stock)
shall be subdivided, by stock split, or otherwise (but other than by stock
dividend, which is addressed in Section 5.4(d)(ii)(2) of these Articles of
Incorporation), into a greater number of shares of Common Stock, the Conversion
Price for each series of Preferred Stock then in effect shall, concurrently with
the effectiveness of such subdivision, be proportionately decreased. In the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, the Conversion Price for each series of Preferred Stock then in effect
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.
(ii) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 5.4, then and
in each such event provision shall be made so that the holders of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common Stock (whether Series A Common Stock, Series E Common Stock or
Common Stock) receivable thereupon, the amount of securities of the Corporation
which they would have received had their Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred been converted
into Common Stock on the date of such event and had then thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 5.4 with respect to the rights of the holders of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred.
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(iii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If the Common Stock (whether Series A Common Stock, Series E Common Stock or
Common Stock) issuable upon conversion of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the terms of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred shall, concurrently with
the effectiveness of such reorganization or reclassification, be modified such
that the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, as the case may be, shall be convertible into,
in lieu of the number of shares of Common Stock which the holders would
otherwise have been entitled to receive, a number of shares of such other class
or classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred immediately before that change.
(f) NO IMPAIRMENT. Except as provided in Section 5.6, the
Corporation will not, by amendment of its Articles of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issuance or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 5.4 and in the
taking of all such actions as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred against
impairment.
(g) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price for the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
pursuant to this Section 5.4, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price in effect at the time
for such series, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of such series of Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event that this Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
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(ii) to offer for subscription, pro rata to the holders of any
class or series of its stock, any additional shares of stock of any class or
series or any other similar rights;
(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding which results in a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up; then, in connection with each
such event;
this Corporation shall send to the holders of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred:
(1) at least twenty (20) days prior written notice of (x)
the record date for such dividend, distribution or subscription rights (and
specifying the date on which the holders of Common Stock shall be entitled
thereto) or (y) the record date at which the rights to vote on the matters
referred to in (iii) and (iv) above will be determined; and
(2) in the case of the matters referred to in (iii) and
(iv) above, at least twenty (20) days prior written notice of the date when the
same shall take place and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event or the record date for
the determination of such holders if such record date is earlier.
Each such written notice shall (x) be delivered personally; (y) given by
certified or registered mail, postage prepaid; or (z) to the extent receipt is
confirmed, by telecopy, telefax or other electronic transmission service;
addressed to the holders of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred at the address for each
such holder as shown on the books of this Corporation.
(i) ELECTION UPON CONVERSION OF SERIES E PREFERRED STOCK. In the
event that a holder of Series E Preferred elects to convert its shares of Series
E Preferred pursuant to Section 5.4(a) or there occurs an event requiring
automatic conversion of the Series E Preferred pursuant to Section 5.4(b), such
holder may elect to convert all of such shares into Series E Common Stock with
the rights provided in these Articles of Incorporation.
5.5 REDEMPTION.
(a) NO CALL. The Corporation shall not have the right to call for
redemption all or any part of the Series B Preferred, Series C Preferred, Series
D Preferred or Series E Preferred.
(b) OPTION TO REQUIRE REDEMPTION. On or at any time after December
31, 2002, within sixty (60) days after the receipt by the Corporation of the
written request (a "Redemption Notice") by one or more holders of shares of
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
(the "Requesting Holders"), together with the written approval of the holders of
not less than two-thirds of the Series B Preferred then outstanding if any
shares of Series B Preferred are to be redeemed, and with the written approval
of not less than two-thirds of the Series C Preferred then outstanding if any
shares of Series C Preferred are to be redeemed, and with the written approval
of not less than two-thirds
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of the Series D Preferred then outstanding if any shares of Series D Preferred
are to be redeemed, and with the written approval of not less than two-thirds of
the Series E Preferred then outstanding if any shares of Series E Preferred are
to be redeemed (each series for which such approval is granted being hereinafter
referred to as an "Approved Series"), the Corporation shall, to the extent it
may lawfully do so, redeem the number of whole shares of each Approved Series
most nearly equal to one-third of the shares specified in the Redemption Notice
by paying therefor in cash the Series B Redemption Price, Series C Redemption
Price, Series D Redemption Price, or Series E Redemption Price (each as defined
below), as appropriate. The date of this payment shall be referred to as an
"Initial Redemption Date." The remaining shares of each Approved Series
specified in the Redemption Notice shall be redeemed in two (2) additional equal
installments (or, if such number of shares is not evenly divisible by two, then
the first such installment shall be rounded to the nearest whole number of
shares) on an annual basis in a similar manner, beginning one (1) year from the
Initial Redemption Date, with all remaining shares of each Approved Series
specified in the Redemption Notice being purchased on the second anniversary of
the Initial Redemption Date (the "Initial Redemption Date" and each of the two
following redemption dates shall be referred to as a "Redemption Date"). The
Corporation shall effect any redemption pursuant to this Section 5.5 on a pro
rata basis according to the aggregate amounts which would be received upon
redemption by each Requesting Holder.
(c) REDEMPTION PRICE. The redemption price to be paid by the
Corporation shall be $0.67 per share, in the case of the Series B Preferred (as
adjusted to reflect subsequent stock dividends, stock splits or
recapitalizations), $1.9634, in the case of the Series C Preferred (as adjusted
to reflect subsequent stock dividends, stock splits or recapitalizations), $7.53
in the case of the Series D Preferred (as adjusted to reflect subsequent stock
dividends, stock splits or recapitalizations) and $8.99, in the case of the
Series E Preferred (as adjusted to reflect subsequent stock dividends, stock
splits or recapitalizations) (in each case, the "Issue Price"), in each case
plus: (i) all declared but unpaid dividends thereon as of the Initial Redemption
Date, and (ii) an amount per share equal to the percentage increase (if any) in
the Implicit Price Deflator for Gross Domestic Product, as published by the
United States Department of Commerce, Economics and Statistics Administration,
Bureau of Economic Analysis, or any successor thereto (1987 = 100), from the
date of the original issuance of the share to the date of the Corporation's
receipt of the Redemption Notice multiplied by the applicable Issue Price (such
totals are referred to as the "Series B Redemption Price," the "Series C
Redemption Price," the "Series D Redemption Price," and the "Series E Redemption
Price," respectively).
(d) NOTICE OF REDEMPTION. Within ten (10) days of the Corporation's
receipt of a Redemption Notice and the related written approval of the holders
of two-thirds of the then outstanding shares of each Approved Series, the
Corporation shall deliver (by (i) personal delivery; (ii) certified or
registered mail, postage prepaid; or (iii) to the extent receipt is confirmed,
by telecopy, telefax or other electronic transmission service) written notice to
each holder of Series B Preferred, Series C Preferred, Series D Preferred or
Series E Preferred who did not approve the Redemption Notice, at the address of
such holder last shown on the records of the Corporation for the purpose of
notice or, if no such address appears or is given, at the place where the
principal executive office of the Corporation is located, identifying each
Requesting Holder and specifying the number of shares to be redeemed by such
holder. If, within ten (10) days of receiving such notice, the holders of Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred who
did not approve the Redemption Notice
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give written notice to the Corporation of their wish to have any of their shares
of Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred redeemed simultaneously with the redemption of the Requesting Holders,
such holders shall become Requesting Holders for purposes of such redemption.
(e) SURRENDER OF CERTIFICATES. On the Initial Redemption Date, each
Requesting Holder shall surrender to the Corporation the certificate or
certificates representing the number of shares of Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred specified in the Redemption
Notice or pursuant to Section 5.5(d). Simultaneously, the Corporation shall pay
one-third of the Series B Redemption Price, the Series C Redemption Price, the
Series D Redemption Price or the Series E Redemption Price (as applicable) of
such shares to be redeemed on that date to the order of the person whose name
appears on such certificate or certificates as the owner thereof and each
surrendered certificate shall be canceled. In the event that less than all the
shares represented by any such certificate are to be redeemed pursuant to the
Redemption Notice, a new certificate shall be issued representing the shares not
subject to redemption and delivered to the Requesting Holder. In the event that
less than all the shares represented by any such certificate have been redeemed
on a Redemption Date, a new certificate shall be issued representing the shares
not redeemed and such certificate shall be retained by the Corporation for
cancellation on the next Redemption Date(s).
(f) STATUS OF SHARES SPECIFIED IN THE REDEMPTION NOTICE. From and
after the Initial Redemption Date, unless there has been a default in payment of
the Series B Redemption Price, the Series C Redemption Price, the Series D
Redemption Price or the Series E Redemption Price, all rights of the Requesting
Holders with respect to the shares of Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred specified in the Redemption Notice
(except the right to receive the Series B Redemption Price, the Series C
Redemption Price, the Series D Redemption Price or the Series E Redemption
Price) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of such shares on any Redemption Date are insufficient
to redeem the total number of shares of Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred to be redeemed on such date, those
funds which are legally available shall be used to redeem the maximum possible
number of such shares, and the shares of Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred not redeemed shall be deemed to be
outstanding and shall be entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of such shares, such funds will immediately
be used to redeem the balance of the shares that the Corporation has become
obligated to redeem on any Redemption Date but that it has not redeemed.
(g) PARTIAL REVOCATION OF REDEMPTION NOTICE. Notwithstanding any
provision in this Section 5.5 to the contrary, if, after the Initial Redemption
Date, while a Requesting Holder has not yet received in full the Series B
Redemption Price, the Series C Redemption Price, the Series D Redemption Price
or the Series E Redemption Price, as applicable, for all shares specified in
his/her/its Redemption Notice (the shares for which the applicable redemption
price has not been received shall be referred to as the "Shares Being
Redeemed"), the Corporation enters into any transaction described in Section
5.2(d) in which the Requesting Holder would have received an amount per share,
in cash or securities of another corporation or corporations, greater than the
Series B Redemption Price, the Series C
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Redemption Price, the Series D Redemption Price or the Series E Redemption
Price, as applicable, for the Shares Being Redeemed had the shares not been the
subject of the Redemption Notice, the Corporation shall notify the Requesting
Holder in writing of such transaction, in accordance with Section 5.4(h), as if
his/her/its rights with respect to the Shares Being Redeemed had not terminated
in accordance with Section 5.5, and if, within seven (7) days of receipt of such
notice, the Requesting Holder delivers written notice to the Corporation of
his/her/its election to convert the Shares Being Redeemed into Common Stock,
such shares shall be converted to Common Stock in accordance with Section 5.4
and simultaneously the Requesting Holder's right to receive the applicable
redemption price for the Shares Being Redeemed shall terminate.
5.6 COVENANTS.
(a) SERIES A PREFERRED, SERIES B PREFERRED, SERIES C PREFERRED AND
SERIES D PREFERRED. In addition to any other rights provided by law, this
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred, voting as a single voting group:
(i) amend or repeal any provision of, or add any provision to,
the Corporation's Articles of Incorporation if such action would alter or change
the preferences, rights, or privileges of the Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred;
(ii) increase or decrease the authorized number of shares of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Common Stock;
(iii) authorize, create or issue any shares of (A) Preferred
Stock or securities convertible into Common Stock equal or senior to the Series
A Preferred, Series B Preferred, Series C Preferred or Series D Preferred as to
dividends, conversion rights, redemption rights or liquidation preference or (B)
Common Stock equal or senior to the Series D Preferred as to redemption rights
or liquidation preference or senior to the Series D Preferred as to dividends or
voting rights (other than shares issuable upon exercise of the Series C
Preferred Stock Warrants issued pursuant to the Series C Preferred Stock
Purchase Agreement dated October 25, 1995 or the Series D Preferred Stock
Purchase Warrants issued pursuant to the Series D Preferred Stock Purchase
Agreement dated November 19, 1996);
(iv) merge or consolidate with one or more other corporations
if, after such merger or consolidation, the stockholders of the Corporation
would hold stock representing less than a majority of the voting power of the
outstanding stock of the surviving corporation; or
(v) declare or pay any dividend on the Common Stock.
(b) SERIES D PREFERRED. In addition to any other rights provided by
law, this Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than Sixty-Six and Two-Thirds Percent
(662/3%) of the outstanding shares of Series D Preferred:
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(i) amend or repeal any provision of, or add any provision to,
the Corporation's Articles of Incorporation if such action would adversely alter
or change the preferences, rights, or privileges of the Series D Preferred;
(ii) increase the authorized number of shares of Series D
Preferred;
(iii) authorize, create or issue any shares of (A) Preferred
Stock or securities convertible into Common Stock equal or senior to the Series
D Preferred as to dividends, conversion rights, redemption rights or liquidation
preference or (B) Common Stock equal or senior to the Series D Preferred as to
redemption rights or liquidation preference or senior to the Series D Preferred
as to dividends or voting rights (other than shares issuable upon exercise of
the Series C Preferred Stock Warrants issued pursuant to the Series C Preferred
Stock Purchase Agreement dated October 25, 1995 or the Series D Preferred Stock
Purchase Warrants issued pursuant to the Series D Preferred Stock Purchase
Agreement dated November 19, 1996); or
(iv) declare or pay any dividend.
ARTICLE VI
DIRECTORS
6.1 NUMBER OF DIRECTORS.
6.1.1 The number of directors of the Corporation shall be fixed as
provided in the Bylaws and may be changed from time to time by amending the
Bylaws.
6.1.2 When the Board of Directors shall consist of four or more
members, the directors shall be divided into three classes: Class 1, Class 2 and
Class 3. Such classes shall be as nearly equal in number of directors as
possible. Except as provided in Section 6.1.4, each director shall serve for a
term ending at the third annual meeting of shareholders following the director's
election; provided, that the director or directors first elected to Class 1
shall serve for a term ending at the first annual meeting of shareholders
following such election, the director or directors first elected to Class 2
shall serve for a term ending at the second annual meeting of shareholders
following such election, and the director or directors first elected to Class 3
shall serve for a term ending at the third annual meeting of shareholders
following such election.
6.1.3 At each annual meeting of shareholders, the directors
nominated to succeed those whose terms then expire shall be identified as being
of the same class as the directors they succeed unless, by reason of any
intervening changes in the authorized number of directors, the Board of
Directors shall designate one or more directorships whose terms then expire as
directorships of another class in order more nearly to achieve equality in the
number of directors in the respective classes. When the Board of Directors fills
a vacancy resulting from the death, resignation or removal of a director, the
director chosen to fill that vacancy shall be of the same class as the director
he succeeds.
6.1.4 Notwithstanding the foregoing provisions of this Section 6.1,
in all cases, including upon any change in the authorized number of directors,
each director then continuing to serve as such will nevertheless continue as a
director of the class of which he is a member until the expiration of his or her
term or his or her earlier death, resignation or
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removal. Any vacancy in any class resulting from the death, resignation or
removal of a director or an increase in the number of authorized directors may
be filled by the directors in any manner permitted by the Act; provided, if the
term of the director or directors in that class is not scheduled to expire at
the next annual meeting of shareholders, the term of the director chosen to fill
such vacancy shall continue only until the next annual meeting of shareholders
at which a successor shall be chosen for a term to expire at the scheduled date
for expiration of the term of the director or directors in that class.
6.1.5 If a Qualified Public Offering does not occur on or prior to
January 31, 1998, then the provisions of Sections 6.1.2 through 6.1.4 shall
automatically cease to apply, and each director then in office shall continue in
office, without class designation, until the next annual meeting of shareholders
or until his or her earlier death, resignation or removal.
6.2 REMOVAL.
6.2.1 Any director or the entire Board of Directors may be removed
with or without cause by the holders of not less than a majority of the shares
then entitled to vote at an election of directors; provided, that, following a
Qualified Public Offering, no director may be removed without "cause," as
defined below. Action to remove a director may be taken at any annual or special
meeting of the shareholders of this Corporation, provided that notice of the
proposed removal, which shall include a statement of the charges alleged against
the director in the event of removal for cause, shall have been duly given to
the shareholders together with or as a part of the notice of the meeting.
6.2.2 Where a proposal to remove a director for cause is to be
presented for shareholder consideration following a Qualified Public Offering,
an opportunity shall be provided the director to present the director's defense
to the shareholders in a statement to accompany or precede the notice of the
meeting at which such proposal is to be presented. The director shall also be
served with notice of the meeting at which such proposal is to be presented,
together with a statement of the specific charges alleged against the director,
and shall be given an opportunity to be present and to be heard at the meeting.
6.2.3 For purposes of this Section 6.2, "cause" for removal shall be
limited to (a) action by a director involving willful malfeasance having a
material adverse effect on the Corporation and (b) conviction of a director of a
felony; provided, that action by a director shall not constitute "cause" if, in
good faith, the director believed such action to be in or not opposed to the
best interests of the Corporation, or if the director is entitled, under
applicable law or the Articles of Incorporation or Bylaws of this Corporation,
to be indemnified with respect to such action.
6.3 AUTHORITY OF BOARD OF DIRECTORS TO AMEND BYLAWS. Subject to the
limitation(s) of RCW 23B.10.210, and subject to the power of the shareholders of
the Corporation to change or repeal the Bylaws, the Board of Directors is
expressly authorized to make, amend, or repeal the Bylaws of the Corporation
unless the shareholders in amending or repealing a particular bylaw provide
expressly that the Board of Directors may not amend or repeal that bylaw.
6.4 CONTRACTS WITH INTERESTED DIRECTORS. Subject to the limitations set
forth in RCW 23B.08.700 through 23B.08.730:
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6.4.1 The Corporation may enter into contracts and otherwise
transact business as vendor, purchaser, lender, borrower, or otherwise with its
directors and with corporations, associations, firms, and entities in which they
are or may be or become interested as directors, officers, shareholders,
members, or otherwise.
6.4.2 Any such contract or transaction shall not be affected or
invalidated or give rise to liability by reason of the director's having an
interest in the contract or transaction.
6.5 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
6.5.1 The capitalized terms in this Section 6.5 shall have the
meanings set forth in RCW 23B.08.500.
6.5.2 The Corporation shall indemnify and hold harmless each
individual who is or was serving as a Director or officer of the Corporation or
who, while serving as a Director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against any and all Liability incurred with respect to any Proceeding to which
the individual is or is threatened to be made a Party because of such service,
and shall make advances of reasonable Expenses with respect to such Proceeding,
to the fullest extent permitted by law, without regard to the limitations in RCW
23B.08.510 through 23B.08.550; provided that no such indemnity shall indemnify
any Director or officer from or on account of (1) acts or omissions of the
Director or officer finally adjudged to be intentional misconduct or a knowing
violation of law; (2) conduct of the Director or officer finally adjudged to be
in violation of RCW 23B.08.310; or (3) any transaction with respect to which it
was finally adjudged that such Director or officer personally received a benefit
in money, property, or services to which the Director or officer was not legally
entitled.
6.5.3 The Corporation may purchase and maintain insurance on behalf
of an individual who is or was a Director, officer, employee, or agent of the
Corporation or, who, while a Director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise against Liability asserted against or incurred by the individual in
that capacity or arising from the individual's status as a Director, officer,
employee, or agent, whether or not the Corporation would have power to indemnify
the individual against such Liability under RCW 23B.08.510 or 23B.08.520.
6.5.4 If, after the effective date of this Section 6.5, the Act is
amended to authorize further indemnification of Directors or officers, then
Directors and officers of the Corporation shall be indemnified to the fullest
extent permitted by the Act as so amended.
6.5.5 To the extent permitted by law, the rights to indemnification
and advance of reasonable Expenses conferred in this Section 6.5 shall not be
exclusive of any other right which any individual may have or hereafter acquire
under any statute, provision of the Bylaws, agreement, vote of shareholders or
disinterested Directors, or otherwise. The right to indemnification conferred in
this Section 6.5 shall be a contract right upon which each Director or officer
shall be presumed to have relied in determining to serve or to continue to serve
as
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such. Any amendment to or repeal of this Section 6.5 shall not adversely
affect any right or protection of a Director or officer of the Corporation for
or with respect to any acts or omissions of such Director or officer occurring
prior to such amendment or repeal.
6.5.6 If any provision of this Section 6.5 or any application
thereof shall be invalid, unenforceable, or contrary to applicable law, the
remainder of this Section 6.5, and the application of such provisions to
individuals or circumstances other than those as to which it is held invalid,
unenforceable, or contrary to applicable law, shall not be affected thereby.
6.6 LIMITATION OF DIRECTORS' LIABILITY. To the fullest extent permitted by
the Act, as it exists on the date hereof or may hereafter be amended, a director
of this Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for conduct as a director. Any amendment to or
repeal of this Section 6.6 shall not adversely affect a director of this
Corporation with respect to any conduct of such director occurring prior to such
amendment or repeal.
ARTICLE VII
OTHER MATTERS
7.1 CERTAIN CORPORATE GOVERNANCE MATTERS. At all times following the
closing of a Qualified Public Offering, the following provisions will apply:
7.1.1 STRATEGIC TRANSACTIONS COMMITTEE.
(a) MEMBERS. There shall be a Strategic Transactions Committee
(the "Committee") of the Board of Directors which shall consist of three (3)
directors. The members of the initial Committee shall be Robert Glaser, the
Corporation's Founder, James Breyer and Mitchell Kapor. A member of the
Committee shall automatically cease to be a member of the Committee upon the
earlier of: (i) his or her death, resignation or removal as a director, or (ii)
at the option of the Chairman of the Committee, his or her ceasing to hold or
control, directly or indirectly, at least five percent (5%) of the outstanding
shares of capital stock of the Corporation. Neither the Board of Directors nor
the shareholders shall have any authority to remove any member of the Committee
or to otherwise reconstitute the Committee or its membership.
(b) CHAIRMAN OF COMMITTEE. Mr. Glaser shall serve as Chairman
of the Committee as long as he is a member of the Committee. At such time as Mr.
Glaser is no longer a member of the Committee, the Committee shall select one of
its members as Chairman.
(c) POWER OF COMMITTEE. Without the prior approval of the
Committee, the Board of Directors of the Corporation shall not have the power
and authority to: (i) adopt a plan of merger, (ii) authorize the sale, lease,
exchange or mortgage of (A) assets representing more than fifty percent (50%) of
the book value of the Corporation's assets prior to the transaction, or (B) any
other asset or assets on which the long-term business strategy of the
Corporation is substantially dependent, (iii) authorize the voluntary
dissolution of the Corporation, or (iv) take any action that has the effect of
clauses (i) through (iii) of this Section 7.1.1(c).
(d) MEETINGS AND NOTICE. The Committee shall meet from time to
time on the call of its Chairman or of the other two members. Each meeting of
the Committee shall be
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held at the date, time and place as may be designated in the notice of the
meeting given by the person or persons authorized to call the meeting. Notice of
the date, time and place of each meeting of the Committee shall be given to each
member of the Committee in any manner permitted by the Act not less than one (1)
day prior to the meeting; such notice need not state the purpose or purposes of
the meeting. The Committee shall keep regular minutes of its meetings and
proceedings.
(e) QUORUM. At any meeting of the Committee, presence of the
Chairman and at least one other member thereof shall constitute a quorum. The
act of at least two (2) members of the Committee at a meeting at which a quorum
is present shall be the act of the Committee. All action of the Committee shall
be taken at a meeting of the Committee or as otherwise provided or allowed by
law.
(f) VACANCIES. Any vacancy on the Committee shall be filled by
the remaining member or members of the Committee, regardless of whether or not a
quorum. If two members of the Committee remain and they are unable to agree on
an individual to fill the vacancy, the vacancy may be filled by the member who
holds or controls, directly or indirectly, the larger percentage of the
outstanding shares of capital stock of the Corporation.
(g) TERMINATION OF COMMITTEE. The Committee, by vote of the
Chairman of the Committee and one additional member, may limit the powers of the
Committee or may terminate the Committee. The existence and powers of the
Committee shall terminate when the members in the aggregate cease to hold or
control, directly or indirectly, at least ten percent (10%) of the outstanding
shares of capital stock of the Corporation. The Board of Directors shall have
and succeed to any and all power and authority of the Committee that have been
limited or eliminated as a result of actions taken pursuant to this Section
7.1.1(g).
7.1.2 POLICY OMBUDSMAN. Mr. Glaser shall serve, or shall appoint
another officer of the Corporation who shall serve, as the Corporation's Policy
Ombudsman. The Policy Ombudsman shall have exclusive responsibility for adopting
or changing the editorial policies of the Corporation as reflected on the
Corporation's Web sites or in other communications or media where the
Corporation has a significant editorial or media voice. The Policy Ombudsman may
be removed only by the unanimous approval of all members of the Board of
Directors. Upon the death, resignation or removal of Mr. Glaser as the Policy
Ombudsman, the Chief Executive Officer or another officer of the Corporation
appointed by the Chief Executive Officer, shall serve as his or her successor.
7.1.3 AUTHORITY FOR SECTION 7.1. The provisions of this Section 7.1
are intended to modify the authority of the Board of Directors in a manner
permitted by RCW 23B.08.010(3) and shall be construed consistent with that
provision of the Act. Except as otherwise provided in these Articles of
Incorporation, as amended from time to time, the Committee shall have all of the
powers and authority of a committee of the Board of Directors created pursuant
to RCW 23B.08.250.
7.1.4 AMENDMENT OF SECTION 7.1. Notwithstanding any provision of
these Articles of Incorporation or the Corporation's Bylaws, as either may be
amended from time to time by the Board of Directors or the shareholders of the
Corporation, this Section 7.1 cannot be amended without the approval of the
holders of ninety percent (90%) of the shares entitled to be voted on such
proposed amendment(s).
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7.2 AMENDMENTS TO ARTICLES OF INCORPORATION. Except as otherwise provided
in these Articles of Incorporation, as amended from time to time, the
Corporation reserves the right to amend, alter, change, or repeal any provisions
contained in these Articles of Incorporation in any manner now or hereafter
prescribed or permitted by statute. All rights of shareholders of the
Corporation are subject to this reservation. A shareholder of the Corporation
does not have a vested property right resulting from any provision of these
Articles of Incorporation.
7.3 CORRECTION OF CLERICAL ERRORS. The Corporation shall have authority to
correct clerical errors in any documents filed with the Secretary of State of
Washington, including these Articles of Incorporation or any amendments hereto,
without the necessity of special shareholder approval of such corrections.
Executed this _____ day of September, 1997.
--------------------------------------
Robert Glaser, Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.4
BYLAWS
OF
PROGRESSIVE NETWORKS, INC.
ADOPTED MARCH 31, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
ARTICLE I SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3.1 Notice of Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3.2 Proposed Articles of Amendment, Merger, Exchange, Sale, Lease or Disposition . . . . . . . . . . . . 2
1.3.3 Proposed Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3.4 Declaration of Mailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3.5 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Quorum; Vote Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6 Fixing Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.7 Shareholders' List for Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.8 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.9 Action by Shareholders Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.10 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE II BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Responsibility of Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Number of Directors; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Election; Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.10 Notice of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.11 Quorum of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.12 Dissent by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.13 Action by Directors Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.14 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.15 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.16 Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Officers Enumerated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
3.3.1 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3.2 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3.3 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3.4 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3.5 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.4 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.5 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.6 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.7 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.8 Other Officers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.9 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.10 General Standards for Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV CONTRACTS, CHECKS AND DRAFTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Checks, Drafts, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.1 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.2 Certificates of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 Stock Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.4 Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.5 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI RECORDS OF CORPORATE MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VII FINANCIAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IX CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE X INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.2 Mandatory Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.4 Changes in Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.5 Exclusivity; Nature of Rights; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE XI MISCELLANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C> <C>
11.1 Communications by Facsimile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.2 Inspector of Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.3 Rules of Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.4 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XII AMENDMENT OF BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE XIII AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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BYLAWS OF
PROGRESSIVE NETWORKS, INC.
These Bylaws are promulgated pursuant to the Washington Business
Corporation Act, as set forth in Title 23B of the Revised Code of Washington
(the "Act").
ARTICLE I
SHAREHOLDERS
1.1 Annual Meeting. The annual meeting of the shareholders of the
corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held each year within
ninety (90) to one hundred eighty (180) days after the fiscal year end of the
corporation at a date, time and location determined by resolution of the Board
of Directors. At any time prior to the commencement of the annual meeting, the
Board may postpone the annual meeting for a period of up to one hundred twenty
(120) days from the date fixed for such meeting in accordance with this Section
1.1.
1.2 Special Meetings. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the Board of Directors or by
the Chairman of the Board (if one be appointed) or by the President or by one
or more shareholders holding at least twenty-five percent (25%) of all the
shares entitled to be cast on any issue proposed to be considered at that
meeting, to be held at such time and place as the Board or the Chairman (if one
be appointed) or the President may prescribe.
If a special meeting is called by any person or persons other than the
Board of Directors or the Chairman of the Board (if one be appointed) or the
President, then a written demand, describing with reasonable clarity the
purpose or purposes for which the meeting is called and specifying the general
nature of the business proposed to be transacted, shall be delivered personally
or sent by registered mail or by telegraphic or other facsimile transmission to
the Secretary of the corporation. Upon receipt of such a demand, the Secretary
shall cause notice of such meeting to be given, within thirty (30) days after
the date the demand was delivered to the Secretary, to the shareholders
entitled to vote, in accordance with the provisions of Section 1.3 of these
Bylaws. Except as provided below, if the notice is not given by the Secretary
within thirty (30) days after the date the demand was delivered to the
Secretary, then the person or persons demanding the meeting may specify the
time and place of the meeting and give notice thereof.
1.3 Notice of Meetings. Except as otherwise provided below, the
Secretary, Assistant Secretary, or any transfer agent of the corporation shall
give, in any manner permitted by law, not less than ten (10) nor more than
sixty (60) days before the date of any
1
<PAGE> 6
meeting of shareholders, written notice stating the place, day, and time of the
meeting to each shareholder of record entitled to vote at such meeting. If
mailed, notice to a shareholder shall be effective when mailed, with
first-class postage thereon prepaid, correctly addressed to each shareholder at
the shareholder's address as it appears on the current record of shareholders
of the corporation. Otherwise, written notice shall be effective at the
earliest of the following: (a) when received, (b) five (5) days after its
deposit in the United States mail, as evidenced by the postmark, if mailed with
first-class postage, prepaid, and correctly addressed, or (c) on the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee.
1.3.1 Notice of Special Meeting. In the case of a special
meeting, the written notice shall also state with reasonable clarity the
purpose or purposes for which the meeting is called and the general nature of
the business proposed to be transacted at the meeting. No business other than
that within the purpose or purposes specified in the notice may be transacted
at a special meeting.
1.3.2 Proposed Articles of Amendment, Merger, Exchange, Sale,
Lease or Disposition. If the business to be conducted at any meeting includes
any proposed amendment to the Articles of Incorporation or any proposed merger
or exchange of shares, or any proposed sale, lease, exchange, or other
disposition of all or substantially all of the property and assets (with or
without the goodwill) of the corporation not in the usual or regular course of
its business, then the written notice shall state that the purpose or one of
the purposes is to consider the proposed amendment or plan of merger, exchange
of shares, sale, lease, exchange, or other disposition, as the case may be,
shall describe the proposed action with reasonable clarity, and shall be
accompanied by a copy of the proposed amendment or plan. Written notice of
such meeting shall be given to each shareholder of record, whether or not
entitled to vote at such meeting, not less than twenty (20) days before such
meeting, in the manner provided in Section 1.3 above.
1.3.3 Proposed Dissolution. If the business to be conducted at
any meeting includes the proposed voluntary dissolution of the corporation,
then the written notice shall state that the purpose or one of the purposes is
to consider the advisability thereof. Written notice of such meeting shall be
given to each shareholder of record, whether or not entitled to vote at such
meeting, not less than twenty (20) days before such meeting, in the manner
provided in Section 1.3 above.
1.3.4 Declaration of Mailing. A declaration of the mailing or
other means of giving any notice of any shareholders' meeting, executed by the
Secretary, Assistant Secretary, or any transfer agent of the corporation giving
the notice , shall be prima facie evidence of the giving of such notice.
1.3.5 Waiver of Notice. A shareholder may waive notice of any
meeting at any time, either before or after such meeting. Except as provided
below, the waiver must be in writing, be signed by the shareholder entitled to
the notice, and be delivered to the corporation for inclusion in the minutes or
filing with the corporate records. A shareholder's
2
<PAGE> 7
attendance at a meeting in person or by proxy waives objection to lack of
notice or defective notice of the meeting unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting on the ground that the meeting is not lawfully called or
convened. In the case of a special meeting, or an annual meeting at which
fundamental corporate changes are considered, a shareholder waives objection to
consideration of a particular matter that is not within the purpose or purposes
described in the meeting notice unless the shareholder objects to considering
the matter when it is presented.
1.4 Quorum; Vote Requirement. A quorum shall exist at any meeting
of shareholders if a majority of the votes entitled to be cast is represented
in person or by proxy. Once a share is represented for any purpose at a
meeting other than solely to object to holding the meeting or transacting
business at the meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or must be set for that adjourned meeting. Subject to the
foregoing, the determination of the voting groups entitled to vote (as required
by law), and the quorum and voting requirements applicable thereto, must be
made separately for each matter being considered at a meeting. In the case of
any meeting of shareholders that is adjourned more than once because of the
failure of a quorum to attend, those who attend the third convening of such
meeting, although less than a quorum, shall nevertheless constitute a quorum
for the purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than
one-third of the shares entitled to vote.
If a quorum exists, action on a matter (other than the election of
directors) is approved by a voting group if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group
opposing the action unless a greater number of affirmative votes is required by
law or by the Articles of Incorporation.
1.5 Adjourned Meetings. An adjournment or adjournments of any
shareholders' meeting, whether by reason of the failure of a quorum to attend
or otherwise, may be taken to such date, time, and place as the chairman of the
meeting may determine without new notice being given if the date, time, and
place are announced at the meeting at which the adjournment is taken. However,
if the adjournment is for more than one hundred twenty (120) days from the date
set for the original meeting, a new record date for the adjourned meeting shall
be fixed and a new notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting, in accordance
with the provisions of Section 1.3 of these Bylaws. At any adjourned meeting,
the corporation may transact any business which might have been transacted at
the original meeting. Any meeting at which directors are to be elected shall
be adjourned only from day to day until such directors are elected.
1.6 Fixing Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders (or, subject to
Section 1.5 above, any adjournment thereof), the Board of Directors may fix in
advance a date as the record date for
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any such determination of shareholders, such date in any case to be not more
than seventy (70) days prior to the meeting. If no such record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, then the day before the first notice is delivered to
shareholders shall be the record date for such determination of shareholders.
If no notice is given because all shareholders entitled to notice have waived
notice, then the record date for the determination of shareholders entitled to
notice of or to vote at a meeting shall be the date on which the last such
waiver of notice was obtained. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, except as
provided in Section 1.5 of these Bylaws. If no notice is given because all
shareholders entitled to notice have signed a consent as described in Section
1.9 below, the record date for determining shareholders entitled to take action
without a meeting is the date the first shareholder signs the consent.
1.7 Shareholders' List for Meeting. The corporation shall cause to
be prepared an alphabetical list of the names of all of its shareholders on the
record date who are entitled to notice of a shareholders' meeting or any
adjournment thereof. The list must be arranged by voting group (and within
each voting group by class or series of shares) and show the address of and the
number of shares held by each shareholder. The shareholders' list must be
available for inspection by any shareholder, beginning ten (10) days prior to
the meeting and continuing through the meeting, at the principal office of the
corporation or at a place identified in the meeting notice in the city where
the meeting will be held. Such list shall be produced and kept open at the
time and place of the meeting. During such ten-day period, and during the
whole time of the meeting, the shareholders' list shall be subject to the
inspection of any shareholder, or the shareholder's agent or attorney. In
cases where the record date is fewer than ten (10) days prior to the meeting
because notice has been waived by all shareholders, the Secretary shall keep
such record available for a period from the date the first waiver of notice was
delivered to the date of the meeting. Failure to comply with the requirements
of this section shall not affect the validity of any action taken at the
meeting.
1.8 Ratification. Subject to the requirements of RCW 23B.08.730,
23B.17.020, and 23B.19.040, any contract, transaction, or act of the
corporation or of any director or officer of the corporation that shall be
authorized, approved, or ratified by the affirmative vote of a majority of
shares represented at a meeting at which a quorum is present shall, insofar as
permitted by law, be as valid and as binding as though ratified by every
shareholder of the corporation.
1.9 Action by Shareholders Without a Meeting. Any action which may
be or which is required by law to be taken at any meeting of shareholders may
be taken, without a meeting or notice of a meeting, if one or more consents in
writing, setting forth the action so taken, are signed by all of the
shareholders entitled to vote or, in the place of any one or more of such
shareholders, by a person holding a valid proxy to vote with respect to the
subject matter thereof, and are delivered to the corporation for inclusion in
the minutes or filing with the corporate records. If notice of the proposed
action to be taken by unanimous
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consent of the voting shareholders is required by law to be given to nonvoting
shareholders, the corporation must give its nonvoting shareholders written
notice of the proposed action at least ten (10) days before the action is
taken. The notice must contain or be accompanied by the same material that, by
law, would have been required to be sent to nonvoting shareholders in a notice
of meeting at which the proposed action would have been submitted to such
shareholders for action. Action taken by unanimous written consent is
effective when all consents are in possession of the corporation, unless the
consent specifies a later effective date. Such consent shall have the same
force and effect as a meeting vote of shareholders and may be described as such
in any articles or other document filed with the Secretary of State of the
State of Washington.
1.10 Telephonic Meetings. Shareholders may participate in a meeting
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time, and participation by such means shall constitute presence in person
at a meeting.
ARTICLE II
BOARD OF DIRECTORS
2.1 Responsibility of Board of Directors. The business and affairs
and property of the corporation shall be managed under the direction of a Board
of Directors. A director shall discharge the duties of a director, including
duties as a member of a committee, in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner the director reasonably believes to be in the best interests of
the corporation. In discharging the duties of a director, a director is
entitled to rely on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by:
(a) one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters presented; (b)
legal counsel, public accountants, or other persons as to matters the director
reasonably believes are within the person's professional or expert competence;
or (c) a committee of the Board of Directors of which the director is not a
member, if the director reasonably believes the committee merits confidence. A
director is not acting in good faith if the director has knowledge concerning
the matter in question that makes reliance otherwise permitted above
unwarranted. The creation of, delegation of authority to, or action by a
committee does not alone constitute compliance by a director with the standards
of conduct imposed by law upon directors. A director is not liable for any
action taken as a director, or any failure to take any action, if the director
performed the duties of the director's office in compliance with this section.
2.2 Number of Directors; Qualification. The Board shall be composed
of not less than one (1) and not more than seven (7) directors, the specific
number to be set by resolution of the Board of Directors or the Shareholders.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires. If a
greater or lesser number of directors than is specified in this section is
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elected by the shareholders, then election of that number shall automatically
be deemed to constitute an amendment to these Bylaws. No director need be a
shareholder of the corporation or a resident of Washington. Each director must
be at least eighteen (18) years of age.
2.3 Election; Term of Office. At the first annual meeting of
shareholders and at each annual meeting thereafter, the shareholders shall
elect directors. Except in the case of death, resignation or removal, each
director shall hold office until the next succeeding annual meeting or, in the
case of staggered terms as permitted by RCW 23B.08.060, for the term for which
she is elected, and in each case until her successor shall have been elected
and qualified.
2.4 Vacancies. Except as otherwise provided by law, any vacancy
occurring in the Board of Directors (whether caused by resignation, death, or
otherwise) may be filled by the affirmative vote of a majority of the directors
present at a meeting of the Board at which a quorum is present, or, if the
directors in office constitute less than a quorum, by the affirmative vote of a
majority of all of the directors in office. Notice shall be given to all of
the remaining directors that such vacancy will be filled at the meeting.
However, if the vacant office was held by a director elected by a voting group
composed of less than all of the voting shareholders, then the Board of
Directors shall not have the power to fill such vacancy. A director elected to
fill any vacancy shall hold office until the next meeting of shareholders at
which directors are elected, and until her successor shall have been elected
and qualified.
2.5 Removal. One or more members of the Board of Directors
(including the entire Board) may be removed, with or without cause, at a
special meeting of shareholders called expressly for that purpose. A director
(or the entire Board) may be removed if the number of votes cast in favor of
removing such director (or the entire Board) exceeds the number of votes cast
against removal; provided that, if a director (or the entire Board) has been
elected by one or more voting groups, only those voting groups may participate
in the vote as to removal. However, if the Articles of Incorporation grant
shareholders the right to cumulate their votes in the election of directors, a
director may not be removed if a number of votes sufficient to elect such
director under cumulative voting (computed on the basis of the number of votes
actually cast at the meeting on the question of removal) is cast against such
director's removal.
2.6 Resignation. A director may resign at any time by delivering
written notice to the Board of Directors, its Chairman, the President, or the
Secretary. A resignation is effective when the notice is delivered unless the
notice specifies a later effective date.
2.7 Annual Meeting. The first meeting of each newly elected Board
of Directors shall be known as the annual meeting thereof and shall be held
without notice immediately after the annual shareholders' meeting or any
special shareholders' meeting at which a Board is elected. Such meeting shall
be held at the same place as such shareholders' meeting unless some other place
shall be specified by resolution of the shareholders.
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2.8 Regular Meetings. Regular meetings of the Board of Directors
may be held at such place, day, and time as shall from time to time be fixed by
resolution of the Board without notice other than the delivery of such
resolution as provided in Section 2.10 below.
2.9 Special Meetings. Special meetings of the Board of Directors
may be called by the President or the Chairman of the Board (if one be
appointed) or any two or more directors, to be held at such place, day, and
time as specified by the person or persons calling the meeting.
2.10 Notice of Meeting. Notice of the place, day, and time of any
meeting of the Board of Directors for which notice is required shall be given,
at least two (2) days preceding the day on which the meeting is to be held, by
the Secretary or an Assistant Secretary, or by the person calling the meeting,
in any manner permitted by law, including orally. Any oral notice given by
personal communication over the telephone or otherwise may be communicated
either to the director or to a person at the office of the director who, the
person giving the notice has reason to believe, will promptly communicate it to
the director. Notice shall be deemed to have been given on the earliest of (a)
the day of actual receipt, (b) five (5) days after the day on which written
notice is deposited in the United States mail, as evidenced by the postmark,
with first-class postage prepaid, and correctly addressed, or (c) on the date
shown on the return receipt, if sent by registered or certified mail, return
receipt requested, and the receipt is signed by or on behalf of the addressee.
No notice of any regular meeting need be given if the place, day, and
time thereof have been fixed by resolution of the Board of Directors and a copy
of such resolution has been delivered to every director at least two (2) days
or deposited in the United States mail, as evidenced by the postmark, with
first-class postage prepaid, and correctly addressed at least five (5) days
preceding the day of the first meeting held in pursuance thereof.
Notice of a meeting of the Board of Directors need not be given to any
director if it is waived by the director in writing, whether before or after
such meeting is held. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting unless required by
law, the Articles of Incorporation, or these Bylaws.
A director's attendance at or participation in a meeting shall
constitute a waiver of notice of such meeting except when a director attends or
participates in a meeting for the express purpose of objecting on legal grounds
prior to or at the beginning of the meeting (or promptly upon the director's
arrival) to the holding of the meeting or the transaction of any business and
does not thereafter vote for or assent to action taken at the meeting. Any
meeting of the Board of Directors shall be a legal meeting without any notice
thereof having been given if all of the directors have received valid notice
thereof, are present without objecting, or waive notice thereof, or any
combination thereof.
2.11 Quorum of Directors. Except in particular situations where a
lesser number is expressly permitted by law, and unless a greater number is
required by the Articles of
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Incorporation, a majority of the number of directors specified in or fixed in
accordance with these Bylaws shall constitute a quorum for the transaction of
business, and the affirmative vote of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors. If the number of directors in office at any time is less than the
number specified in or fixed in accordance with these Bylaws, then a quorum
shall consist of a majority of the number of directors in office; provided that
in no event shall a quorum consist of fewer than one-third of the number
specified in or fixed in accordance with these Bylaws.
Directors at a meeting of the Board of Directors at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, provided such withdrawal does not reduce the number of
directors attending the meeting below the level of a quorum.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the Board of Directors to another time and
place. If the meeting is adjourned for more than forty-eight (48) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 2.10 of these
Bylaws, to the directors who were not present at the time of the adjournment.
2.12 Dissent by Directors. Any director who is present at any meeting
of the Board of Directors at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless the director
objects at the beginning of the meeting (or promptly upon the director's
arrival) to the holding of, or the transaction of business at, the meeting; or
unless the director's dissent or abstention shall be entered in the minutes of
the meeting; or unless the director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before the
adjournment thereof or to the corporation within a reasonable time after the
adjournment of the meeting. Such right to dissent or abstention shall not be
available to any director who votes in favor of such action.
2.13 Action by Directors Without a Meeting. Any action required by law
to be taken or which may be taken at a meeting of the Board of Directors may be
taken without a meeting if one or more consents in writing, setting forth the
action so taken, shall be signed either before or after the action so taken by
all of the directors and delivered to the corporation for inclusion in the
minutes or filing with the corporate records. Such consent shall have the same
effect as a meeting vote. Action taken under this section is effective when
the last director signs the consent, unless the consent specifies a later
effective date.
2.14 Telephonic Meetings. Except as may be otherwise restricted by the
Articles of Incorporation, members of the Board of Directors may participate in
a meeting of the Board by any means of communication by which all directors
participating in the meeting may simultaneously hear each other during the
meeting. Participation by such means shall constitute presence in person at a
meeting.
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2.15 Compensation. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, and may be paid a fixed sum or a
stated salary as a director, for attendance at each meeting of the Board. No
such payment shall preclude any director from serving the corporation in any
other capacity and receiving compensation therefor.
2.16 Committees. The Board of Directors, by resolution adopted by the
greater of (a) a majority of all of the directors in office, or (b) the number
of directors required by the Articles of Incorporation or these Bylaws to take
action may from time to time create, and appoint individuals to, one or more
committees, each of which must have at least two (2) members. If a committee
is formed for the purpose of exercising functions of the Board, the committee
must consist solely of directors. If the only function of a committee is to
study and make recommendations for action by the full Board, the committee need
not consist of directors. Members of a committee composed solely of directors,
in fulfilling their standard of conduct, may rely upon Section 2.1 above.
Committees of directors may exercise the authority of the Board of Directors to
the extent specified by such resolution or in the Articles of Incorporation or
these Bylaws. However, no committee shall:
(a) authorize or approve a distribution (as defined in RCW
23B.01.400) except according to a general formula or method prescribed by the
Board of Directors;
(b) approve or propose to shareholders action that by law
is required to be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any of
its committees;
(d) amend the Articles of Incorporation;
(e) adopt, amend, or repeal Bylaws;
(f) approve a plan of merger not requiring shareholder
approval; or
(g) authorize or approve the issuance or sale or contract
for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee of directors (or a senior
executive officer of the corporation) to do so within limits specifically
prescribed by the Board of Directors.
Committees shall be governed by the same provisions as govern the
meetings, actions without meetings, notice and waiver of notice, quorum and
voting requirements, and standards of conduct of the Board of Directors. The
Executive Committee (if one be established) shall meet periodically between
meetings of the full Board. All committees shall keep regular minutes of their
meetings and shall cause them to be recorded in books kept for that purpose at
the office of the corporation.
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ARTICLE III
OFFICERS
3.1 Appointment. The officers of the corporation shall be appointed
annually by the Board of Directors at its annual meeting held after the annual
meeting of the shareholders. If the appointment of officers is not held at
such meeting, such appointment shall be held as soon thereafter as a Board
meeting conveniently may be held. Except in the case of death, resignation, or
removal, each officer shall hold office until the next annual meeting of the
Board and until her successor is appointed and qualified.
3.2 Qualification. None of the officers of the corporation need be
a director, except as specified below. Any two or more of the corporate
offices may be held by the same person.
3.3 Officers Enumerated. Except as otherwise provided by resolution
of the Board of Directors, the officers of the corporation and their respective
powers and duties shall be as follows:
3.3.1 Chairman of the Board. The Chairman of the Board (if
such an officer be appointed) shall be a director and shall perform such duties
as shall be assigned to her by the Board of Directors and in any employment
agreement. The Chairman shall preside at all meetings of the shareholders and
at all meetings of the Board at which she is present. The Chairman may sign
deeds, mortgages, bonds, contracts, and other instruments, except when the
signing thereof has been expressly delegated by the Board or by these Bylaws to
some other officer or agent of the corporation or is otherwise required by law
to be signed by some other officer or in some other manner. If the President
dies or becomes unable to act, the Chairman shall perform the duties of the
President, except as may be limited by resolution of the Board of Directors,
with all the powers of and subject to all the restrictions upon the President.
3.3.2 President. Subject to such supervisory powers as may be
given by the Board of Directors to the Chairman of the Board (if such an
officer be appointed), the President shall be the chief executive officer of
the corporation unless some other officer is so designated by the Board and,
subject to the control of the Board and the Executive Committee (if one be
established), shall supervise and control all of the assets, business, and
affairs of the corporation. The President may sign certificates for shares of
the corporation, deeds, mortgages, bonds, contracts, and other instruments,
except when the signing thereof has been expressly delegated by the Board or by
these Bylaws to some other officer or agent of the corporation or is otherwise
required by law to be signed by some other officer or in some other manner.
The President shall vote the shares owned by the corporation in other
corporations, domestic or foreign, unless otherwise prescribed by law or
resolution of the Board. In general, the President shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Board from time to time. In the absence of the Chairman of the Board,
the President, if a director, shall preside over all meetings of the
shareholders and over all meetings of the Board of Directors. The President
shall have
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the authority to appoint one or more Assistant Secretaries and Assistant
Treasurers, as she deems necessary.
3.3.3 Vice Presidents. If no Chairman of the Board has been
appointed, in the absence or disability of the President, the Vice Presidents,
if any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board shall perform all the duties
of the President and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the President; provided that no such Vice
President shall assume the authority to preside as Chairman of meetings of the
Board unless such Vice President is a member of the Board. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be respectively prescribed for them by the Board, these Bylaws, the
President, or the Chairman of the Board (if one be appointed).
3.3.4 Secretary. The Secretary shall:
(a) have responsibility for preparing minutes of
meetings of the shareholders and the Board of Directors and for
authenticating records of the corporation;
(b) see that all notices are duly given in
accordance with the provisions of Sections 1.3, 1.5, 2.8, and 2.10 of
these Bylaws and as required by law;
(c) be custodian of the corporate records and seal
of the corporation, if one be adopted;
(d) keep a register of the post office address of
each shareholder and director;
(e) attest certificates for shares of the
corporation;
(f) have general charge of the stock transfer books
of the corporation;
(g) when required by law or authorized by
resolution of the Board of Directors, sign with the President, or other
officer authorized by the President or the Board, deeds, mortgages,
bonds, contracts, and other instruments; and
(h) in general, perform all duties incident to the
office of Secretary and such other duties as from time to time may be
assigned by the President or the Board of Directors.
In the absence of the Secretary, an Assistant Secretary may perform the
duties of the Secretary.
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3.3.5 Treasurer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of her duties in such
sum and with such surety or sureties as the Board shall determine. The
Treasurer shall:
(a) have charge and custody of and be responsible
for all funds and securities of the corporation;
(b) receive and give receipts for moneys due and
payable to the corporation from any source whatsoever and deposit all
such moneys in the name of the corporation in banks, trust companies, or
other depositories selected in accordance with the provisions of these
Bylaws; and
(c) in general, perform all of the duties incident
to the office of Treasurer and such other duties as from time to time
may be assigned by the President or the Board of Directors.
In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
3.4 Delegation. In case of the absence or inability to act of any
officer of the corporation and of each person herein authorized to act in her
place, the Board of Directors may from time to time delegate the powers and
duties of such officer to any other officer or other person whom it may select.
3.5 Resignation. Any officer may resign at any time by delivering
notice to the corporation. Any such resignation shall take effect at the time
the notice is delivered unless the notice specifies a later effective date.
Unless otherwise specified therein, acceptance of such resignation by the
corporation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
3.6 Removal. Any officer or agent may be removed by the Board with
or without cause. An officer empowered to appoint another officer or assistant
officer also has the power to remove any officer she would have the power to
appoint whenever in her judgment the best interests of the corporation would be
served thereby. The removal of an officer or agent shall be without prejudice
to the contract rights, if any, of the corporation or the person so removed.
Appointment of an officer or agent shall not of itself create contract rights.
3.7 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, creation of a new office, or any other
cause may be filled by the Board of Directors for the unexpired portion of the
term or for a new term established by the Board.
3.8 Other Officers and Agents. One or more Vice Presidents and such
other officers and assistant officers as may be deemed necessary or advisable
may be appointed by
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the Board of Directors or, to the extent provided in Section 3.3.2 above, by
the President. Such other officers and assistant officers shall hold office
for such periods, have such authorities, and perform such duties as are
provided in these Bylaws or as may be provided by resolution of the Board. Any
officer may be assigned by the Board any additional title that the Board deems
appropriate. The Board may delegate to any officer or agent the power to
appoint any such assistant officers or agents and to prescribe their respective
terms of office, authorities, and duties.
3.9 Compensation. Compensation, if any, for officers and other
agents and employees of the corporation shall be determined by the Board of
Directors, or by the President to the extent such authority may be delegated to
her by the Board. No officer shall be prevented from receiving compensation in
such capacity by reason of the fact that she is also a director of the
corporation.
3.10 General Standards for Officers. Officers with discretionary
authority shall discharge their duties under that authority in accordance with
the same standards of conduct applicable to directors as specified in Section
2.1 above (except for subsection (c) thereof).
ARTICLE IV
CONTRACTS, CHECKS AND DRAFTS
4.1 Contracts. The Board of Directors may authorize any officer or
officers or agent or agents to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation. Such authority
may be general or confined to specific instances.
Subject to the limitations set forth in RCW 23B.08.700 through
23B.08.730, 23B.17.020, and 23B.19.040, to the extent applicable:
(a) The corporation may enter into contracts and otherwise
transact business as vendor, purchaser, lender, borrower, or otherwise with its
directors and shareholders and with corporations, associations, firms, and
entities in which they are or may be or become interested as directors,
officers, shareholders, members, or otherwise.
(b) Any such contract or transaction shall not be affected
or invalidated or give rise to liability by reason of the director's or
shareholder's having an interest in the contract or transaction.
4.2 Checks, Drafts, Etc. All checks, drafts, and other orders for
the payment of money, notes, and other evidences of indebtedness issued in the
name of the corporation shall be signed by such officer or officers or agent or
agents of the corporation and in such manner as may be determined from time to
time by resolution of the Board of Directors.
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4.3 Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies, or other depositories as the Treasurer, subject to the
direction of the Board of Directors, may select.
ARTICLE V
STOCK
5.1 Issuance of Shares. No shares of the corporation shall be
issued unless authorized by the Board of Directors, which authorization shall
include the maximum number of shares to be issued, the consideration to be
received for each share, and, if the consideration is in a form other than
cash, the determination of the value of the consideration.
5.2 Certificates of Stock. Certificates of stock shall be issued in
numerical order, and each shareholder shall be entitled to a certificate signed
by the President or a Vice President, attested to by the Secretary or an
Assistant Secretary, and sealed with the corporate seal, if any. Every
certificate of stock shall state:
(a) The state of incorporation;
(b) The name of the registered holder of the shares
represented thereby;
(c) The number and class of shares, and the designation of
the series, if any, which such certificate represents;
(d) If the corporation is authorized to issue different
classes of shares or different series within a class, either a summary of (on
the face or back of the certificate), or a statement that the corporation will
furnish to any shareholder upon written request and without charge a summary
of, the designations, relative rights, preferences, and limitations applicable
to each class and the variations in rights, preferences and limitations
determined for each series, and the authority of the Board of Directors to
determine variations for future series; and
(e) If the shares are subject to transfer or other
restrictions under applicable securities laws or contracts with the
corporation, either a complete description of or a reference to the existence
and general nature of such restrictions on the face or back of the certificate.
5.3 Stock Records. The corporation or its agent shall maintain at
the registered office or principal office of the corporation, or at the office
of the transfer agent or registrar of the corporation, if one be designated by
the Board of Directors, a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders in
alphabetical order by class of shares showing the number and class of shares
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held by each. The person in whose name shares stand on the books of the
corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
5.4 Restrictions on Transfer. The Board of Directors shall have the
authority to issue shares of the capital stock of this corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose. Except to the extent that the corporation has obtained an
opinion of counsel acceptable to the corporation that transfer restrictions are
not required under applicable securities laws, all certificates representing
shares of the corporation shall bear the following legend (or a legend of
substantially the same import) on the face of the certificate or on the reverse
of the certificate if a reference to the legend is contained on the face:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this certificate have not been
registered under the Securities Act of 1933, or any state
securities laws, and may not be offered, sold, transferred,
encumbered, or otherwise disposed of except upon satisfaction of
certain conditions. Information concerning these restrictions
may be obtained from the corporation or its legal counsel. Any
offer or disposition of these securities without satisfaction of
said conditions will be wrongful and will not entitle the
transferee to register ownership of the securities with the
corporation.
5.5 Transfers. Shares of stock may be transferred by delivery of
the certificates therefor, accompanied by:
(a) an assignment in writing on the back of the
certificate, or an assignment separate from certificate, or a written power of
attorney to sell, assign, and transfer the same, signed by the record holder of
the certificate; and
(b) such additional documents, instruments, and other items
of evidence as may be reasonably necessary to satisfy the requirements of any
transfer restrictions applicable to such shares, whether arising under
applicable securities or other laws, or by contract, or otherwise.
Except as otherwise specifically provided in these Bylaws, no shares of
stock shall be transferred on the books of the corporation until the
outstanding certificate therefor has been surrendered to the corporation. All
certificates surrendered to the corporation for transfer shall be canceled, and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that, in case
of a lost, destroyed, or mutilated certificate, a new one may be issued
therefor upon such terms (including indemnity to the corporation) as the Board
of Directors may prescribe.
15
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ARTICLE VI
RECORDS OF CORPORATE MEETINGS
The corporation shall keep, as permanent records, minutes of all
meetings of its shareholders and Board of Directors, a record of all actions
taken by the shareholders or Board of Directors without a meeting, and a record
of all actions taken by a committee of the Board of Directors exercising the
authority of the Board of Directors on behalf of the corporation. The
corporation shall keep at its principal office a copy of the minutes of all
shareholders' meetings that have occurred, and records of all action taken by
shareholders without a meeting, within the past three (3) years. Any person
dealing with the corporation may rely upon a copy of any of the records of the
proceedings, resolutions, or votes of the Board or shareholders when certified
by the President or Secretary.
ARTICLE VII
FINANCIAL MATTERS
The corporation shall maintain appropriate accounting records at its
principal office and shall prepare the annual financial statements required by
RCW 23B.16.200. Except to the extent otherwise expressly determined by the
Board of Directors or otherwise required by law, the accounting records of the
corporation shall be kept and prepared in accordance with generally accepted
accounting principles applied on a consistent basis from period to period. The
fiscal year of the corporation shall be the calendar year unless otherwise
expressly determined by the Board of Directors.
ARTICLE VIII
DISTRIBUTIONS
The Board of Directors may from time to time authorize, and the
corporation may make, distributions (as defined in RCW 23B.01.400) to its
shareholders to the extent permitted by RCW 23B.06.400, subject to any
limitation in the Articles of Incorporation. A director who votes for or
assents to a distribution made in violation of RCW 23B.06.400 is personally
liable to the corporation for the amount of the distribution that exceeds that
which could have been distributed without violating RCW 23B.06.400 if it is
established that the director did not perform the director's duties in
compliance with Section 2.1 above.
ARTICLE IX
CORPORATE SEAL
The Board of Directors may, but shall not be required to, adopt a
corporate seal for the corporation in such form and with such inscription as
the Board may determine. If such a corporate seal shall at any time be so
adopted, the application of or the failure to apply such
16
<PAGE> 21
seal to any document or instrument shall have no effect upon the validity or
invalidity of such document or instrument under otherwise applicable principles
of law.
ARTICLE X
INDEMNIFICATION
As provided by Section 5.4 of the Articles of Incorporation:
10.1 Definitions. The capitalized terms in this Article X shall have
the meanings set forth in RCW 23B.08.500.
10.2 Mandatory Indemnification. The Corporation shall indemnify and
hold harmless each individual who is or was serving as a Director or officer of
the Corporation or who, while serving as a Director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against any and all Liability incurred with respect to any
Proceeding to which the individual is or is threatened to be made a Party
because of such service, and shall make advances of reasonable Expenses with
respect to such Proceeding, to the fullest extent permitted by law, without
regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided that
no such indemnity shall indemnify any Director or officer from or on account of
(a) acts or omissions of the Director or officer finally adjudged to be
intentional misconduct or a knowing violation of law; (b) conduct of the
Director or officer finally adjudged to be in violation of RCW 23B.08.310; or
(c) any transaction with respect to which it was finally adjudged that such
Director or officer personally received a benefit in money, property, or
services to which the Director or officer was not legally entitled.
10.3 Insurance. The Corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee, or
agent of the Corporation or, who, while a director, officer, employee, or agent
of the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise against Liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee, or agent, whether or not the Corporation would
have power to indemnify the individual against such Liability under RCW
23B.08.510 or 23B.08.520.
10.4 Changes in Law. If, after the effective date of this Article X,
the Act is amended to authorize further indemnification of Directors or
officers, then Directors and officers of the Corporation shall be indemnified
to the fullest extent permitted by the Act as so amended.
10.5 Exclusivity; Nature of Rights; Amendment. To the extent
permitted by law, the rights to indemnification and advance of reasonable
Expenses conferred in this Article X
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<PAGE> 22
shall not be exclusive of any other right which any individual may have or
hereafter acquire under any statute, provision of the Bylaws, agreement, vote
of shareholders or disinterested directors, or otherwise. The right to
indemnification conferred in this Article X shall be a contract right upon
which each Director or officer shall be presumed to have relied in determining
to serve or to continue to serve as such. Any amendment to or repeal of this
Article X shall not adversely affect any right or protection of a Director or
officer of the Corporation for or with respect to any acts or omissions of such
Director or officer occurring prior to such amendment or repeal.
ARTICLE XI
MISCELLANY
11.1 Communications by Facsimile. Whenever these Bylaws require
notice, consent, or other communication to be delivered for any purpose,
transmission by phone, wire, or wireless equipment which transmits a facsimile
of such communication shall constitute sufficient delivery for such purpose.
Such communication shall be deemed to have been received by or in the
possession of the addressee upon completion of the transmission.
11.2 Inspector of Elections. Before any annual meeting of
shareholders, the Board of Directors may appoint an inspector of elections to
act at the meeting and any adjournment thereof. If no inspector of elections
is so appointed by the Board, then the chairman of the meeting may appoint an
inspector of elections to act at the meeting. If any person appointed as
inspector fails to appear or fails or refuses to act, then the chairman of the
meeting may, and upon the request of any shareholder or a shareholder's proxy
shall, appoint a person to fill that vacancy.
Such inspector of elections shall:
(a) determine the number of shares outstanding and the
voting power of each, the number of shares represented at the meeting, the
existence of a quorum, and, with the advice of legal counsel to the
corporation, the authenticity, validity, and effect of proxies pursuant to RCW
23B.07.220 and 23B.07.240 and any procedure adopted by the Board of Directors
pursuant to RCW 23B.07.230;
(b) receive votes, ballots, or consents;
(c) hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine the result; and
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(f) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
11.3 Rules of Order. The rules contained in the most recent edition
of Robert's Rules of Order, Revised, shall govern all meetings of shareholders
and directors where those rules are not inconsistent with the Articles of
Incorporation or Bylaws, subject to the following:
(a) The chairman of the meeting shall have absolute
authority over matters of procedure, and there shall be no appeal from the
ruling of the chairman. If the chairman in her absolute discretion deems it
advisable to dispense with the rules of parliamentary procedure for any meeting
or any part thereof, the chairman shall so state and shall clearly state the
rules under which the meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents continuation of
the legitimate business of the meeting, the chairman may quit the chair and
announce the adjournment of the meeting; upon so doing, the meeting shall be
deemed immediately adjourned, subject to being reconvened in accordance with
Section 1.5 of these Bylaws, as the case may be.
(c) The chairman may ask or require that anyone not a bona
fide shareholder or proxy leave the meeting of shareholders.
(d) A resolution or motion at a meeting of shareholders
shall be considered for vote only if proposed by a shareholder or duly
authorized proxy and seconded by an individual who is a shareholder or duly
authorized proxy other than the individual who proposed the resolution or
motion.
11.4 Construction. Within these Bylaws, words of any gender shall be
construed to include any other gender, and words in the singular or plural
number shall be construed to include the plural or singular, respectively,
unless the context otherwise requires.
11.5 Severability. If any provision of these Bylaws or any
application thereof shall be invalid, unenforceable, or contrary to applicable
law, the remainder of these Bylaws, and the application of such provisions to
individuals or circumstances other than those as to which it is held invalid,
unenforceable, or contrary to applicable law, shall not be affected thereby.
ARTICLE XII
AMENDMENT OF BYLAWS
Subject to the requirements of RCW 23B.10.210 relating to supermajority
quorum provisions for the Board of Directors, the Bylaws of the corporation may
be amended or repealed, or new Bylaws may be adopted, by: (a) the
shareholders, even though the Bylaws may also be amended or repealed, or new
Bylaws may also be adopted, by the Board of
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Directors; or (b) subject to the power of the shareholders of the corporation
to change or repeal the Bylaws, the Board of Directors, unless such power is
reserved, by the Articles of Incorporation or by law, exclusively to the
shareholders in whole or in part or unless the shareholders, in amending or
repealing a particular bylaw, provide expressly that the Board of Directors may
not amend or repeal that bylaw.
ARTICLE XIII
AUTHENTICATION
The foregoing Bylaws were read, approved, and duly adopted by the Board
of Directors of Progressive Networks, Inc. on the 31st day of March, 1995, and
the President and Secretary of the corporation were empowered to authenticate
such Bylaws by their signatures below.
/s/ Rob Glaser
___________________________
Rob Glaser, President
/s/ Rob Glaser
___________________________
Rob Glaser, Secretary
20
<PAGE> 1
Exhibit 10.1
PROGRESSIVE NETWORKS, INC.
1995 STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 PURPOSE AND EFFECTIVENESS....................................................-1-
1.1 Purpose......................................................................-1-
1.2 Effective Date...............................................................-1-
ARTICLE 2 DEFINITIONS..................................................................-1-
2.1 Certain Defined Terms........................................................-1-
ARTICLE 3 ADMINISTRATION...............................................................-3-
3.1 Administrative Committee.....................................................-3-
3.2 Administration Following Exchange Act Registration...........................-3-
3.3 Powers; Regulations..........................................................-4-
3.4 Limits on Authority..........................................................-4-
3.5 Exercise of Authority........................................................-4-
ARTICLE 4 SHARES SUBJECT TO THE PLAN...................................................-5-
4.1 Number of Shares.............................................................-5-
4.2 Adjustments..................................................................-5-
ARTICLE 5 ELIGIBILITY..................................................................-5-
5.1 General......................................................................-5-
5.2 Ineligibility................................................................-5-
ARTICLE 6 STOCK OPTIONS................................................................-6-
6.1 Grant of Options.............................................................-6-
6.2 Purchase Price...............................................................-6-
6.3 Limitation on Grants.........................................................-6-
6.4 Term of Options..............................................................-6-
6.5 Option Agreement.............................................................-7-
6.6 Exercise of Options..........................................................-7-
6.7 Manner of Exercise...........................................................-7-
6.8 Legends......................................................................-8-
6.9 Nontransferability...........................................................-8-
6.10 Repurchase of Shares.........................................................-8-
6.11 Class of Common Stock........................................................-9-
ARTICLE 7 GENERAL PROVISIONS..........................................................-10-
7.1 Acceleration of Options___Approved Transactions; Control Purchase...........-10-
7.2 Termination of Services.....................................................-10-
7.3 Right to Terminate Services.................................................-11-
7.4 Nonalienation of Benefits...................................................-12-
7.5 Shareholders Agreement......................................................-12-
7.6 Termination and Amendment...................................................-12-
7.7 Government and Other Regulations............................................-13-
7.8 Withholding.................................................................-13-
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7.9 Separability................................................................-13-
7.10 Non-Exclusivity of the Plan.................................................-13-
7.11 Exclusion from Pension and Profit-Sharing Computation.......................-13-
7.12 No Shareholder Rights.......................................................-14-
7.13 Governing Law...............................................................-14-
7.14 Company's Rights............................................................-14-
</TABLE>
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<PAGE> 4
PROGRESSIVE NETWORKS, INC.
1995 STOCK OPTION PLAN
ARTICLE 1
PURPOSE AND EFFECTIVENESS
1.1 PURPOSE. The purpose of the 1995 Stock Option Plan (the "Plan") is to
provide a method by which selected individuals rendering services to Progressive
Networks, Inc., a Washington corporation (the "Company"), may be offered an
opportunity to invest in capital stock of the Company, thereby increasing their
personal interest in the growth and success of the Company. The Plan is also
intended to aid in attracting persons of exceptional ability to become officers
and employees of the Company.
1.2 EFFECTIVE DATE; SHAREHOLDER APPROVAL. The Plan shall be effective at
the time specified in the resolutions of the Board adopting the Plan (the
"Effective Date"). The Plan shall be subject to the requirement of RCW
21.20.310(10) that the Administrator of Securities of the Department of
Financial Institutions of the State of Washington be provided with notification
of the adoption of the Plan. No Option shall be granted hereunder until this
notification requirement has been satisfied. The issuance of Incentive Stock
Options shall be subject to approval of the Plan by holders of shares of Common
Stock constituting at least a majority of the shares of Common Stock represented
in person or by proxy at the meeting at which the approval is sought. If this
shareholder approval requirement is not satisfied within twelve (12) months
after the Effective Date, all Incentive Stock Options issued under the Plan
shall automatically become Nonqualified Stock Options.
ARTICLE 2
DEFINITIONS
2.1 CERTAIN DEFINED TERMS. Capitalized terms not defined elsewhere in the
Plan shall have the following meanings (whether used in the singular or plural):
"Administrative Committee" is defined in Section 3.1.
"Affiliate" of the Company means any corporation, partnership, or other
business association that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
"Approved Transaction" means (a) any merger, consolidation or binding
share exchange pursuant to which shares of Common Stock are changed or converted
into or exchanged for cash, securities or other property, other than any such
transaction in which the persons who hold Common Stock immediately prior to the
transaction have immediately following the transaction the same proportionate
ownership of the common stock of, and the same voting power with respect to, the
surviving corporation; (b) any merger, consolidation or binding share exchange
in which the persons who hold Common Stock immediately prior to the transaction
have immediately following the transaction less than a majority of the combined
voting power of the outstanding capital stock of the Company ordinarily (and
apart from rights accruing under special circumstances) having the right to vote
in the election of directors; (c) any liquidation or dissolution of the Company;
and (d) any sale, lease, exchange or other transfer not in the
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<PAGE> 5
ordinary course of business (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto. Reference to any specific
section of the Code shall include any successor section.
"Common Stock" means the Series B Common Stock or the Series C Common
Stock of the Company.
"Company" means Progressive Networks, Inc., a Washington corporation.
"Control Purchase" means any transaction (or series of related
transactions), consummated without the approval of the Board, in which (a) any
person, corporation or other entity (including any "person" as defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company
and any employee benefit plan sponsored by the Company) purchases any Common
Stock (or securities convertible into Common Stock) for cash, securities or any
other consideration pursuant to a tender offer or exchange offer; or (b) any
person, corporation or other entity (including any "person" as defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company
and any employee benefit plan sponsored by the Company) becomes the "beneficial
owner" (as that term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special circumstances)
having the right to vote in the election of directors (calculated as provided in
Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the
Company's securities).
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or that has lasted or can be expected to
last for a continuous period of not less than twelve (12) months.
"Disinterested Person" is defined in Section 3.2(b).
"Effective Date" is defined in Section 1.2.
"Eligible Person" is defined in Section 5.1.
"Equity Securities" has the meaning given that term in Rule 16a-1
promulgated under the Exchange Act, or any successor rule.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor statute or statutes thereto. Reference to any
specific section of the Exchange Act shall include any successor section.
"Fair Market Value" on any day means, if the Common Stock is publicly
traded, the last sales price (or, if no last sales price is reported, the
average of the high bid and low asked prices) for a share of Common Stock on
that day (or, if that day is not a trading day, on the next preceding trading
day), as reported by the principal exchange on which the Common Stock is listed,
or, if the Common Stock is publicly traded but not listed on an exchange, as
reported on NASDAQ, or, if such prices or quotations are not reported on NASDAQ,
as reported by any
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<PAGE> 6
other available source of prices or quotations selected by the Administrative
Committee. If the Common Stock is not publicly traded, or if the Fair Market
Value is not determinable by any of the foregoing means, the Fair Market Value
on any day shall be determined in good faith by the Administrative Committee on
the basis of such considerations as the Administrative Committee deems
appropriate.
"Holder" means an Eligible Person who has received an Option under this
Plan or, if rights continue under the Option following the death of the Eligible
Person, the person who succeeds to those rights by will or by the laws of
descent and distribution.
"Incentive Stock Option" means an Option that is an incentive stock option
within the meaning of Section 422 of the Code.
"NASDAQ" means the National Association of Securities Dealers, Inc.
Automated Quotation System.
"Nonqualified Stock Option" means an Option that is designated as a
nonqualified stock option.
"Option" means an Incentive Stock Option or Nonqualified Stock Option.
"Option Agreement" is defined in Section 6.5.
"Plan" is defined in Section 1.1.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as
amended from time to time, or any successor rule thereto.
"10% Shareholder" means a person who owns (or is considered as owning
within the meaning of Section 424 of the Code) stock possessing more than 10% of
the total combined voting power of all classes of capital stock of the Company.
ARTICLE 3
ADMINISTRATION
3.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by the Board
unless the Board, either voluntarily or as required by Section 3.2 below,
appoints a separate committee of the Board to administer the Plan (the Board, or
such committee, if it is administering the Plan, will be referred to in the Plan
as the "Administrative Committee"). The Administrative Committee shall select
one of its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of its members shall constitute a
quorum and all determinations shall be made by a majority of that quorum. Any
determination reduced to writing and signed by all of the members of the
Administrative Committee shall be fully as effective as if it had been made by a
majority vote at a meeting duly called and held.
3.2 ADMINISTRATION FOLLOWING EXCHANGE ACT REGISTRATION. Notwithstanding
the foregoing provisions of this Article 3, if the Company registers any class
of any Equity Security pursuant to Section 12 of the Exchange Act, the Plan
shall, from the effective date of the registration until six (6) months after
the termination of the registration, be administered as follows:
(a) If at any time a member of the Board is not a Disinterested
Person, then the Board shall appoint a committee, consisting of two or more of
its members each of whom is a
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<PAGE> 7
Disinterested Person, to administer this Plan in accordance with such terms and
conditions not inconsistent with this Plan as the Board may prescribe. Once
appointed, the committee shall continue to serve until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members, remove members (with or without cause) and appoint
new members in their place, fill vacancies however caused, and/or remove all
members of the committee and thereafter directly administer this Plan at any
later time when all members of the Board are Disinterested Persons. At no time
shall a person who is not a Disinterested Person serve on the committee
appointed under this Section 3.2(a), nor shall the committee at any time have
fewer than two members.
(b) The term "Disinterested Person" shall mean a member of the
Board who is not, during the period of one (1) year prior to service as a member
of the Administrative Committee, or during such service, granted or awarded
Equity Securities pursuant to the Plan or any other plan of the Company or any
of its Affiliates, other than grants or awards that would not prevent the member
from being a "disinterested person" with respect to the Plan for purposes of
Rule 16b-3.
3.3 POWERS; REGULATIONS. The Administrative Committee shall have full
power and authority, subject only to the express provisions of the Plan (a) to
designate the Eligible Persons to whom Options are to be granted under the Plan;
(b) to determine the number of shares subject to, and all of the other terms and
conditions (which need not be identical) of, all Options so granted; (c) to
interpret the provisions of the Plan and the Option Agreements evidencing the
Options so granted; (d) to correct any defect, supply any information and
reconcile any inconsistency in such manner and to such extent as shall be deemed
necessary or advisable to carry out the purpose of the Plan; (e) to supervise
the administration of the Plan; and (f) to take such other actions in connection
with or in relation to the Plan as it deems necessary or advisable. The
Administrative Committee is authorized to establish, amend and rescind such
rules and regulations not inconsistent with the terms and conditions of the Plan
as it deems necessary or advisable for the proper administration of the Plan. In
making determinations hereunder, the Administrative Committee may give such
consideration to the recommendations of management of the Company as the
Administrative Committee deems desirable.
3.4 LIMITS ON AUTHORITY. Exercise by the Administrative Committee of its
authority under the Plan shall be consistent (a) with the intent that all
Incentive Stock Options issued under the Plan be qualified under the terms of
Section 422 of the Code (including any amendments thereto and any similar
successor provision), and (b) if the Company registers any class of any Equity
Security pursuant to Section 12 of the Exchange Act, with the intent that the
Plan be administered in a manner that satisfies the conditions of Rule
16b-3(c)(2)(i) under the Exchange Act (including any amendments thereto and any
similar successor provision) so that the grant of Options under this Plan, as
well as all other transactions with respect to the Plan, to Options granted
thereunder and to any Common Stock acquired upon exercise of Options, shall, to
the extent possible, be exempt from the operation of Section 16(b) of the
Exchange Act.
3.5 EXERCISE OF AUTHORITY. Each action and determination made or taken
pursuant to the Plan by the Administrative Committee, including but not limited
to any interpretation or construction of the Plan and the Option Agreements,
shall be final and conclusive for all purposes and upon all persons. No member
of the Administrative Committee shall be liable for any action or determination
made or taken by the member or the Administrative Committee in good faith with
respect to the Plan.
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<PAGE> 8
ARTICLE 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of this Article 4, the
maximum number of shares of Common Stock with respect to which Options may be
granted during the term of the Plan shall be Three Million Six Hundred Thousand
(3,600,000). Shares of Common Stock will be made available from the authorized
but unissued shares of the Company or from shares reacquired by the Company. If
any Option terminates for any reason without having been exercised in full, the
shares of Common Stock subject to the Option for which it has not been exercised
shall again be available for purposes of the Plan.
4.2 ADJUSTMENTS. If the Company subdivides its outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock dividend,
stock split, reclassification or otherwise) or combines its outstanding shares
of Common Stock into a smaller number of shares of Common Stock (by reverse
stock split, reclassification or otherwise), or if the Administrative Committee
determines, in its sole discretion, that any stock dividend, extraordinary cash
dividend, reclassification, recapitalization, reorganization, split-up,
spin-off, combination, exchange of shares, warrants or rights offering to
purchase Common Stock, or other similar corporate event (including a merger or
consolidation other than one that constitutes an Approved Transaction) affects
the Common Stock such that an adjustment is required in order to preserve the
benefits or potential benefits intended to be made available under this Plan,
then the Administrative Committee shall, in its sole discretion and in such
manner as the Administrative Committee may deem equitable and appropriate, make
adjustments to any or all of (a) the number and kind of shares with respect to
which Options may thereafter be granted under this Plan; (b) the number and kind
of shares subject to outstanding Options, and (c) the purchase price under
outstanding Options; PROVIDED, HOWEVER, that the number of shares subject to an
Option shall always be a whole number. The Administrative Committee may, if
deemed appropriate, provide for a cash payment to any Holder of an Option in
connection with any adjustment made pursuant to this Section 4.2.
ARTICLE 5
ELIGIBILITY
5.1 GENERAL. The persons eligible to participate in the Plan and to
receive Options under the Plan ("Eligible Persons") shall, subject to Section
5.2, be (a) employees (including officers and directors who are also employees)
of the Company or any of its Affiliates, and (b) consultants (other than
directors) rendering services to the Company or any of its Affiliates in the
capacity of independent contractors. Options may be granted to Eligible Persons
even if they hold or have held Options under this Plan or options or similar
awards under any other plan of the Company or any of its Affiliates.
5.2 INELIGIBILITY. If the Company registers any class of any Equity
Security pursuant to Section 12 of the Exchange Act, then, from the effective
date of the registration until six (6) months after the termination of the
registration, no member of the Administrative Committee, while serving as such,
shall be eligible to receive an Option.
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<PAGE> 9
ARTICLE 6
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the limitations of the Plan, the
Administrative Committee shall designate from time to time each Eligible Person
who is to be granted an Option, the time when the Option shall be granted, the
number of shares subject to the Option, whether the Option is to be an Incentive
Stock Option or a Nonqualified Stock Option and, subject to Section 6.2, the
purchase price of the shares of Common Stock subject to the Option; PROVIDED,
HOWEVER, that Incentive Stock Options may only be granted to Eligible Persons
who are employees of the Company or an Affiliate that constitutes a "parent
corporation" or a "subsidiary corporation" within the meaning of Section 424 of
the Code. Each Option granted under this Plan shall also be subject to such
other terms and conditions not inconsistent with this Plan as the Administrative
Committee, in its sole discretion, determines. Subject to the limitations of the
Plan, the same Eligible Person may receive Incentive Stock Options and
Nonqualified Stock Options at the same time and pursuant to the same Option
Agreement, provided that Incentive Stock Options and Nonqualified Stock Options
are clearly designated as such.
6.2 PURCHASE PRICE. The price at which shares may be purchased upon
exercise of an Option shall be fixed by the Administrative Committee and may be
more than, less than or equal to the Fair Market Value of the Common Stock as of
the date the Option is granted; PROVIDED, HOWEVER, that the purchase price of an
Incentive Stock Option shall be (a) at least 110% of the Fair Market Value as of
the date of grant of the Common Stock subject thereto, if the Incentive Stock
Option is being granted to a 10% Shareholder, and (b) at least 100% of the Fair
Market Value as of the date of grant of the Common Stock subject thereto, if the
Incentive Stock Option is being granted to any other Eligible Person.
6.3 LIMITATION ON GRANTS. The aggregate Fair Market Value of the Common
Stock with respect to which, during any calendar year, one or more Incentive
Stock Options under this Plan (and/or one or more options under any other plan
maintained by the Company or any of its Affiliates for the granting of options
intended to qualify under Section 422 of the Code) are exercisable for the first
time by a Holder shall not exceed $100,000 (said value to be determined as of
the respective dates on which the options are granted to the Holder). If an
Option that would otherwise qualify as an Incentive Stock Option becomes
exercisable for the first time in any calendar year for shares of Common Stock
that would cause such aggregate Fair Market Value to exceed $100,000, then the
portion of the Option in respect of such shares shall be deemed to be a
Nonqualified Stock Option.
6.4 TERM OF OPTIONS. Subject to the provisions of the Plan with respect to
termination of Options upon death, Disability or termination of services, the
term of each Option shall be for such period as the Administrative Committee
shall determine, but not more than (a) five (5) years from the date of grant in
the case of Incentive Stock Options held by 10% Shareholders; (b) ten (10) years
from the date of grant in the case of Incentive Stock Options held by persons
other than 10% Shareholders; and (c) twenty (20) years from the date of grant in
the case of all other Options, provided, however, that the term for Nonqualifed
Stock Option granted more than one (1) year following the Effective Date shall
be ten (10) years unless otherwise determined by the Administrative Committee.
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<PAGE> 10
6.5 OPTION AGREEMENT. Each Option granted under the Plan shall be
evidenced by an agreement (the "Option Agreement") which shall designate the
Option as an Incentive Stock Option or a Nonqualified Stock Option and contain
such terms and provisions not inconsistent with the provisions of the Plan as
the Administrative Committee from time to time approves. Each grantee of an
Option shall be notified promptly of the grant, an Option Agreement shall be
executed and delivered by the Company to the grantee within sixty (60) days
after the date the Administrative Committee approves the grant, and, in the
discretion of the Administrative Committee, the grant shall terminate if the
Option Agreement is not signed by the grantee (or his or her attorney) and
delivered to the Company within sixty (60) days after it is delivered to the
grantee. An Option Agreement may contain (but shall not be required to contain)
such provisions as the Administrative Committee deems appropriate to insure that
the penalty provisions of Section 4999 of the Code will not apply to any stock
received by the Holder from the Company. An Option Agreement may be modified
from time to time pursuant to Section 7.6(b).
6.6 EXERCISE OF OPTIONS. An Option granted under the Plan shall become and
remain exercisable during the term of the Option to the extent provided in the
Option Agreement evidencing the Option and in this Plan and, unless the Option
Agreement otherwise provides, may be exercised to the extent exercisable, in
whole or in part, at any time and from time to time during such term; PROVIDED,
HOWEVER, that subsequent to the grant of an Option, the Administrative
Committee, at any time before complete termination of the Option, may accelerate
the time or times at which the Option may be exercised in whole or in part
(without reducing the term of the Option).
6.7 MANNER OF EXERCISE.
(a) FORM OF PAYMENT. An Option shall be exercised by written notice
to the Company upon such terms and conditions as the Option Agreement evidencing
the Option may provide and in accordance with such other procedures for the
exercise of Options as the Administrative Committee may establish from time to
time. The method or methods of payment of the purchase price for the shares to
be purchased upon exercise of an Option and of any amounts required by Section
7.8 shall be determined by the Administrative Committee and may consist of (i)
cash, (ii) check, (iii) promissory note, (iv) whole shares of Common Stock
already owned by the Holder, (v) the withholding of shares of Common Stock
issuable upon exercise of the Option, (vi) the delivery, together with a
properly executed exercise notice, of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the purchase price, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment as may be
permitted for the issuance of shares under applicable securities and other laws.
The permitted methods or methods of payment of the amounts payable upon exercise
of an Option, if other than in cash, shall be set forth in the Option Agreement
evidencing the Option and may be subject to such conditions as the
Administrative Committee deems appropriate. Without limiting the generality of
the foregoing, if a Holder is permitted to elect to have shares of Common Stock
issuable upon exercise of an Option withheld to pay all or any part of the
amounts payable in connection with the exercise, then the Administrative
Committee shall have the sole discretion to approve or disapprove the election,
which approval or disapproval shall be given after the election is made, and the
making of the election (including the related exercise of the Option) shall
comply with the requirements for exemptive relief under Rule 16b-3, including
but not limited to paragraphs (e)(3) and (e)(4) thereof (to the extent Rule
16b-3 applies to the election or exercise).
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<PAGE> 11
(b) VALUE OF SHARES. Shares of Common Stock delivered in payment of
all or any part of the amounts payable in connection with the exercise of an
Option, and shares of Common Stock withheld for the payment, shall be valued for
such purpose at their Fair Market Value as of the exercise date.
(c) ISSUANCE OF SHARES. The Company shall effect the issuance of
the shares of Common Stock purchased under the Option as soon as practicable
after the exercise thereof and payment in full of the purchase price therefor
and of any amounts required by Section 7.8, and within a reasonable time
thereafter the issuance shall be evidenced on the books of the Company.
6.8 LEGENDS. Each certificate representing shares of Common Stock issued
under the Plan upon exercise of an Option shall, unless the Administrative
Committee otherwise determines, contain on its face the notice "SEE TRANSFER
RESTRICTIONS ON REVERSE" and on its reverse a legend in form substantially as
follows, together with any other legends that are required by the terms and
conditions of the Plan or that the Administrative Committee in its discretion
deems necessary or appropriate:
NOTICE: TRANSFER AND OTHER RESTRICTIONS
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
ENCUMBERED, OR OTHERWISE DISPOSED OF EXCEPT UPON SATISFACTION OF
CERTAIN CONDITIONS. INFORMATION CONCERNING THESE RESTRICTIONS MAY
BE OBTAINED FROM THE CORPORATION. ANY OFFER OR DISPOSITION OF THESE
SECURITIES WITHOUT SATISFACTION OF SAID CONDITIONS WILL BE WRONGFUL
AND WILL NOT ENTITLE THE TRANSFEREE TO REGISTER OWNERSHIP OF THE
SECURITIES WITH THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO RESTRICTIONS ON TRANSFER, AND MAY BE SUBJECT TO
REPURCHASE BY THE CORPORATION OR ONE OR MORE OF ITS SHAREHOLDERS
PURSUANT TO THE PROVISIONS OF THE CORPORATION'S 1995 STOCK OPTION
PLAN AND/OR AN AGREEMENT BETWEEN THE HOLDER AND THE CORPORATION
AND/OR AN AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS.
INFORMATION CONCERNING THESE RESTRICTIONS MAY BE OBTAINED FROM THE
CORPORATION.
The Company may cause the transfer agent for the Common Stock to place a stop
transfer order with respect to such shares.
6.9 NONTRANSFERABILITY. Options shall not be transferable other than by
will or the laws of descent and distribution, and Options may be exercised
during the lifetime of the Holder thereof only by the Holder (or his or her
court appointed legal representative).
6.10 REPURCHASE OF SHARES.
(a) RIGHT OF REPURCHASE. The Company shall have the right, but
shall not be required, to repurchase from a Holder who is an employee of the
Company or any of its Affil-
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<PAGE> 12
iates or a party to a written consulting agreement with the Company or any of
its Affiliates, all or part of the shares of Common Stock that the Holder has
acquired upon the exercise of the Option. Such right shall be exercisable at any
time and from time to time during the period of ninety (90) days commencing on
the date of termination of the Holder's employment or consulting agreement with
the Company or any of its Affiliates for "cause," as defined in Section 7.2(b).
(b) EXERCISE OF REPURCHASE RIGHT. The Company's right of repurchase
under this Section 6.10 shall be exercised by delivery written notice to the
Holder specifying the number of shares to be repurchased and the effective date
of the repurchase, which date shall not be earlier than the date of the notice
nor later than the date of termination of the Company's right of repurchase.
(c) REPURCHASE PRICE. With respect to each share to be repurchased
by the Company upon its exercise of its right of repurchase under this Section
6.10, the repurchase price shall be the Fair Market Value of the share as of the
effective date of the repurchase. The Company may elect to pay the amount owed
to the Holder either (i) in cash, in which case the amount shall be paid,
without interest, within thirty (30) days following the effective date of the
repurchase, or (ii) in three equal installments, with the first installment
payable on the first anniversary of the effective date of the repurchase, and
the remaining installments payable on the corresponding date in each of the next
two years, with each installment to include interest on the unpaid principal
computed at the prime rate in effect at the effective date of the repurchase,
for the period from the effective date of the repurchase or the date of the most
recent installment, as the case may be, to the due date of the installment being
paid.
(d) TERMINATION OF RIGHT OF REPURCHASE. Any right of repurchase of
the Company under this Section 6.10 shall terminate upon the occurrence of a
Control Purchase or an Approved Transaction (other than an Approved Transaction
in connection with which the Administrative Committee determines, in accordance
with the last sentence of Section 7.1, that Options otherwise subject to such
right of repurchase will not vest or become exercisable on an accelerated basis
and/or will not terminate if not exercised prior to consummation of the Approved
Transaction). Any right of repurchase of the Company under this Section 6.10
shall also terminate upon the effective date of the registration by the Company
of any class of any Equity Security pursuant to Section 12 of the Exchange Act.
6.11 CLASS OF COMMON STOCK. The class of shares subject to each Option and
the class of shares to be received upon exercise of each Option shall depend
upon the employment status of the Eligible Person at the date the Option is
granted and at the date the Option is exercised. If the Eligible Person is an
employee (including officers and directors who are also employees) of the
Company or one of its Affiliates as of the date the Option is granted, the
shares subject to the Option shall be shares of Series B Common Stock, which are
automatically convertible into the shares of Series C Common Stock upon the
occurrence of certain events (a "Conversion Event") as described in the
Company's Articles of Incorporation, as amended from time to time (the
"Articles"), provided, that if a Conversion Event occurs prior to the exercise
of an Option, the shares subject to the Option shall be shares of Series C
Common Stock, with the rights defined in the Articles. If the Eligible Person is
a consultant (other than a director) rendering services to the Company or any of
its Affiliates in the capacity of an independent contractor as of the date the
Option is granted, the shares subject to the Option shall be shares of Series C
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<PAGE> 13
Common Stock, with the rights defined in the Articles, regardless of the
Eligible Person's employment status with the Company at the date the Option is
exercised
ARTICLE 7
GENERAL PROVISIONS
7.1 ACCELERATION OF OPTIONS--APPROVED TRANSACTIONS; CONTROL PURCHASE. In
the event of any Approved Transaction or Control Purchase, each outstanding
Option under the Plan shall become exercisable in full in respect of the
aggregate number of shares covered thereby, notwithstanding any contrary vesting
schedule in the Option Agreement evidencing the Option (except to the extent the
Option Agreement expressly provides otherwise), effective upon the Control
Purchase or immediately prior to consummation of the Approved Transaction. In
the case of an Approved Transaction, the Company shall provide notice of the
pendency of the Approved Transaction, at least fifteen (15) days prior to the
expected date of consummation thereof, to each Holder of an outstanding Option.
Each Holder shall thereupon be entitled to exercise the Option at any time prior
to consummation of the Approved Transaction. Any such exercise as to any portion
of the Option that will only become vested immediately prior to the consummation
of the Approved Transaction in accordance with the foregoing acceleration
provision shall be contingent on such consummation. Any such exercise as to any
other portion of the Option will not be contingent on such consummation unless
so elected by the Holder in a notice delivered to the Company simultaneously
with the exercise. Upon consummation of the Approved Transaction, all Options
shall expire to the extent such exercise has not occurred. Notwithstanding the
foregoing, except to the extent otherwise provided in one or more Option
Agreements evidencing Options, the Administrative Committee may, in its
discretion, determine that any or all outstanding Options will not vest or
become exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to consummation of
the Approved Transaction, if the Board or the surviving or acquiring
corporation, as the case may be, shall take, or made effective provision for the
taking of, such action as in the opinion of the Administrative Committee is
equitable and appropriate in order to substitute new Options for such Options,
or to assume such Options (which assumption may be effected by any means
determined by the Administrative Committee, in its discretion, including, but
not limited to, by a cash payment to each Holder, in cancellation of the Options
held by him or her, of such amount as the Administrative Committee determines,
in its sole discretion, represents the then value of the Options) and in order
to make such new or assumed Options, as nearly as practicable, equivalent to the
old Options (before giving effect to any acceleration of the vesting or
exercisability thereof), taking into account, to the extent applicable, the kind
and amount of securities, cash or other assets into or for which the Common
Stock may be changed, converted or exchanged in connection with the Approved
Transaction.
7.2 TERMINATION OF SERVICES. The provisions of this Section 7.2 shall
apply to any Holder who is an employee of the Company or any of its Affiliates
or a party to a written consulting agreement with the Company or any of its
Affiliates.
(a) GENERAL. If such a Holder's employment or consulting agreement
terminates prior to the complete exercise of an Option, then the Option shall,
except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, thereafter be exercisable, to the extent that the Holder was
entitled to exercise the Option on the date of such termination, for a period of
three (3) months following such termination (but not later than the scheduled
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<PAGE> 14
expiration date of the Option); PROVIDED, HOWEVER, that (i) if the Holder's
employment or consulting agreement terminates by reason of death or Disability,
then, except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, the Option shall be exercisable, to the extent that the
Holder was entitled to exercise the Option on the date of such termination, for
a period of one (1) year following such termination (but not later than the
scheduled expiration of the Option), and (ii) any termination by the Company or
any of its Affiliates for cause will be treated in accordance with the
provisions of Section 7.2(b) (except to the extent the Option Agreement
expressly provides otherwise).
(b) TERMINATION BY COMPANY FOR CAUSE. If a Holder's employment or
consulting agreement with the Company or any of its Affiliates is terminated for
cause, then all Options held by the Holder shall immediately terminate and,
accordingly, may not be exercised, except to the extent one or more of the
Option Agreements evidencing the Options expressly provides otherwise. For
purposes of this Plan, "cause" shall have the meaning given that term in any
employment agreement or consulting agreement to which the Holder is a party or,
in the absence thereof, the conduct that shall constitute "cause" for purposes
of this Plan shall be insubordination, dishonesty, incompetence, moral
turpitude, the refusal to perform the Holder's duties and responsibilities for
any reason other than illness or incapacity, and any other misconduct of any
kind that the Administrative Committee determines constitutes "cause" for
purposes of this Plan; PROVIDED, HOWEVER, that if a termination occurs within
twelve (12) months after an Approved Transaction or Control Purchase,
termination for cause shall mean only a felony conviction for fraud,
misappropriation or embezzlement.
(c) MISCELLANEOUS. The Administrative Committee may determine
whether any given leave of absence of a Holder constitutes a termination of the
Holder's employment or consulting agreement; PROVIDED, HOWEVER, that for
purposes of the Plan___
(i) a leave of absence, duly authorized in writing by the
Company or any of its Affiliates for military service or sickness, or for
any other purpose approved by the Company or any of its Affiliates, if the
period of the leave does not exceed ninety (90) days, and
(ii) a leave of absence in excess of ninety (90) days, duly
authorized in writing by the Company or any of its Affiliates, provided
the Holder's right to return to service with the Company or the Affiliate
is guaranteed either by statute or by contract___
shall not be deemed a termination of the Holder's employment or consulting
agreement. Options granted under the Plan shall not be affected by any change of
a Holder's employment or consulting agreement so long as the Holder continues to
be an employee of or consultant to the Company or any of its Affiliates. Except
to the extent an Option Agreement evidencing an Option expressly provides
otherwise, if a Holder has an employment or consulting agreement with an
Affiliate of the Company that ceases to be an Affiliate, such event shall be
deemed to constitute a termination of the Holder's employment or consulting
agreement for a reason other than death or Disability.
7.3 RIGHT TO TERMINATE SERVICES. Nothing contained in the Plan or in any
Option Agreement, and no action of the Company or the Administrative Committee
with respect thereto, shall confer or be construed to confer on any Holder any
right to continue in the service of the Company or any of its Affiliates or
interfere in any way with the right of the Company or any
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<PAGE> 15
of its Affiliates, subject to the provisions of any agreement between the Holder
and the Company or any of its Affiliates, to terminate at any time, with or
without cause, the employment or consulting agreement with the Holder.
7.4 NONALIENATION OF BENEFITS. Except as provided in Section 6.9, no right
or benefit under the Plan shall be subject to anticipation, alienation, sale,
assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge,
and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void. No right or
benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the person entitled to the right or benefit.
7.5 SHAREHOLDERS AGREEMENT. Unless the Option Agreement evidencing an
Option expressly provides otherwise, the Holder of the Option shall be required,
as a condition to the issuance of any shares of Common Stock that the Holder
acquires upon the exercise of the Option, to execute and deliver to the Company
a shareholders agreement in such form as may be in use by the Company at the
time of such exercise, or a counterpart thereof, together with, unless the
Holder is unmarried, a spousal consent in the form required thereby, unless the
Holder has previously executed and delivered such documents and they are in
effect at the time the shares are to be issued.
7.6 TERMINATION AND AMENDMENT.
(a) GENERAL. Unless the Plan shall previously have been terminated
as hereinafter provided, no Options may be granted under the Plan on or after
the tenth (10th) anniversary of the Effective Date. The Board or the
Administrative Committee may at any time prior to the tenth (10th) anniversary
of the Effective Date terminate the Plan, and may, from time to time, suspend or
discontinue the Plan or modify or amend the Plan in such respects as it shall
deem advisable; PROVIDED, HOWEVER, that any such modification or amendment shall
comply with all applicable laws, applicable stock exchange listing requirements,
and applicable requirements for exemption (to the extent necessary) under Rule
16b-3. Notwithstanding the foregoing, if shareholder approval is obtained
pursuant to Section 1.2, without further shareholder approval no modification or
amendment to this Plan shall increase the number of shares of Common Stock
subject to the Plan (except as authorized by Article 4), change the class of
persons eligible to receive Options under the Plan, or otherwise materially
increase the benefits accruing to participants under the Plan.
(b) MODIFICATION. No termination, modification or amendment of the
Plan may adversely affect the rights of the Holder of an outstanding Option in
any material way unless the Holder consents thereto. No modification, extension,
renewal or other change in any Option granted under the Plan shall be made after
the grant of the Option, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder and subject to the terms and conditions
of the Plan (including Section 7.6(a)), the Administrative Committee may amend
outstanding Option Agreements with any Holder, including, without limitation,
any amendment that would (i) accelerate the time or times at which the Option
may be exercised, and/or (ii) extend the scheduled expiration date of the
Option. Without limiting the generality of the foregoing, the Administrative
Committee may, but solely with the Holder's consent unless otherwise provided in
the Option Agreement, agree to cancel any Option under the Plan and issue a new
Option in substitution therefor, provided that the Option so substituted shall
satisfy all of the requirements of the Plan as of the date the new Option is
granted. Nothing contained in the foregoing provisions of this Section 7.6(b)
shall be construed to prevent the Administrative
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<PAGE> 16
Committee from providing in any Option Agreement that the rights of the Holder
with respect to the Option are subject to such rules and regulations as the
Administrative Committee may, subject to the express provisions of the Plan,
adopt from time to time, or impair the enforceability of any such provision.
7.7 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with
respect to Options shall be subject to all applicable laws, rules and
regulations and such approvals by any governmental agencies as may be required,
including, without limitation, the effectiveness of any registration statement
required under the Securities Act of 1933, and the rules and regulations of any
securities exchange or association on which the Common Stock may be listed or
quoted. As long as the Common Stock is registered under the Exchange Act, the
Company shall use its reasonable efforts to comply with any legal requirements
(a) to maintain a registration statement in effect under the Securities Act of
1933 with respect to all shares of Common Stock that may be issued to Holders
under the Plan, and (b) to file in a timely manner all reports required to be
filed by it under the Exchange Act.
7.8 WITHHOLDING. The Company's obligation to deliver shares of Common
Stock upon exercise of an Option shall be subject to applicable federal, state
and local tax withholding requirements. Federal, state and local withholding tax
due at the time an Option is exercised may, in the discretion of the
Administrative Committee, be paid in shares of Common Stock already owned by the
Holder or through the withholding of shares otherwise issuable to the Holder,
upon such terms and conditions as the Administrative Committee shall determine.
If the Holder shall fail to pay, or make arrangements satisfactory to the
Administrative Committee for the payment of, all such federal, state and local
taxes, then the Company or any of its Affiliates shall, to the extent not
prohibited by law, have the right to deduct from any payment of any kind
otherwise due to the Holder an amount equal to any federal, state or local taxes
of any kind required to be withheld by the Company or any of its Affiliates with
respect to the Option.
7.9 SEPARABILITY. With respect to Incentive Stock Options, if this Plan
does not contain any provision required to be included herein under Section 422
of the Code, such provision shall be deemed to be incorporated herein with the
same force and effect as if such provision had been set out at length herein;
PROVIDED, HOWEVER, that to the extent any Option that is intended to qualify as
an Incentive Stock Option cannot so qualify, the Option, to that extent, shall
be deemed to be a Nonqualified Stock Option for all purposes of the Plan.
7.10 NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the shareholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding of
stock and cash otherwise than under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
7.11 EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance
of an Option, unless otherwise provided in the Option Agreement evidencing the
Option, the Holder shall be deemed to have agreed that the Option is special
incentive compensation that will not be taken into account, in any manner, as
salary, compensation or bonus in determining the amount of any payment under any
pension, retirement or other employee benefit plan, program or policy of the
Company or any of its Affiliates.
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<PAGE> 17
7.12 NO SHAREHOLDER RIGHTS. No Holder or other person shall have any
voting or other shareholder rights with respect to shares of Common Stock
subject to an Option until the Option has been duly exercised, full payment of
the purchase price has been made, all conditions under the Option and this Plan
to issuance of the shares have been satisfied, and a certificate for the shares
has been issued. No adjustment shall be made for cash or other dividends or
distributions to shareholders for which the record date is prior to the date of
such issuance.
7.13 GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Washington.
7.14 COMPANY'S RIGHTS. The grant of Options pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
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<PAGE> 1
Exhibit 10.2
REALNETWORKS, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED
AS OF SEPTEMBER 24, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 PURPOSE AND EFFECTIVENESS..................................................--1--
1.1 Purpose....................................................................--1--
1.2 Effective Date.............................................................--1--
ARTICLE 2 DEFINITIONS................................................................--1--
2.1 Certain Defined Terms......................................................--1--
ARTICLE 3 ADMINISTRATION.............................................................--3--
3.1 Administrative Committee...................................................--3--
3.2 Appointment of Administrative Committee....................................--3--
3.3 Powers; Regulations........................................................--4--
3.4 Limits on Authority........................................................--4--
3.5 Exercise of Authority......................................................--4--
ARTICLE 4 SHARES SUBJECT TO THE PLAN.................................................--4--
4.1 Number of Shares...........................................................--4--
4.2 Adjustments................................................................--4--
ARTICLE 5 ELIGIBILITY................................................................--5--
ARTICLE 6 STOCK OPTIONS..............................................................--5--
6.1 Grant of Options...........................................................--5--
6.2 Purchase Price.............................................................--5--
6.3 Limitations on Grants......................................................--6--
6.4 Term of Options............................................................--6--
6.5 Option Agreement...........................................................--6--
6.6 Exercise of Options........................................................--7--
6.7 Manner of Exercise.........................................................--7--
6.8 Legends....................................................................--8--
6.9 Nontransferability.........................................................--8--
6.10 Repurchase of Shares.......................................................--9--
6.11 Class of Common Stock.....................................................--10--
6.12 Delegation to Executive Officer of Authority to Grant Options..............--10--
ARTICLE 7 GENERAL PROVISIONS........................................................--10--
7.1 Acceleration of Options___Approved Transactions; Control Purchase.........--10--
7.2 Termination of Services...................................................--11--
7.3 Right to Terminate Services...............................................--12--
7.4 Nonalienation of Benefits.................................................--12--
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
7.5 Shareholders Agreement....................................................--12--
7.6 Termination and Amendment.................................................--13--
7.7 Government and Other Regulations..........................................--13--
7.8 Withholding...............................................................--14--
7.9 Separability..............................................................--14--
7.10 Non-Exclusivity of the Plan...............................................--14--
7.11 Exclusion from Pension and Profit-Sharing Computation.....................--14--
7.12 No Shareholder Rights.....................................................--14--
7.13 Governing Law.............................................................--15--
7.14 Company's Rights..........................................................--15--
</TABLE>
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<PAGE> 4
REALNETWORKS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
ARTICLE 1
PURPOSE AND EFFECTIVENESS
1.1 PURPOSE. The purpose of the 1996 Stock Option Plan (the "Plan") is
to provide a method by which selected individuals rendering services to
RealNetworks, Inc., a Washington corporation (the "Company"), may be offered an
opportunity to invest in capital stock of the Company, thereby increasing their
personal interest in the growth and success of the Company. The Plan is also
intended to aid in attracting persons of exceptional ability to become officers
and employees of the Company.
1.2 EFFECTIVE DATE; SHAREHOLDER APPROVAL. The Plan shall be effective at
the time specified in the resolutions of the Board adopting the Plan (the
"Effective Date"). The Plan shall be subject to the requirement of RCW
21.20.310(10) that the Administrator of Securities of the Department of
Financial Institutions of the State of Washington be provided with notification
of the adoption of the Plan. No Option shall be granted hereunder until this
notification requirement has been satisfied. The issuance of Incentive Stock
Options shall be subject to approval of the Plan by holders of shares of Common
Stock constituting at least a majority of the shares of Common Stock represented
in person or by proxy at the meeting at which the approval is sought. If this
shareholder approval requirement is not satisfied within twelve (12) months
after the Effective Date, all Incentive Stock Options issued under the Plan
shall automatically become Nonqualified Stock Options.
ARTICLE 2
DEFINITIONS
2.1 CERTAIN DEFINED TERMS. Capitalized terms not defined elsewhere in the
Plan shall have the following meanings (whether used in the singular or plural):
"Administrative Committee" is defined in Section 3.1.
"Affiliate" of the Company means any corporation, partnership, or other
business association that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with the
Company.
"Approved Transaction" means (a) any merger, consolidation or binding
share exchange pursuant to which shares of Common Stock are changed or converted
into or exchanged for cash, securities or other property, other than any such
transaction in which the persons who hold Common Stock immediately prior to the
transaction have immediately following the transaction the same proportionate
ownership of the common stock of, and the same voting power with respect to, the
surviving corporation; (b) any merger, consolidation or binding share exchange
in which the persons who hold Common Stock immediately prior to the transaction
have immediately following the transaction less than a majority of the combined
voting power of the outstanding capital stock of the Company ordinarily (and
apart from rights accruing under special circumstances) having the right to vote
in the election of directors; (c) any liquidation or dissolution of the Company;
and (d) any sale, lease, exchange or other transfer not in the
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<PAGE> 5
ordinary course of business (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto. Reference to any specific
section of the Code shall include any successor section.
"Common Stock" means the Series B Common Stock or the Series C Common
Stock of the Company.
"Company" means RealNetworks, Inc., a Washington corporation.
"Control Purchase" means any transaction (or series of related
transactions), consummated without the approval or recommendation of the Board,
in which (a) any person, corporation or other entity (including any "person" as
defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the
Company and any employee benefit plan sponsored by the Company) purchases any
Common Stock (or securities convertible into Common Stock) for cash, securities
or any other consideration pursuant to a tender offer or exchange offer; or (b)
any person, corporation or other entity (including any "person" as defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company
and any employee benefit plan sponsored by the Company) becomes the "beneficial
owner" (as that term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special circumstances)
having the right to vote in the election of directors (calculated as provided in
Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the
Company's securities).
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or that has lasted or can be expected to
last for a continuous period of not less than twelve (12) months.
"Disinterested Person" is defined in Section 3.2(b).
"Effective Date" is defined in Section 1.2.
"Eligible Person" is defined in Section 5.1.
"Equity Securities" has the meaning given that term in Rule 3a11-1
promulgated under the Exchange Act, as amended from time to time, or any
successor rule thereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, or any successor statute or statutes thereto. Reference to any
specific section of the Exchange Act shall include any successor section.
"Executive Officer" means any employee of the company who is an "officer"
within the meaning of Rule 16a-1(f) of the Exchange Act, as amended from time to
time, or any successor rule thereto.
"Fair Market Value" on any day means, if the Common Stock is publicly
traded, the last sales price (or, if no last sales price is reported, the
average of the high bid and low asked prices) for a share of Common Stock on
that day (or, if that day is not a trading day, on the next
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<PAGE> 6
preceding trading day), as reported by the principal exchange on which the
Common Stock is listed, or, if the Common Stock is publicly traded but not
listed on an exchange, as reported by The Nasdaq Stock Market, or, if such
prices or quotations are not reported by The Nasdaq Stock Market, as reported by
any other available source of prices or quotations selected by the
Administrative Committee. If the Common Stock is not publicly traded, or if the
Fair Market Value is not determinable by any of the foregoing means, the Fair
Market Value on any day shall be determined in good faith by the Administrative
Committee on the basis of such considerations as the Administrative Committee
deems appropriate.
"Holder" means an Eligible Person who has received an Option under this
Plan or, if rights continue under the Option following the death of the Eligible
Person, the person who succeeds to those rights by will or by the laws of
descent and distribution.
"Incentive Stock Option" means an Option that is an incentive stock option
within the meaning of Section 422 of the Code.
"Nonqualified Stock Option" means an Option that is designated as a
nonqualified stock option.
"Option" means an option with respect to shares of Common Stock awarded
pursuant to Article 6.
"Option Agreement" is defined in Section 6.5.
"Plan" is defined in Section 1.1.
"Securities Act" means the Securities Act of 1933, as amended from time to
time, or any successor statute or statutes thereto. Reference to any specific
section of the Securities Act shall include any successor section.
"10% Shareholder" means a person who owns (or is considered as owning
within the meaning of Section 424 of the Code) stock possessing more than 10% of
the total combined voting power of all classes of capital stock of the Company.
ARTICLE 3
ADMINISTRATION
3.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by the Board
unless the Board, either voluntarily or as required by Section 3.2 below,
appoints a separate committee of the Board to administer the Plan (the Board, or
such committee, if it is administering the Plan, will be referred to in the Plan
as the "Administrative Committee"). The Administrative Committee shall select
one of its members as its chairman and shall hold its meetings at such times and
places as it shall deem advisable. A majority of its members shall constitute a
quorum and all determinations shall be made by a majority of that quorum. Any
determination reduced to writing and signed by all of the members of the
Administrative Committee shall be fully as effective as if it had been made by a
majority vote at a meeting duly called and held.
3.2 APPOINTMENT OF ADMINISTRATIVE COMMITTEE. The Board may appoint a
committee consisting of two or more of its members to administer the Plan. Once
appointed, the committee shall continue to serve until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members, remove members (with or
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<PAGE> 7
without cause) and appoint new members in their place, fill vacancies however
caused, and/or remove all members of the committee and thereafter directly
administer the Plan.
3.3 POWERS; REGULATIONS. The Administrative Committee shall have full
power and authority, subject only to the express provisions of the Plan (a) to
designate the Eligible Persons to whom Options are to be granted under the Plan;
(b) to determine the number of shares subject to, and all of the other terms and
conditions (which need not be identical) of, all Options so granted; (c) to
interpret the provisions of the Plan and the Option Agreements evidencing the
Options so granted; (d) to correct any defect, supply any information and
reconcile any inconsistency in such manner and to such extent as shall be deemed
necessary or advisable to carry out the purpose of the Plan; (e) to supervise
the administration of the Plan; and (f) to take such other actions in connection
with or in relation to the Plan as it deems necessary or advisable. The
Administrative Committee is authorized to establish, amend and rescind such
rules and regulations not inconsistent with the terms and conditions of the Plan
as it deems necessary or advisable for the proper administration of the Plan. In
making determinations hereunder, the Administrative Committee may give such
consideration to the recommendations of management of the Company as the
Administrative Committee deems desirable.
3.4 LIMITS ON AUTHORITY. Exercise by the Administrative Committee of its
authority under the Plan shall be consistent (a) with the intent that all
Incentive Stock Options issued under the Plan be qualified under the terms of
Section 422 of the Code (including any amendments thereto and any similar
successor provision), and (b) if the Company registers any class of Equity
Security pursuant to Section 12 of the Exchange Act, with the intent that the
Plan be administered in a manner so that, to the extent possible, the grant of
Options and all other transactions with respect to the Plan, to Options and to
any Common Stock acquired upon exercise of Options, shall be exempt from the
operation of Section 16(b) of the Exchange Act.
3.5 EXERCISE OF AUTHORITY. Each action and determination made or taken
pursuant to the Plan by the Administrative Committee, including but not limited
to any interpretation or construction of the Plan and the Option Agreements,
shall be final and conclusive for all purposes and upon all persons. No member
of the Administrative Committee shall be liable for any action or determination
made or taken by the member or the Administrative Committee in good faith with
respect to the Plan.
ARTICLE 4
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of this Article 4, the
maximum number of shares of Common Stock with respect to which Options may be
granted during the term of the Plan shall be the sum of (a) 8,800,000, plus (b)
an additional 892,736 shares of Common Stock previously reserved for issuance
pursuant to Section 4.1 of the Company's 1995 Stock Option Plan (the "1995
Plan"), plus (c) any of the 1,540,473 shares of Common Stock subject to options
outstanding under the 1995 Plan on September 24, 1997, to the extent the options
terminate with having been exercised in full. Shares of Common Stock will be
made available from the authorized but unissued shares of the Company or from
shares reacquired by the Company. If any Option terminates for any reason
without having been exercised in full, the shares of Common Stock subject to the
Option for which it has not been exercised shall again be available for purposes
of the Plan.
4.2 ADJUSTMENTS. If the Company subdivides its outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock dividend,
stock split, reclassification or otherwise) or combines its outstanding shares
of Common Stock into a smaller number of shares of Common Stock (by reverse
stock split, reclassification or otherwise), or if the
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<PAGE> 8
Administrative Committee determines, in its sole discretion, that any stock
dividend, extraordinary cash dividend, reclassification, recapitalization,
reorganization, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock, or other similar corporate event
(including a merger or consolidation other than one that constitutes an Approved
Transaction) affects the Common Stock such that an adjustment is required in
order to preserve the benefits or potential benefits intended to be made
available under this Plan, then the Administrative Committee shall, in its sole
discretion and in such manner as the Administrative Committee may deem equitable
and appropriate, make adjustments to any or all of (a) the number and kind of
shares with respect to which Options may thereafter be granted under this Plan;
(b) the number and kind of shares subject to outstanding Options, and (c) the
purchase price under outstanding Options; PROVIDED, HOWEVER, that the number of
shares subject to an Option shall always be a whole number. The Administrative
Committee may, if deemed appropriate, provide for a cash payment to any Holder
of an Option in connection with any adjustment made pursuant to this Section
4.2.
ARTICLE 5
ELIGIBILITY
The persons eligible to participate in the Plan and to receive Options
under the Plan ("Eligible Persons") shall, subject to Section 5.2, be (a)
employees (including officers and directors who are also employees) of the
Company or any of its Affiliates, and (b) consultants (and directors who are not
employees) rendering services to the Company or any of its Affiliates in the
capacity of independent contractors. Options may be granted to Eligible Persons
even if they hold or have held Options under this Plan or options or similar
awards under any other plan of the Company or any of its Affiliates.
ARTICLE 6
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the limitations of the Plan, the
Administrative Committee shall designate from time to time each Eligible Person
who is to be granted an Option, the time when the Option shall be granted, the
number of shares subject to the Option, whether the Option is to be an Incentive
Stock Option or a Nonqualified Stock Option and, subject to Section 6.2, the
purchase price of the shares of Common Stock subject to the Option; PROVIDED,
HOWEVER, that Incentive Stock Options may only be granted to Eligible Persons
who are employees of the Company or an Affiliate that constitutes a "parent
corporation" or a "subsidiary corporation" within the meaning of Section 424 of
the Code. Each Option granted under this Plan shall also be subject to such
other terms and conditions not inconsistent with this Plan as the Administrative
Committee, in its sole discretion, determines. Subject to the limitations of the
Plan, the same Eligible Person may receive Incentive Stock Options and
Nonqualified Stock Options at the same time and pursuant to the same Option
Agreement, provided that Incentive Stock Options and Nonqualified Stock Options
are clearly designated as such.
6.2 PURCHASE PRICE. The price at which shares may be purchased upon
exercise of an Option shall be fixed by the Administrative Committee and may be
more than, less than or equal to the Fair Market Value of the Common Stock as of
the date the Option is granted; PROVIDED, HOWEVER, that the purchase price of an
Incentive Stock Option shall be (a) at least 110% of the
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<PAGE> 9
Fair Market Value as of the date of grant of the Common Stock subject thereto,
if the Incentive Stock Option is being granted to a 10% Shareholder, and (b) at
least 100% of the Fair Market Value as of the date of grant of the Common Stock
subject thereto, if the Incentive Stock Option is being granted to any other
Eligible Person.
6.3 LIMITATIONS ON GRANTS.
(a) ANNUAL LIMITATION ON GRANTS OF INCENTIVE STOCK OPTIONS. The
aggregate Fair Market Value of the shares of Common Stock with respect to which,
during any calendar year, one or more Incentive Stock Options under this Plan
(and/or one or more options under any other plan maintained by the Company or
any of its Affiliates for the granting of options intended to qualify under
Section 422 of the Code) become exercisable for the first time by a Holder shall
not exceed $100,000 (said value to be determined as of the respective dates on
which the options are granted to the Holder). If (i) a Holder holds one or more
Incentive Stock Options under this Plan (and/or one or more options under any
other plan maintained by the Company or any of its Affiliates for the granting
of options intended to qualify under Section 422 of the Code), and (ii) the
aggregate Fair Market Value of the shares of Common Stock with respect to which,
during any calendar year, such options become exercisable for the first time
exceeds $100,000 (said value to be determined as provided above), then such
option or options are intended to qualify under Section 422 of the Code with
respect to the maximum number of such shares as can, in light of the foregoing
limitation, be so qualified, with the shares so qualified to be the shares
subject to the option or options earliest granted to the Holder. If an Option
that would otherwise qualify as an Incentive Stock Option becomes exercisable
for the first time in any calendar year for shares of Common Stock that would
cause such aggregate Fair Market Value to exceed $100,000, then the portion of
the Option in respect of such shares shall be deemed to be a Nonqualified Stock
Option.
(b) ANNUAL LIMITATION ON GRANTS FOLLOWING EXCHANGE ACT
REGISTRATION. If the Company registers any class of any Equity Security pursuant
to Section 12 of the Exchange Act, then, from the effective date of the
registration until six (6) months after the termination of the registration, the
number of shares subject to one or more Options granted during any calendar year
to an Eligible Person shall not exceed one million (1,000,000).
6.4 TERM OF OPTIONS. Subject to the provisions of the Plan with respect to
termination of Options upon death, Disability or termination of services, the
term of each Option shall be for such period as the Administrative Committee
shall determine, but not more than (a) five (5) years from the date of grant in
the case of Incentive Stock Options held by 10% Shareholders; (b) ten (10) years
from the date of grant in the case of Incentive Stock Options held by persons
other than 10% Shareholders; and (c) twenty (20) years from the date of grant in
the case of all other Options, provided, however, that the term for a
Nonqualified Stock Option granted more than one (1) year following the Effective
Date shall be ten (10) years unless otherwise determined by the Administrative
Committee.
6.5 OPTION AGREEMENT. Each Option granted under the Plan shall be
evidenced by an agreement (the "Option Agreement") which shall designate the
Option as an Incentive Stock Option or a Nonqualified Stock Option and contain
such terms and provisions not inconsistent with the provisions of the Plan as
the Administrative Committee from time to time approves. Each grantee of an
Option shall be notified promptly of the grant, an Option Agreement shall be
executed and delivered by the Company to the grantee within sixty (60) days
after the date the Administrative Committee approves the grant, and, in the
discretion of the Administrative
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<PAGE> 10
Committee, the grant shall terminate if the Option Agreement is not signed by
the grantee (or his or her attorney) and delivered to the Company within sixty
(60) days after it is delivered to the grantee. An Option Agreement may contain
(but shall not be required to contain) such provisions as the Administrative
Committee deems appropriate to insure that the penalty provisions of Section
4999 of the Code will not apply to any stock received by the Holder from the
Company. An Option Agreement may be modified from time to time pursuant to
Section 7.6(b).
6.6 EXERCISE OF OPTIONS. An Option granted under the Plan shall become and
remain exercisable during the term of the Option to the extent provided in the
Option Agreement evidencing the Option and in this Plan and, unless the Option
Agreement otherwise provides, may be exercised to the extent exercisable, in
whole or in part, at any time and from time to time during such term; PROVIDED,
HOWEVER, that subsequent to the grant of an Option, the Administrative
Committee, at any time before complete termination of the Option, may accelerate
the time or times at which the Option may be exercised in whole or in part
(without reducing the term of the Option). If an Option is scheduled to become
exercisable on one or more dates specified in its Option Agreement, and its
Holder has a leave of absence without pay, such date or dates shall be postponed
for a period equal to the duration of the leave unless the Administrative
Committee determines otherwise.
6.7 MANNER OF EXERCISE.
(a) FORM OF PAYMENT. An Option shall be exercised by written notice
to the Company upon such terms and conditions as the Option Agreement evidencing
the Option may provide and in accordance with such other procedures for the
exercise of Options as the Administrative Committee may establish from time to
time. The method or methods of payment of the purchase price for the shares to
be purchased upon exercise of an Option and of any amounts required by Section
7.8 shall be determined by the Administrative Committee and may consist of (i)
cash, (ii) check, (iii) promissory note, (iv) whole shares of Common Stock
already owned by the Holder, (v) the withholding of shares of Common Stock
issuable upon exercise of the Option, (vi) the delivery, together with a
properly executed exercise notice, of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds required to
pay the purchase price, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment as may be
permitted for the issuance of shares under applicable securities and other laws.
The permitted methods or methods of payment of the amounts payable upon exercise
of an Option, if other than in cash, shall be set forth in the Option Agreement
evidencing the Option and may be subject to such conditions as the
Administrative Committee deems appropriate. Without limiting the generality of
the foregoing, if a Holder is permitted to elect to have shares of Common Stock
issuable upon exercise of an Option withheld to pay all or any part of the
amounts payable in connection with the exercise, then the Administrative
Committee shall have the sole discretion to approve or disapprove the election,
which approval or disapproval shall be given after the election is made.
(b) VALUE OF SHARES. Shares of Common Stock delivered in payment of
all or any part of the amounts payable in connection with the exercise of an
Option, and shares of Common Stock withheld for the payment, shall be valued for
such purpose at their Fair Market Value as of the exercise date.
(c) ISSUANCE OF SHARES. The Company shall effect the issuance of
the shares of Common Stock purchased under the Option as soon as practicable
after the exercise thereof and
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<PAGE> 11
payment in full of the purchase price therefor and of any amounts required by
Section 7.8, and within a reasonable time thereafter the issuance shall be
evidenced on the books of the Company. Following the exercise of an Incentive
Stock Option, the Administrative Committee shall cause the information statement
required by Section 6039 of the Code to be furnished to the Holder within the
time and in the manner prescribed by law.
6.8 LEGENDS. Each certificate representing shares of Common Stock issued
under the Plan upon exercise of an Option shall, unless the Administrative
Committee otherwise determines, contain on its face the notice "SEE TRANSFER
RESTRICTIONS ON REVERSE" and on its reverse a legend in form substantially as
follows, together with any other legends that are required by the terms and
conditions of the Plan or that the Administrative Committee in its discretion
deems necessary or appropriate:
NOTICE: TRANSFER AND OTHER RESTRICTIONS
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
ENCUMBERED, OR OTHERWISE DISPOSED OF EXCEPT UPON SATISFACTION OF
CERTAIN CONDITIONS. INFORMATION CONCERNING THESE RESTRICTIONS MAY
BE OBTAINED FROM THE CORPORATION. ANY OFFER OR DISPOSITION OF THESE
SECURITIES WITHOUT SATISFACTION OF SAID CONDITIONS WILL BE WRONGFUL
AND WILL NOT ENTITLE THE TRANSFEREE TO REGISTER OWNERSHIP OF THE
SECURITIES WITH THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO RESTRICTIONS ON TRANSFER, AND MAY BE SUBJECT TO
REPURCHASE BY THE CORPORATION OR ONE OR MORE OF ITS SHAREHOLDERS
PURSUANT TO THE PROVISIONS OF THE CORPORATION'S 1996 STOCK OPTION
PLAN AND/OR AN AGREEMENT BETWEEN THE HOLDER AND THE CORPORATION
AND/OR AN AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS.
INFORMATION CONCERNING THESE RESTRICTIONS MAY BE OBTAINED FROM THE
CORPORATION.
The Company may cause the transfer agent for the Common Stock to place a stop
transfer order with respect to such shares.
6.9 NONTRANSFERABILITY. Unless the Administrative Committee determines
otherwise at the time an Option is granted (or at any later time when the
Administrative Committee, by written notice to the Holder, releases in whole or
in part the restrictions under this Section 6.9), an Option shall not be
transferable other than by will or the laws of descent and distribution, and may
be exercised during the lifetime of the Holder thereof only by the Holder (or
his or her court appointed legal representative). Options shall not be
transferable other than by will or the laws of descent and distribution, and
Options may be exercised during the lifetime of the Holder thereof only by the
Holder (or his or her court appointed legal representative).
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<PAGE> 12
6.10 REPURCHASE OF SHARES.
(a) RIGHT OF REPURCHASE. If so specified by the Administrative
Committee at the time an Option is granted to a Holder who is an employee of the
Company or any of its Affiliates or a party to a consulting arrangement with the
Company or any of its Affiliates, the Company shall have the right, but shall
not be required, to repurchase from the Holder all or part of (i) the shares of
Common Stock that the Holder acquires upon the exercise of the Option, and (ii)
any other shares of Common Stock or other securities issued or acquired with
respect to the shares specified in the preceding clause (i) or this clause (ii)
in connection with any stock dividend, stock split, reclassification,
recapitalization, reorganization, split-up, spin-off, combination, exchange of
shares, warrants or rights offering to purchase Common Stock, or other similar
corporate event. Such right shall be exercisable at any time and from time to
time during the period of ninety (90) days commencing on the date of termination
of the Holder's employment or consulting agreement with the Company or any of
its Affiliates for "cause," as defined in Section 7.2(b).
(b) EXERCISE OF REPURCHASE RIGHT. The Company's right of repurchase
under this Section 6.10 shall be exercised by delivery written notice to the
Holder specifying the number of shares or other securities to be repurchased and
the effective date of the repurchase, which date shall not be earlier than the
date of the notice nor later than the date of termination of the Company's right
of repurchase. If a Holder transfers shares or other securities that are subject
to the Company's right of repurchase, the shares or other securities shall
remain subject to the Company's right of repurchase during the period specified
in the last sentence of Section 6.10(a) (exercise of the right of repurchase in
such even shall be effected by notice to the person or entity holding the shares
or other securities at the time of exercise).
(c) REPURCHASE PRICE. With respect to each share or other security
to be repurchased by the Company upon its exercise of its right of repurchase
under this Section 6.10, the repurchase price shall be the Fair Market Value of
the share or security as of the effective date of the repurchase. The Company
may elect to pay the amount owed to the Holder (or to the person or entity
holding the share or other security to be repurchased) either (i) in cash, in
which case the amount shall be paid, without interest, within thirty (30) days
following the effective date of the repurchase, or (ii) in three equal
installments, with the first installment payable on the first anniversary of the
effective date of the repurchase, and the remaining installments payable on the
corresponding date in each of the next two years, with each installment to
include interest on the unpaid principal computed at the prime rate published in
the Wall Street Journal for the first business day of the month in which the
effective date of the repurchase occurs, for the period from the effective date
of the repurchase or the date of the most recent installment, as the case may
be, to the due date of the installment being paid.
(d) TERMINATION OF RIGHT OF REPURCHASE. Any right of repurchase of
the Company under this Section 6.10 shall terminate upon the occurrence of a
Control Purchase or an Approved Transaction (other than an Approved Transaction
in connection with which the Administrative Committee determines, in accordance
with the last sentence of Section 7.1, that Options otherwise subject to such
right of repurchase will not vest or become exercisable on an accelerated basis
and/or will not terminate if not exercised prior to consummation of the Approved
Transaction). Any right of repurchase of the Company under this Section 6.10
shall also terminate upon the effective date of the registration by the Company
of any class of any Equity Security pursuant to Section 12 of the Exchange Act.
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<PAGE> 13
6.11 CLASS OF COMMON STOCK. The class of shares subject to each Option and
the class of shares to be received upon exercise of each Option shall depend
upon the employment status of the Eligible Person at the date the Option is
granted and at the date the Option is exercised. If the Eligible Person is an
employee (including officers and directors who are also employees) of the
Company or one of its Affiliates as of the date the Option is granted, the
shares subject to the Option shall be shares of Series B Common Stock, which are
automatically convertible into the shares of Series C Common Stock upon the
occurrence of certain events (a "Conversion Event") as described in the
Company's Articles of Incorporation, as amended from time to time (the
"Articles"), provided, that if a Conversion Event occurs prior to the exercise
of an Option, the shares subject to the Option shall be shares of Series C
Common Stock, with the rights defined in the Articles. If the Eligible Person is
a consultant (other than a director) rendering services to the Company or any of
its Affiliates in the capacity of an independent contractor as of the date the
Option is granted, the shares subject to the Option shall be shares of Series C
Common Stock, with the rights defined in the Articles, regardless of the
Eligible Person's employment status with the Company at the date the Option is
exercised
6.12 DELEGATION TO EXECUTIVE OFFICER OF AUTHORITY TO GRANT OPTIONS. The
Board may delegate to an Executive Officer the authority to determine from time
to time (a) the Eligible Persons to whom Options are to be granted; (b) the
number of shares of Common Stock for which the Options are exercisable and the
purchase price of such shares; (c) whether the Options are Incentive Stock
Options or Nonqualified Stock Options; and (d) all of the other terms and
conditions (which need not be identical) of the Options; PROVIDED, HOWEVER, that
(i) the authority delegated to the Executive Officer under this Section 6.12
shall not exceed that of the Administrative Committee under the foregoing
provisions of this Article 6 and shall be subject to such limitations, in
addition to those specified in this Section 6.12, as may be specified by the
Board at the time of delegation; (ii) the Executive Officer may not be delegated
authority under this Section 6.12 to grant any Option to any person who is an
Executive Officer or a director of the Company at the time of the grant; (iii)
the purchase price of each share of Common Stock under an Option granted under
this Section 6.12 shall not be less than the Fair Market Value of such share on
the date of grant of the Option; and (iv) the Executive Officer shall promptly
provide a report to the Administrative Committee of each person to whom an
Option has been granted under this Section 6.12 and the material terms and
conditions of the Option.
ARTICLE 7
GENERAL PROVISIONS
7.1 ACCELERATION OF OPTIONS -- APPROVED TRANSACTIONS; CONTROL PURCHASE. In
the event of any Approved Transaction or Control Purchase, each outstanding
Option under the Plan shall become exercisable in full in respect of the
aggregate number of shares covered thereby, notwithstanding any contrary vesting
schedule in the Option Agreement evidencing the Option (except to the extent the
Option Agreement expressly provides otherwise), effective upon the Control
Purchase or immediately prior to consummation of the Approved Transaction. In
the case of an Approved Transaction, the Company shall provide notice of the
pendency of the Approved Transaction, at least fifteen (15) days prior to the
expected date of consummation thereof, to each Holder of an outstanding Option.
Each Holder shall thereupon be entitled to exercise the Option at any time prior
to consummation of the Approved Transaction. Any such exercise as to any portion
of the Option that will only become vested immediately prior to the consummation
of the Approved Transaction in accordance with the foregoing acceleration
- 10 -
<PAGE> 14
provision shall be contingent on such consummation. Any such exercise as to any
other portion of the Option will not be contingent on such consummation unless
so elected by the Holder in a notice delivered to the Company simultaneously
with the exercise. Upon consummation of the Approved Transaction, all Options
shall expire to the extent such exercise has not occurred. Notwithstanding the
foregoing, except to the extent otherwise provided in one or more Option
Agreements evidencing Options, the Administrative Committee may, in its
discretion, determine that any or all outstanding Options will not vest or
become exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to consummation of
the Approved Transaction, if the Board or the surviving or acquiring
corporation, as the case may be, shall take, or made effective provision for the
taking of, such action as in the opinion of the Administrative Committee is
equitable and appropriate in order to substitute new Options for such Options,
or to assume such Options (which assumption may be effected by any means
determined by the Administrative Committee, in its discretion, including, but
not limited to, by a cash payment to each Holder, in cancellation of the Options
held by him or her, of such amount as the Administrative Committee determines,
in its sole discretion, represents the then value of the Options) and in order
to make such new or assumed Options, as nearly as practicable, equivalent to the
old Options (before giving effect to any acceleration of the vesting or
exercisability thereof), taking into account, to the extent applicable, the kind
and amount of securities, cash or other assets into or for which the Common
Stock may be changed, converted or exchanged in connection with the Approved
Transaction.
7.2 TERMINATION OF SERVICES. The provisions of this Section 7.2 shall
apply to any Holder who is an employee of the Company or any of its Affiliates
or a party to a written consulting agreement with the Company or any of its
Affiliates.
(a) GENERAL. If such a Holder's employment or consulting agreement
terminates prior to the complete exercise of an Option, then the Option shall,
except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, thereafter be exercisable, to the extent that the Holder was
entitled to exercise the Option on the date of such termination, for a period of
three (3) months following such termination (but not later than the scheduled
expiration date of the Option); PROVIDED, HOWEVER, that (i) if the Holder's
employment or consulting agreement terminates by reason of death or Disability,
then, except to the extent the Option Agreement evidencing the Option expressly
provides otherwise, the Option shall be exercisable, to the extent that the
Holder was entitled to exercise the Option on the date of such termination, for
a period of one (1) year following such termination (but not later than the
scheduled expiration of the Option), and (ii) any termination by the Company or
any of its Affiliates for cause will be treated in accordance with the
provisions of Section 7.2(b) (except to the extent the Option Agreement
expressly provides otherwise).
(b) TERMINATION BY COMPANY FOR CAUSE. If a Holder's employment or
consulting agreement with the Company or any of its Affiliates is terminated for
cause, then all Options held by the Holder shall immediately terminate and,
accordingly, may not be exercised, except to the extent one or more of the
Option Agreements evidencing the Options expressly provides otherwise. For
purposes of this Plan, "cause" shall have the meaning given that term in any
employment agreement or consulting agreement to which the Holder is a party or,
in the absence thereof, the conduct that shall constitute "cause" for purposes
of this Plan shall be insubordination, a knowing violation of a state or federal
law involving the commission of a crime against the Company or any of its
Affiliates or a felony, any misrepresentation, deception, fraud or dishonesty
that is materially injurious to the Company or any of its Affiliates,
- 11 -
<PAGE> 15
incompetence, moral turpitude, the refusal to perform the Holder's duties and
responsibilities for any reason other than illness or incapacity, and any other
misconduct of any kind that the Administrative Committee determines constitutes
"cause" for purposes of this Plan; PROVIDED, HOWEVER, that if a termination
occurs within twelve (12) months after an Approved Transaction or Control
Purchase, termination for cause shall mean only a felony conviction for fraud,
misappropriation or embezzlement. Following termination of a Holder's employment
or consulting agreement, if the Holder engages in any act that would have
constituted cause if the Holder had remained employed by or in a consulting
relationship with the Company or any of its Affiliates, then the Administrative
Committee shall be entitled to terminate any Options held by the Holder.
(c) MISCELLANEOUS. The Administrative Committee may determine
whether any given leave of absence of a Holder constitutes a termination of the
Holder's employment or consulting agreement; PROVIDED, HOWEVER, that for
purposes of the Plan --
(i) a leave of absence, duly authorized in writing by the
Company or any of its Affiliates for military service or sickness, or for
any other purpose approved by the Company or any of its Affiliates, if the
period of the leave does not exceed ninety (90) days, and
(ii) a leave of absence in excess of ninety (90) days, duly
authorized in writing by the Company or any of its Affiliates, provided
the Holder's right to return to service with the Company or the Affiliate
is guaranteed either by statute or by contract --
shall not be deemed a termination of the Holder's employment or consulting
agreement. Options granted under the Plan shall not be affected by any change of
a Holder's employment or consulting agreement so long as the Holder continues to
be an employee of or consultant to the Company or any of its Affiliates. Except
to the extent an Option Agreement evidencing an Option expressly provides
otherwise, if a Holder has an employment or consulting agreement with an
Affiliate of the Company that ceases to be an Affiliate, such event shall be
deemed to constitute a termination of the Holder's employment or consulting
agreement for a reason other than death or Disability.
7.3 RIGHT TO TERMINATE SERVICES. Nothing contained in the Plan or in any
Option Agreement, and no action of the Company or the Administrative Committee
with respect thereto, shall confer or be construed to confer on any Holder any
right to continue in the service of the Company or any of its Affiliates or
interfere in any way with the right of the Company or any of its Affiliates,
subject to the provisions of any agreement between the Holder and the Company or
any of its Affiliates, to terminate at any time, with or without cause, the
employment or consulting agreement with the Holder.
7.4 NONALIENATION OF BENEFITS. Except as provided in Section 6.9, no right
or benefit under the Plan shall be subject to anticipation, alienation, sale,
assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge,
and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void. No right or
benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the person entitled to the right or benefit.
7.5 SHAREHOLDERS AGREEMENT. Unless the Option Agreement evidencing an
Option expressly provides otherwise, the Holder of the Option shall be required,
as a condition to the
- 12 -
<PAGE> 16
issuance of any shares of Common Stock that the Holder acquires upon the
exercise of the Option, to execute and deliver to the Company a shareholders
agreement in such form as may be in use by the Company at the time of such
exercise, or a counterpart thereof, together with, unless the Holder is
unmarried, a spousal consent in the form required thereby, unless the Holder has
previously executed and delivered such documents and they are in effect at the
time the shares are to be issued.
7.6 TERMINATION AND AMENDMENT.
(a) GENERAL. Unless the Plan shall previously have been terminated
as hereinafter provided, no Options may be granted under the Plan on or after
February 16, 2006. The Board or the Administrative Committee may at any time
prior to February 16, 2006 terminate the Plan, and may, from time to time,
suspend or discontinue the Plan or modify or amend the Plan in such respects as
it shall deem advisable; PROVIDED, HOWEVER, that any such modification or
amendment shall comply with all applicable laws and stock exchange listing
requirements and, with respect to Incentive Stock Options granted or to be
granted under the Plan, shall be subject to any approval by shareholders of
the Company required under the Code.
(b) MODIFICATION. No termination, modification or amendment of the
Plan may adversely affect the rights of the Holder of an outstanding Option in
any material way unless the Holder consents thereto. No modification, extension,
renewal or other change in any Option granted under the Plan shall be made after
the grant of the Option, unless the same is consistent with the provisions of
the Plan. With the consent of the Holder and subject to the terms and conditions
of the Plan (including Section 7.6(a)), the Administrative Committee may amend
outstanding Option Agreements with any Holder, including, without limitation,
any amendment that would (i) accelerate the time or times at which the Option
may be exercised, and/or (ii) extend the scheduled expiration date of the
Option. Without limiting the generality of the foregoing, the Administrative
Committee may, but solely with the Holder's consent unless otherwise provided in
the Option Agreement, agree to cancel any Option under the Plan and issue a new
Option in substitution therefor, provided that the Option so substituted shall
satisfy all of the requirements of the Plan as of the date the new Option is
granted. Nothing contained in the foregoing provisions of this Section 7.6(b)
shall be construed to prevent the Administrative Committee from providing in any
Option Agreement that the rights of the Holder with respect to the Option are
subject to such rules and regulations as the Administrative Committee may,
subject to the express provisions of the Plan, adopt from time to time, or
impair the enforceability of any such provision.
7.7 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with
respect to Options shall be subject to all applicable laws, rules and
regulations and such approvals by any governmental agencies as may be required,
including, without limitation, the effectiveness of any registration statement
required under the Securities Act, and the rules and regulations of any
securities exchange or association on which the Common Stock may be listed or
quoted. As long as the Common Stock is not registered under the Exchange Act,
the Company intends that all offers and sales of Options and shares of Common
Stock issuable upon exercise of Options shall be exempt from registration under
the provisions of Section 5 of the Securities Act, and the Plan shall be
administered in a manner so as to preserve such exemption. The Company also
intends that the Plan shall constitute a written compensatory benefit plan,
within the meaning of Rule 701(b) promulgated under the Securities Act, and that
each Option granted under the Plan at a time when the Common Stock is not
registered under the Exchange Act shall, unless
- 13 -
<PAGE> 17
otherwise provided by the Administrative Committee at the time the Option is
granted, be granted in reliance on the exemption from the registration
requirements of Section 5 of the Securities Act provided by Rule 701. As long as
the Common Stock is registered under the Exchange Act, the Company shall use its
reasonable efforts to comply with any legal requirements to file in a timely
manner all reports required to be filed by it under the Exchange Act.
7.8 WITHHOLDING. The Company's obligation to deliver shares of Common
Stock upon exercise of an Option shall be subject to applicable federal, state
and local tax withholding requirements. Federal, state and local withholding tax
due at the time an Option is exercised may, in the discretion of the
Administrative Committee, be paid in shares of Common Stock already owned by the
Holder or through the withholding of shares otherwise issuable to the Holder,
upon such terms and conditions as the Administrative Committee shall determine.
If the Holder shall fail to pay, or make arrangements satisfactory to the
Administrative Committee for the payment of, all such federal, state and local
taxes, then the Company or any of its Affiliates shall, to the extent not
prohibited by law, have the right to deduct from any payment of any kind
otherwise due to the Holder an amount equal to any federal, state or local taxes
of any kind required to be withheld by the Company or any of its Affiliates with
respect to the Option.
7.9 SEPARABILITY. With respect to Incentive Stock Options, if this Plan
does not contain any provision required to be included herein under Section 422
of the Code, such provision shall be deemed to be incorporated herein with the
same force and effect as if such provision had been set out at length herein;
PROVIDED, HOWEVER, that to the extent any Option that is intended to qualify as
an Incentive Stock Option cannot so qualify, the Option, to that extent, shall
be deemed to be a Nonqualified Stock Option for all purposes of the Plan.
7.10 NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the shareholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding of
stock and cash otherwise than under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
7.11 EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance
of an Option, unless otherwise provided in the Option Agreement evidencing the
Option, the Holder shall be deemed to have agreed that the Option is special
incentive compensation that will not be taken into account, in any manner, as
salary, compensation or bonus in determining the amount of any payment under any
pension, retirement or other employee benefit plan, program or policy of the
Company or any of its Affiliates.
7.12 NO SHAREHOLDER RIGHTS. No Holder or other person shall have any
voting or other shareholder rights with respect to shares of Common Stock
subject to an Option until the Option has been duly exercised, full payment of
the purchase price has been made, all conditions under the Option and this Plan
to issuance of the shares have been satisfied, and a certificate for the shares
has been issued. No adjustment shall be made for cash or other dividends or
distributions to shareholders for which the record date is prior to the date of
such issuance.
- 14 -
<PAGE> 18
7.13 GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Washington.
7.14 COMPANY'S RIGHTS. The grant of Options pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
- 15 -
<PAGE> 1
Exhibit 10.3
THE SECURITIES OFFERED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR QUALIFIED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE, AND ANY SALE OF SUCH SECURITIES IS SUBJECT TO COMPLIANCE WITH, OR THE
AVAILABILITY OF EXEMPTIONS FROM COMPLIANCE WITH, THE REGISTRATION AND
QUALIFICATION REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THIS INSTRUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE.
TRANSFER OF THIS INSTRUMENT AND THE SECURITIES OFFERED HEREBY IS RESTRICTED AS
PROVIDED IN SECTIONS 7, 8, 9 AND 10 BELOW.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is entered into effective as
of _______________, 19__ the "Grant Date"), by PROGRESSIVE NETWORKS, INC., a
Washington corporation (the "Company") and _______________ (the "Holder").
R E C I T A L S
A. The Company has adopted the Progressive Networks, Inc. 1996 Stock Option
Plan, as amended and restated (the "Plan"), a copy of which is attached as
Exhibit A (capitalized terms that are used but not defined in this Agreement
will have the meanings given those terms in the Plan).
B. The Holder is an employee of the Company, and has been designated by the
Administrative Committee to receive a stock option under the Plan.
NOW, THEREFORE, the Company and the Holder covenant and agree as follows:
1. GRANT OF THE OPTION.
(a) The Company hereby grants to the Holder a stock option (the
"Option") to acquire from the Company ____________ (______) shares of the Series
B Common Stock, no par value, of the Company (the "Common Stock"), at the price
of $____ per share (the "Option Price"). The Option is not intended to qualify
as an "incentive stock option," as that term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended.
(b) The Holder acknowledges that: (i) a copy of the Company's Articles
of Incorporation, as amended and currently in effect as of the Grant Date (the
"Articles"), is attached as Exhibit B; (ii) the Articles, as amended from time
to time, define the rights of the Common Stock; (iii) although this Option is
currently an option to purchase shares of Series B Common Stock, such shares
will automatically convert into shares of Series C Common Stock, or Common
Stock, upon the occurrence of certain events, as described in the Articles, and,
accordingly, the shares issued upon exercise of this Option may be shares of
Series B Common Stock, shares of Series C Common Stock or shares of Common
Stock.
2. TERM OF THE OPTION. Unless earlier terminated in accordance with the
provisions of the Plan, the Option will terminate on the earliest to occur of
(a) the expiration of twenty (20) years from the Grant Date; (b) the expiration
of ninety (90) days following termination of the Holder's employment with the
Company for any reason other than death, Disability or cause (as defined in
Section 7.2(b) of the Plan); (c) the expiration of one (1) year following
termination of the Holder's employment with the Company on account of death or
Disability; and (d) the date of termination of the Holder's employment with the
Company for cause (as defined in Section 7.2(b) of the Plan).
<PAGE> 2
3. VESTING. The vesting schedule applicable to the Option shall commence on
_________, 19__ (the "Vest Date"). The Option shall vest and become exercisable
in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Number
Date of Shares Vested (Percent)
---- ---------------- ---------
<S> <C> <C>
12 months after Vest Date _________ (20%)
18 months after Vest Date _________ (30%)
24 months after Vest Date _________ (40%)
30 months after Vest Date _________ (50%)
36 months after Vest Date _________ (60%)
42 months after Vest Date _________ (70%)
48 months after Vest Date _________ (80%)
54 months after Vest Date _________ (90%)
60 months after Vest Date _________ (100%)
</TABLE>
provided, however, that, if the Holder's employment with the Company terminates
for any reason, the Option will not vest further following such termination. To
the extent the Option is vested, it shall be exercisable at any time and from
time to time prior to its termination as provided in Section 2.
4. OTHER LIMITATIONS ON THE OPTION. The Option is subject to all of the
provisions of the Plan, including but not limited to Section 4.2 (which permits
adjustments to the Option upon the occurrence of certain corporate events such
as stock dividends, extraordinary cash dividends, reclassifications,
recapitalizations, reorganizations, split-ups, spin-offs, combinations,
exchanges of shares, and warrants or rights offerings), Section 6.10 (which
provides that the Company may repurchase any and all shares of Common Stock
issued upon exercise of the Option in the event the Holder's employment is
terminated for "cause"), and Section 7.1 (which applies in the event of an
Approved Transaction or Control Purchase).
5. EXERCISE OF THE OPTION. To exercise the Option, the Holder must do the
following:
(a) deliver to the Company a written notice, in the form attached to
this Agreement as Exhibit C, specifying the number of shares of Common Stock for
which the Option is being exercised;
(b) surrender this Agreement to the Company;
(c) tender payment of the aggregate Option Price for the shares for
which the Option is being exercised, which payment may be made (i) in cash or by
check; or (ii) by such other means as the Administrative Committee, in its sole
discretion, shall permit at the time of exercise;
(d) pay, or make arrangements satisfactory to the Administrative
Committee for payment to the Company of all federal, state and local taxes, if
any, required to be withheld by the Company in connection with the exercise of
the Option;
(e) if requested by the Administrative Committee, deliver to the
Company, at the Holder's expense, a legal opinion, satisfactory in form and
substance to the Company, of legal counsel designated by the Holder and
satisfactory to the Company, to the effect that exercise of the Option by the
Holder, and the acquisition of shares of Common Stock pursuant thereto, may be
effected without registration or
Option No. NQ-___
<PAGE> 3
qualification of such shares under the Securities Act of 1933, as amended (the
"1933 Act"), or any applicable state securities laws;
(f) if not already a party to the Shareholders' Buy-Sell Agreement (as
defined in Section 9), execute and become a party to that agreement (as required
by Section 9) by delivering to the Company an executed Consent to Be Bound by
Shareholders' Buy-Sell Agreement in the form attached to this Agreement as
Exhibit D; and
(g) execute and deliver to the Company the documents required by the
Plan and any other documents required from time to time by the Administrative
Committee in order to promote compliance with the Plan, the 1933 Act, applicable
state securities laws, or any other applicable law, rule or regulation.
6. DELIVERY OF SHARE CERTIFICATE. As soon as practicable after the Option
has been duly exercised, the Company will deliver to the Holder a certificate
for the shares of Common Stock for which the Option was exercised. Unless the
Option has expired or been exercised in full, the Company and the Holder agree
to execute a new Stock Option Agreement, covering the remaining shares of Common
Stock that may be acquired upon exercise of the Option, which will be identical
to this Agreement except as to the number of shares of Common Stock subject
thereto. In lieu of replacing this Agreement in such manner, the Company may
affix to this Agreement an appropriate notation indicating the number of shares
for which the Option was exercised and return this Agreement to the Holder.
7. NONTRANSFERABILITY. The Option is not transferable other than by will or
the laws of descent and distribution, and the Option may be exercised during the
lifetime of the Holder only by the Holder or the Holder's court appointed legal
representative.
8. WARRANTIES AND REPRESENTATIONS OF THE HOLDER. By executing this
Agreement, the Holder accepts the Option and represents and warrants to the
Company and covenants and agrees with the Company as follows:
(a) The Holder agrees to comply with all of the provisions of this
Agreement and the Plan.
(b) The Holder recognizes, agrees and acknowledges that no
registration statement under the 1933 Act, or under any state securities laws,
has been or will be filed with respect to the Option or any shares of Common
Stock that may be acquired upon exercise of the Option.
(c) The Holder warrants and represents that the Option and any shares
of Common Stock acquired upon exercise of the Option will be acquired and held
by the Holder for the Holder's own account, for investment purposes only, and
not with a view towards the distribution or public offering thereof nor with any
present intention of reselling or distributing the same at any particular future
time.
(d) The Holder agrees not to sell, transfer or otherwise dispose of
any shares of Common Stock that may be acquired upon exercise of the Option
unless (i) there is an effective registration statement under the 1933 Act
covering the proposed disposition and compliance with governing state securities
laws, (ii) the Holder delivers to the Company, at the Holder's expense, a
"no-action" letter or similar interpretative opinion, satisfactory in form and
substance to the Company, from the staff of each appropriate securities agency,
to the effect that such shares may be disposed of by the Holder in the manner
proposed, or (iii) the Holder delivers to the Company, at the Holder's expense,
a legal opinion, satisfactory in form and substance to the Company, of legal
counsel designated by the Holder and satisfactory to the Company, to the effect
that the proposed disposition is exempt from registration under the 1933 Act and
governing state securities laws.
(e) The Holder acknowledges and consents to the appearance of the
restrictive legends, in the form required by Section 6.8 of the Plan, on each
certificate representing shares of Common Stock issued upon exercise of the
Option.
Option No. NQ-___
<PAGE> 4
(f) The Holder agrees not to sell, transfer or otherwise dispose of
the Option or any shares of Common Stock acquired upon exercise of the Option,
except as specifically permitted by this Agreement, the Plan and any applicable
securities laws.
9. SHAREHOLDERS AGREEMENT. The Holder shall be required, as a condition to
the issuance of any shares of Common Stock upon the exercise of the Option, to
execute and deliver to the Company a shareholders agreement in such form as may
be in use by the Company at the time of such exercise, or a counterpart thereof,
together with, unless the Holder is unmarried, a spousal consent in the form
required thereby, unless the Holder has previously executed and delivered such
documents and they are in effect at the time the shares are to be issued.
10. PROCEDURES UPON PERMITTED TRANSFER. Prior to any sale, transfer or
other disposition of any of the shares of Common Stock acquired upon exercise of
the Option, the Holder agrees to give written notice to the Company of the
Holder's intention to effect such disposition. The notice must describe the
circumstances of the proposed transfer in reasonable detail and must specify the
manner in which the requirements of Section 8(d) above will be satisfied in
connection with the proposed disposition. After (a) legal counsel to the Company
has determined that the requirements of Section 8(d) above will be satisfied,
(b) the Holder has executed such documentation as may be necessary to effect the
proposed disposition, and (c) the Holder has paid, or made arrangements
satisfactory to the Administrative Committee for the payment of, all federal,
state and local taxes, if any, required to be withheld by the Company in
connection with the proposed disposition, the Company will, as soon as
practicable, transfer such shares in accordance with the terms of the notice.
Any stock certificate issued upon such transfer will bear the restrictive
legends, in the form required by Section 6.8 of the Plan, unless in the opinion
of legal counsel to the Company such legends are not required. Compliance with
the foregoing procedures are in addition to compliance with any separate
requirements applicable to the Holder under the Company's Articles of
Incorporation or otherwise.
11. RIGHTS AS SHAREHOLDER. The Holder will have no rights as a shareholder
of the Company on account of the Option or on account of shares of Common Stock
which will be acquired upon exercise of the Option (but with respect to which no
certificates have been delivered to the Holder).
12. TAX WITHHOLDING. The Holder agrees to pay, or to make arrangements
satisfactory to the Administrative Committee for payment to the Company of, all
federal, state and local income and employment taxes, if any, required to be
withheld by the Company in connection with the exercise of the Option or any
sale, transfer or other disposition of any shares of Common Stock acquired upon
exercise of the Option. If the Holder fails to do so, then the Holder hereby
authorizes the Company to deduct all or any portion of such taxes from any
payment of any kind otherwise due to the Holder.
13. FURTHER ASSURANCES. The Holder agrees from time to time to execute such
additional documents as the Company may reasonably require to effectuate the
purposes of the Plan and this Agreement.
14. BINDING EFFECT. This Agreement shall be binding upon the Holder and the
Holder's heirs, successors and assigns.
15. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, together with the Plan
and agreements referenced in this Agreement and/or the Plan, constitutes the
entire agreement and understanding between the Company and the Holder regarding
the subject matter hereof. Except as otherwise provided in the Plan, no
modification of the Option or this Agreement, or waiver of any provision of this
Agreement or the Plan, shall be valid unless in writing and duly executed by the
Company and the Holder. The failure of any party to enforce any of that party's
rights against the other party for breach of any of the terms of this Agreement
shall not be construed as a waiver of such rights as to any continued or
subsequent breach.
Option No. NQ-___
<PAGE> 5
16. COST OF LITIGATION. In any action at law or in equity to enforce any of
the provisions or rights under this Agreement, the unsuccessful party to such
litigation, as determined by the court in a final judgment or decree, shall pay
the successful party or parties all costs, expenses and reasonable attorneys'
fees incurred by the successful party or parties (including without limitation
costs, expenses and fees in any appellate proceedings), and if the successful
party recovers judgment in any such action or proceeding, such costs, expenses
and attorneys' fees shall be included as part of the judgment.
17. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Washington.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
"COMPANY" PROGRESSIVE NETWORKS, INC.
BY
-----------------------------------------
ITS CHIEF FINANCIAL OFFICER
"HOLDER"
-----------------------------------------
Option No. NQ-___
<PAGE> 6
EXHIBIT A
(ATTACH AMENDED AND RESTATED 1996 STOCK OPTION PLAN)
<PAGE> 7
EXHIBIT B
(ATTACH AMENDED AND RESTATED ARTICLES OF INCORPORATION)
<PAGE> 8
FORM OF EXERCISE OF OPTION
To: Progressive Networks, Inc.
1111 Third Avenue, Suite 2900
Seattle, WA 98101
The undersigned holds Option Number NQ-___ (the "Option"), represented by a
Stock Option Agreement dated effective as of ________________ (the "Agreement"),
granted to the undersigned pursuant to the Progressive Networks, Inc. 1996 Stock
Option Plan as Amended (the "Plan"). The undersigned hereby exercises the Option
and elects to purchase _______________ shares (the "Shares") of Series B Common
Stock (or shares of Common Stock) of Progressive Networks, Inc. (the "Company")
pursuant to the Option. This notice is accompanied by full payment of the Option
Price of $____ per share for the Shares in cash or by check or in another manner
permitted by Section 5(c) of the Agreement. The undersigned has also paid, or
made arrangements satisfactory to the Administrative Committee administering the
Plan for payment of, all federal, state and local taxes, if any, required to be
withheld by the Company in connection with the exercise of the Option.
The undersigned acknowledges that no registration statement under the 1933
Act, or under any state securities laws, has been or will be filed with respect
to the Shares. The undersigned warrants and represents that the undersigned is
acquiring and will hold the Shares for the undersigned's own account, for
investment purposes only, and not with a view towards the distribution or public
offering of the Shares nor with any present intention of reselling or
distributing the Shares at any particular future time. The undersigned consents
to the appearance of restrictive legends, in the form required by Section 6.8 of
the Plan, on the certificate for the Shares. The undersigned agrees not to sell,
transfer or otherwise dispose of the Shares except as specifically permitted by
the Agreement, the Plan and any applicable securities laws.
Date:
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Signature of Holder
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EXHIBIT C
<PAGE> 9
CONSENT TO BE BOUND BY
SHAREHOLDERS' BUY-SELL AGREEMENT
In consideration of the issuance, sale, pledge or other transfer to the
undersigned of shares of the capital stock of Progressive Networks, Inc., a
Washington corporation (the "Company"), the undersigned (the "Shareholder")
consents and agrees to the terms of, and does hereby execute and become a party
to, the Shareholders' Buy-Sell Agreement dated March 31, 1995 (the "Agreement")
among the Company and certain of the Company's shareholders, as such may be
amended from time to time as provided in the Agreement. The undersigned
acknowledges receipt of a copy of the Agreement and agrees that all Shares (as
defined in the Agreement) of the undersigned shall be held in accordance with
and restricted by the terms of the Agreement.
The execution of this Consent by the spouse of the Shareholder signifies
that the spouse authorizes, ratifies, confirms and approves the execution of
this Consent and, therefore, the Agreement, by the Shareholder, and he or she
further authorizes and appoints the Shareholder as his or her attorney-in-fact
to exercise all rights he or she may have with respect to the ownership of any
Shares of the Company, including the encumbrance and disposition of such Shares.
DATED:
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BY SIGNING BELOW, I ACKNOWLEDGE THAT I HAVE READ AND
UNDERSTOOD THE SHAREHOLDERS' BUY-SELL AGREEMENT AND HAVE
BEEN ENCOURAGED TO RETAIN SEPARATE COUNSEL
----------------------------------
Shareholder:
---------------
Address:
------------------------
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Social Security Number
BY SIGNING BELOW, I ACKNOWLEDGE THAT I HAVE READ AND
UNDERSTOOD THE SHAREHOLDERS' BUY-SELL AGREEMENT,
INCLUDING SECTION 10 AND HAVE BEEN ENCOURAGED
TO RETAIN SEPARATE COUNSEL
----------------------------------
Shareholder's Spouse
----------------------------------
Social Security Number
EXHIBIT D
<PAGE> 1
EXHIBIT 10.4
REALNETWORKS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
REALNETWORKS, INC., a Washington corporation (the "Company"), hereby
establishes this 1998 Employee Stock Purchase Plan (the "Plan").
1. PURPOSE OF PLAN. The purpose of the Plan is to enable Eligible
Employees (as defined in Section 3) who wish to become shareholders of the
Company a convenient and favorable method of doing so. The Plan is intended to
constitute an "employee stock purchase plan," as defined in Section 423(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and shall be
interpreted and administered to further that intent.
2. ADMINISTRATION OF THE PLAN. The Plan will be administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"). Subject to the provisions of the Plan, the Committee
will have the complete authority to interpret the Plan, to adopt, amend and
rescind rules and procedures relating to the Plan, and to make all of the
determinations necessary or advisable for the administration of the Plan. All
such interpretations, rules, procedures and determinations will, in the absent
of fraud or patent mistake, be conclusive and binding on all persons with any
interest in the Plan.
3. ELIGIBLE EMPLOYEES. The term "Eligible Employees" means all
common law employees of the Company and its current majority-owned subsidiaries
(and each other corporation designated by the Committee that hereafter becomes
a majority-owned subsidiary of the Company), except the following: (a)
employees who have been employed for less than 90 days; (b) employees whose
customary employment is 20 hours or less per week; and (c) employees whose
customary employment is for not more than five months in any calendar year.
Except as otherwise expressly provided in the Plan and permitted by Section 423
of the Code, all Eligible Employees shall have the same rights and obligations
under the Plan.
4. STOCK SUBJECT TO THE PLAN. The stock subject to the Plan shall
be shares of the Company's authorized but unissued voting Common Stock, $.001
par value per share (the "Common Stock"). The aggregate number of shares of
Common Stock that may be purchased by Eligible Employees pursuant to the Plan
is 1,000,000, subject to adjustment as provided in Section 13.
5. OFFERING PERIODS. The Common Stock shall be offered under the
Plan during ten consecutive six-month periods (the "Offering Periods"). The
first Offering Period shall begin on January 1, 1998 and end on June 30, 1998.
Thereafter, the Offering Periods will begin on the first day and end on the
last day of each subsequent six-month period.
6. PARTICIPANTS; PAYROLL DEDUCTIONS
6.1 A person who is an Eligible Employee at the beginning of an
Offering Period may elect to have the Company make deductions from the person's
Compensation (as defined in Section 6.4), at a specified percentage rate, to be
used to purchase of shares of Common Stock pursuant to the Plan. Such election
shall be made prior to the beginning of the Offering Period in accordance with
such procedures as the Committee may adopt (each Eligible Employee who so
elects to have such deductions made will be referred to as a "Participant").
<PAGE> 2
6.2 The maximum rate of deduction that a Participant may elect
for any Offering Period is 10%. An amount equal to the elected percentage shall
be deducted from the Participant's pay each time during the Offering Period
that any Compensation is paid to the Participant. The Committee may set such
minimum level of payroll deductions as the Committee determines to be
appropriate. Any minimum level of deductions set by the Committee shall apply
equally to all Eligible Employees. A Participant's accumulated payroll
deductions shall remain the property of the Participant until applied toward
the purchase of shares of Common Stock under the Plan, but may be commingled
with the general funds of the Company. No interest will be paid on payroll
deductions accumulated under the Plan.
6.3 A Participant in the Plan on the last day of an Offering
Period shall automatically continue to participate in the Plan during the next
Offering Period unless he or she withdraws in the manner described in Section
11.
6.4 The term "Compensation" means all cash salary, wages,
bonuses, commissions and other amounts paid to or on behalf of a Participant
for services performed or on account of holidays, vacation, sick leave or other
similar events, including any amounts by which such amounts are reduced, at the
election of a Participant, pursuant to a cafeteria plan described in Section
125 of the Code, a dependent care assistance program described in Section 129
of the Code, a cash or deferred arrangement described in Section 401(k) of the
Code, or any similar plan, program or arrangement, but excluding the value of
any noncash benefits under any employee benefit plans and any special amounts
paid to the Participant that are specifically excluded by the Committee.
7. PURCHASE OF SHARES
7.1 At the end of an Offering Period, a Participant's
accumulated payroll deductions for the Offering Period will, subject to the
limitations in Section 9 and the termination provisions of Section 16, be
applied toward the purchase of shares of Common Stock at a purchase price (the
"Purchase Price") equal to the lesser of --
(a) 85% of the Market Price (as defined in Section 8.1) of the
Common Stock on the first Business Day (as defined in Section 8.2) of
the Offering Period; or
(b) 85% of the Market Price for the Common Stock on the last
Business Day of the Offering Period;
in either event rounded to the nearest whole cent.
7.2 Shares of Common Stock may be purchased under the Plan only
with a Participant's accumulated payroll deductions. Fractional shares cannot
be purchased. Any portion of a Participant's accumulated payroll deductions for
an Offering Period not used for the purchase of Common Stock shall be applied
to the purchase of Common Stock in the next Offering Period, if the Participant
is participating in the Plan during that Offering Period, or returned to the
Participant.
7.3 Each Participant who purchases shares of Common Stock under
the Plan shall thereby be deemed to have agreed that the Company or the
subsidiary of the Company that employs the Participant shall be entitled to
withhold, from any other amounts that may be payable to the Participant at or
around the time of the purchase, such federal, state, local and foreign income,
employment and other taxes may be required to be withheld under applicable
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<PAGE> 3
laws. In lieu of such withholding, the Company or such subsidiary may require
the Participant to remit such taxes to the Company or such subsidiary as a
condition of the purchase.
8. MARKET PRICE
8.1 For purposes of the Plan, the term "Market Price" on any
day means, if the Common Stock is publicly traded, the last sales price (or, if
no last sales price is reported, the average of the high bid and low asked
prices) for a share of Common Stock on that day as reported by the principal
exchange on which the Common Stock is listed, or, if the Common Stock is
publicly traded but not listed on an exchange, as reported by The Nasdaq Stock
Market, or, if such prices or quotations are not reported by The Nasdaq Stock
Market, as reported by any other available source of prices or quotations
selected by the Committee.
8.2 For purposes of the Plan, the term "Business Day" means a
day on which prices or quotations for the Common Stock are reported by a
national securities exchange, the Nasdaq Stock Market, or any other available
source of prices or quotations selected by the Committee, whichever is
applicable pursuant to the preceding paragraph.
8.3 If the Market Price of the Common Stock must be determined
for purposes of the Plan at a time when the Common Stock is not publicly
traded, then the term "Market Price" shall mean the fair market value of the
Common Stock as determined by the Committee, after taking into consideration
all the factors it deems appropriate, including, without limitation, recent
sale and offer prices of the Common Stock in private transactions negotiated at
arm's length.
9. LIMITATIONS ON SHARE PURCHASES
9.1 Notwithstanding Section 3, an employee will not be an
Eligible Employee for purposes of the Plan if the employee owns stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company. For purposes of this 5% limitation, an
employee shall be treated as owning any stock the ownership of which is
attributed to him or her under the rules of Section 424(d) of the Code, as well
as any stock that, in the absence of this paragraph, the employee could
purchase under the Plan with his or her payroll deductions held pursuant to
Section 6 but not yet applied to the purchase of shares of Common Stock under
the Plan.
9.2 During any calendar year, the maximum value of the Common
Stock that may be purchased by a Participant under the Plan is $10,000, said
value to be determined on the basis of the Market Price of the Common Stock on
the first Business Day of each Offering Period that ends in the calendar year.
9.3 The limitations in Section 9.1 and Section 9.2 are intended
to and shall be interpreted in such a manner as will comply with Section
423(b)(3) and Section 423(b)(8) of the Code, respectively.
10. CHANGES IN PAYROLL DEDUCTIONS. The rate of payroll deductions
for an Offering Period may not be increased or decreased by a Participant
during the Offering Period. However, the Participant may change the rate of
payroll deduction for a subsequent Offering Period. In addition, a Participant
may withdraw in full from the Plan in the manner described in Section 11.
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<PAGE> 4
11. WITHDRAWAL FROM THE PLAN
11.1 A Participant may elect to withdraw from the Plan,
effective for the Offering Period in progress, by delivering to the Committee
written notice thereof prior to the end of the Offering Period. If a
Participant so withdraws, all of the Participant's payroll deductions for that
Offering Period will be promptly returned to the Participant. If a
Participant's payroll deductions are interrupted by any legal process, the
Participant will be deemed to have elected to withdraw from the Plan for the
Offering Period in which the interruption occurs.
11.2 A Participant may elect to withdraw from the Plan,
effective for an Offering Period that has not yet commenced, by delivering to
the Committee written notice thereof prior to the first day of the Offering
Period.
11.3 Following withdrawal from the Plan, in order to participate
in the Plan for any subsequent Offering Period, the Participant must again
elect to participate in the manner described in Section 6.1.
12. ISSUANCE OF COMMON STOCK.
12.1 Certificates for the shares of Common Stock purchased by
Participants will be delivered by the Company's transfer agent as soon as
practicable after each Offering Period. In lieu of issuing certificates for
such shares directly to Participants, the Company shall be entitled to issue
such shares to a bank, broker-dealer or similar custodian (the "Custodian")
that has agreed to hold such shares for the accounts of the respective
Participants. Fees and expenses of the Custodian shall be paid by the Company
or allocated among the respective Participants in such manner as the Committee
determines.
12.2 A Participant may direct, in accordance with such
procedures as the Committee may adopt, that shares purchased by the Participant
shall be issued (or, if such shares are issued to the Custodian, that the
account for such shares be held) in the names of the Participant and one other
person designated by the Participant, as joint tenants with right of
survivorship, tenants in common, or community property, to the extent and in
the manner permitted by applicable law.
12.3 A Participant may at any time, in the manner described in
Section 18, undertake a disposition (as that term is defined in Section 424(c)
of the Code), whether by sale, exchange, gift or other transfer of legal title,
of any or all of the shares held for the Participant by the Custodian. In the
absence of such a disposition of the shares, the shares shall continue to be
held by the Custodian until the holding period set forth in Section 423(a) of
the Code has been satisfied. If a Participant so requests, shares for which
such holding period has been satisfied will be transferred to another brokerage
account specified by the Participant, or a stock certificate for such shares
will be issued and delivered to the Participant or his or her designee.
13. CHANGES IN CAPITALIZATION
13.1 Upon the happening of any of the following described
events, a Participant's right to purchase shares of Common Stock under the Plan
shall be adjusted as hereinafter provided:
(a) If the shares of Common Stock are subdivided or combined
into a greater or smaller number of shares of Common Stock or if, upon a
recapitalization, split-up or other reorganization of the Company, the
shares of Common Stock are exchanged for other securities of the
Company, the rights of each Participant shall be modified
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<PAGE> 5
so that the Participant is entitled to purchase, in lieu of the shares
of Common Stock that the Participant would otherwise have been entitled
to purchase for the Offering Period in progress at the time of such
subdivision, combination or exchange (the "Offering Period Shares"),
such number of shares of Common Stock or such number and type of other
securities as the Participant would have received if such Offering
Period Shares had been issued and outstanding at the time of such
subdivision, combination or exchange (unless in the case of an exchange
the Committee determines that the nature of the exchange is such that it
is not feasible or advisable that the rights of Participants be so
modified, in which event the exchange shall be deemed a Terminating
Event under Section 14); and
(b) If the Company issues any of its shares as a stock dividend
upon or with respect to the Common Stock, each Participant who purchases
shares of Common Stock under the Plan at the end of the Offering Period
in progress on the record date for the stock dividend shall be entitled
to receive the shares so purchased (the "Purchased Shares") and shall
also be entitled to receive at no additional cost, but only if the
Purchase Price for the Purchased Shares was determined with reference to
the Market Price of the Common Stock on the first Business Day of the
Offering Period, the number of shares of the class of stock issued as a
stock dividend, and the amount of cash in lieu of fractional shares,
that the Participant would have received if he or she had been the
holder of the Purchased Shares on the record date for the stock
dividend.
13.2 Upon the happening of an event specified in clause (a) or
(b) above, the class and aggregate number of shares available under the Plan,
as set forth in Section 4, shall be appropriately adjusted to reflect the
event. Notwithstanding the foregoing, such adjustments shall be made only to
the extent that the Committee, based on advice of counsel for the Company,
determines that such adjustments will not constitute a change requiring
shareholder approval under Section 423(b)(2) of the Code.
14. TERMINATING EVENTS
14.1 Upon (a) the dissolution or liquidation of the Company, (b)
a merger or other reorganization of the Company with one or more corporations
as a result of which the Company will not be a surviving corporation, (c) the
sale of all or substantially all of the assets of the Company or a material
division of the Company, (d) a sale or other transfer, pursuant to a tender
offer or otherwise, of more than fifty percent (50%) of the then outstanding
shares of Common Stock of the Company, (e) an acquisition by the Company
resulting in an extraordinary expansion of the Company's business or the
addition of a material new line of business, or (f) any exchange that is
subject to this Section 14 in accordance with the provisions of Section 13 (any
of such events is herein referred to as a "Terminating Event"), the Committee
may but shall not be required to --
(a) make provision for the continuation of the Participants'
rights under the Plan on such terms and conditions as the Committee
determines to be appropriate and equitable, including where applicable,
but not limited to, an arrangement for the substitution on an equitable
basis, for each share of Common Stock that could otherwise be purchased
at the end of the Offering Period in progress at the time of the
Terminating Event, of any consideration payable with respect to each
then outstanding share of Common Stock in connection with the
Terminating Event; or
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<PAGE> 6
(b) terminate all rights of Participants under the Plan for
such Offering Period and --
(i) return to the Participants all of their payroll
deductions for such Offering Period; and
(ii) for each share of Common Stock, if any, that
otherwise could have been purchased under the Plan by a
Participant at the end of such Offering Period (determined by
assuming that payroll deductions at the rate elected by the
Participant were continued to the end of the Payroll Period and
used to purchase shares based on the Market Price of the Common
Stock on the first Business Day of the Offering Period) and with
respect to which (A) the Purchase Price at which such share could
be purchased (determined with reference only to the Market Price
of the Common Stock on the first Business Day of the Offering
Period) is exceeded by (B) the Market Price on the date of the
Terminating Event of a share of Common Stock, as determined by
the Committee, pay to the Participant an amount equal to such
excess.
14.2 The Committee shall make all determinations necessary or
advisable in connection with Terminating Events, and its determinations shall,
in the absent of fraud or patent mistake, be conclusive and binding on all
persons with any interest in the Plan.
15. NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. An Eligible
Employee's rights under the Plan are the Eligible Employee's alone and may not
be voluntarily or involuntarily transferred or assigned to, or availed of by,
any other person other than by will or the laws of descent and distribution. An
Eligible Employee's rights under the Plan are exercisable during his or her
lifetime by the Eligible Employee alone.
16. TERMINATION OF EMPLOYEE'S RIGHTS
16.1 Subject to Section 16.2, a Participant's rights under the
Plan will terminate if he or she for any reason (including death, disability or
voluntary or involuntary termination of employment) ceases to be an employee of
the Company or one of its subsidiaries.
16.2 Notwithstanding the foregoing, if a Participant ceases to
be an employee of the Company or one of its subsidiaries, the termination of
the Participant's rights under the preceding paragraph shall not apply to any
right the Participant may have to purchase shares of Common Stock at the end of
the Offering Period in progress when the Participant ceases to be an employee.
Such purchases of shares of Common Stock shall, to the extent of payroll
deductions accumulated for the Offering Period, occur automatically at the end
of the Offering Period, unless the Participant or his or her personal
representative withdraws from the Plan for the Offering Period in the manner
described in Section 11.
16.3 To the extent that the rights of a Participant terminate in
accordance with this Section 16, any of the Participant's payroll deductions
not used to purchase shares of Common Stock will be promptly returned to the
Participant or his or her personal representative.
17. TERMINATION AND AMENDMENT OF PLAN
17.1 The Plan shall terminate on December 31, 2002. The Plan may
be terminated at any earlier time by the Board, but, except as provided in
Section 14, such termination shall not affect the rights of Participants under
the Plan for the Offering Period in progress at the time of termination. The
Plan will also terminate in any case when all or substantially all of the
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unissued shares of Common Stock reserved for the purposes of the Plan have been
purchased. If at any time shares of Common Stock reserved for the purpose of
the Plan remain available for purchase but not in sufficient number to satisfy
all then unfilled purchase requirements, the available shares shall be
apportioned among Participants in proportion to the respective amounts of their
accumulated payroll deductions, and the Plan shall terminate. Upon such
termination or any other termination of the Plan, all payroll deductions not
used to purchase shares of Common Stock will be refunded to the Participants
entitled thereto.
17.2 The Committee or the Board may from time to time adopt
amendments to the Plan; PROVIDED, HOWEVER, that, without the approval of the
shareholders of the Company, no amendment may increase the number of shares
that may be issued under the Plan or make any other change for which
shareholder approval is required by Section 423 of the Code or the regulations
thereunder.
18. DISPOSITION OF SHARES. Subject to compliance with any applicable
federal and state securities and other laws and any policy of the Company in
effect from time to time with respect to trading in its shares, a Participant
may effect a disposition (as that term is defined in Section 424(c) of the
Code) of Common Stock purchased under the Plan at any time the Participant
chooses; PROVIDED, HOWEVER, each Participant agrees, by purchasing shares of
Common Stock under the Plan, that (a) the Company shall be entitled to
withhold, from any other amounts that may be payable to the Participant by the
Company at or around the time of such disposition, such federal, state, local
and foreign income, employment and other taxes as the Company may be required
to withhold under applicable law; and (b) in lieu of such withholding, the
Participant will, upon request of the Company, promptly remit such taxes to the
Company. EACH EMPLOYEE PURCHASING SHARES OF COMMON STOCK UNDER THE PLAN ASSUMES
THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE THEREOF.
19. NO SHAREHOLDER RIGHTS; INFORMATION TO PARTICIPANTS. A
Participant shall not have any rights as a shareholder of the Company (other
than the right potentially to receive stock dividends under Section 13) on
account of shares of Common Stock that may be purchased under the Plan prior to
the time such shares are actually purchased by and issued to the Participant.
Notwithstanding the foregoing, the Company shall deliver to each Participant
under the Plan who does not otherwise receive such materials (a) a copy of the
Company's annual financial statements (which shall be delivered annually as
promptly as practical following each fiscal year of the Company and review or
audit of such statements by the Company's auditors), together with management's
discussion and analysis of financial condition and results of operations for
the fiscal year, and (b) a copy of all reports, proxy statements and other
communications distributed to the Company's security holders generally.
20. USE OF PROCEEDS. The proceeds received by the Company from the
sale of shares of Common Stock under the Plan will be used for general
corporate purposes.
21. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver shares of the Common Stock under the Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares, including the Securities and Exchange
Commission, the securities administrators of the states in which Participants
reside, and the Internal Revenue Service.
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22. MISCELLANEOUS PROVISIONS
22.1 Nothing contained in the Plan shall obligate the Company or
any of its subsidiaries to employ a Participant for any period, nor shall the
Plan interfere in any way with the right of the Company or any of its
subsidiaries to reduce a Participant's compensation.
22.2 The provisions of the Plan shall be binding upon each
Participant and, subject to the provisions of Section 15, the heirs, successors
and assigns of each Participant.
22.3 Where the context so requires, references in the Plan to
the singular shall include the plural, and vice versa, and references to a
particular gender shall include either or both additional genders.
22.4 The Plan shall be construed, administered and enforced in
accordance with the laws of the United States, to the extent applicable
thereto, as well as the laws of the State of Washington.
23. APPROVAL OF SHAREHOLDERS. The Plan shall be effective January 1,
1998, subject to approval by the shareholders of the Company in a manner that
complies with Section 423(b)(2) of the Code. If such approval does not occur
prior to January 1, 1998, the Plan shall be void and of no effect.
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<PAGE> 1
Exhibit 10.5
NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACT (COLLECTIVELY, THE
"SECURITIES LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES (I) ARE
REGISTERED UNDER THE SECURITIES LAWS OR (II) ARE EXEMPT FROM REGISTRATION UNDER
THE SECURITIES LAWS AND THE COMPANY IS PROVIDED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
No. ___ WARRANT TO PURCHASE _______
ISSUED: NOVEMBER 27, 1996 SHARES OF SERIES D PREFERRED STOCK
HOLDER:__________________
PROGRESSIVE NETWORKS, INC.
SERIES D PREFERRED STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that, for value received and subject to the terms and
conditions of this Warrant, the person whose name appears as holder above, or
such other person to whom this Warrant may be transferred pursuant to Section 6
of this Warrant (the "Holder"), is entitled, at any time before the termination
of this Warrant as provided in Section 5 (the "Exercise Period"), to subscribe
for and purchase upon exercise of this Warrant ________________________
(_____________) fully paid and nonassessable shares of Series D Preferred Stock
(the "Warrant Stock") of Progressive Networks, Inc., a Washington corporation
(the "Company"), at a price per share of $9.4125 (the "Unit Price"). In the
event, however, that pursuant to the Company's Articles of Incorporation, as
amended, an event causing conversion of the Company's Series D Preferred Stock
shall have occurred prior to the exercise of this Warrant, in whole or in part,
then this Warrant shall be exercisable for the number of shares of Common Stock
of the Company into which the Series D Preferred Stock not purchased upon any
prior exercise of the Warrant would have been so converted (and, where the
context requires, reference to "Warrant Stock" shall be deemed to include such
Common Stock).
This Warrant is subject to the following additional terms and
conditions:
1. Issuance of Warrant. This Warrant is issued in connection with
Holder's acquisition of shares of Series D Preferred Stock pursuant to the terms
of the Series D Preferred Stock Purchase Agreement dated November 19, 1996 (the
"Stock Purchase Agreement").
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<PAGE> 2
2. Method of Exercise.
(a) This Warrant may be exercised in whole at any time or from
time to time in part, but not as to a fractional share of Warrant Stock, by
delivering to the Company during the Exercise Period (i) the attached form of
"Election to Purchase," duly completed and executed by the Holder, (ii) this
Warrant, and (iii) payment of the Unit Price for each share of Warrant Stock for
which the Warrant is exercised in cash or by certified or official bank check
payable to the order of the Company or by wire transfer of immediately available
funds to the account of the Company. At the option of the Holder, in case of an
exercise of this Warrant other than in connection with an initial public
offering, in lieu of paying the Unit Price, the Holder may deliver Warrants to
the Company for cancellation and receive shares of Warrant Stock in accordance
with the following formula: in exchange for each share of Warrant Stock issuable
on exercise of each Warrant the Holder delivers for cancellation, such Holder
shall receive a fractional share of Warrant Stock, such fraction to have a
numerator equal to the Fair Market Value per share of Warrant Stock at such time
minus the Unit Price per share of Warrant Stock at such time, and a denominator
equal to the Fair Market Value per share of Warrant Stock at such time. If the
Holder receives notice of a proposed initial public offering of the Company or
an event described in Section 8(c)(i) through (v) below, the Holder may make
exercise of this Warrant contingent upon consummation of such transaction (and,
if such transaction is an initial public offering, upon inclusion of the Warrant
Stock as selling shareholder shares in the offering) by so electing in writing
in the Election to Purchase delivered to the Company under this Section 2.
(b) For purposes of clause (a) of this Section 2, the "Fair
Market Value" per share of the Warrant Stock means: (A) the average of the
closing prices of the Company's Common Stock as quoted by NASDAQ or listed on
any exchange, whichever is applicable, as published in the Western Edition of
The Wall Street Journal for the five (5) trading days prior to the date of the
Holder's election hereunder or (B) if applicable at the time of or in connection
with the exercise under clause (a) of this Section 2, the gross sales price of
one share of the Company's Common Stock pursuant to a registered public offering
or that amount which shareholders of the Company will receive for each share of
Common Stock pursuant to a merger, reorganization or sale of assets. If the
Company's Common Stock is not quoted by NASDAQ or listed on an exchange, the
"Fair Market Value" of the Series D Preferred shall be the price at which a
willing buyer would buy and a willing seller would sell the Series D Preferred
on the date of exercise of the warrant as agreed to by the Holder and the
Company. If the Holder and the Company cannot agree on the Fair Market Value
within ten (10) business days of the Company's receipt of the Holder's Election
to Purchase, the Fair Market Value shall be determined by an independent
appraiser selected by the Company and reasonably acceptable to the Holder. The
cost of the appraisal shall be divided equally between the Company and the
Holder.
3. Delivery of Stock Certificates. Within three (3) days after the
exercise of this Warrant (in full or in part), the Company at its expense
(except for the payment of any applicable issue taxes) shall issue in the name
of and deliver to the Holder (a) a certificate or certificates for the number of
fully paid and nonassessable shares of Warrant Stock to which
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<PAGE> 3
the Holder shall be entitled upon such exercise (in such denominations of
Warrant Stock as may be requested by the Holder hereof and registered in the
name of such Holder or such other name(s) as shall be designated by such Holder,
subject to the limitations contained in Section 6), and (b) unless this Warrant
has expired, a new Warrant representing the number of shares of Warrant Stock,
if any, with respect to which this Warrant shall not have been exercised. The
Holder shall for all purposes be deemed to have become the holder of record of
such shares of Warrant Stock on the date on which this Warrant is surrendered
and payment of the Warrant Price is made (or immediately upon consummation of a
Reorganization, in the case of an exercise that is contingent upon such an
event), irrespective of the date of delivery of the certificate or certificates
representing the Warrant Stock; provided, that if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of record of such shares of
Warrant Stock at the close of business on the next succeeding date on which the
stock transfer books are open.
4. Covenants as to Warrant Stock. The Company covenants and agrees that
all shares of Warrant Stock issued pursuant to the terms of this Warrant as well
as all shares of Common Stock issuable upon conversion of the Warrant Stock
(collectively, the "Reserved Shares") will, upon their issuance, be validly
issued and outstanding, fully paid and nonassessable. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved a sufficient number of the Reserved Shares to provide for the exercise
of the rights represented by this Warrant.
5. Vesting and Termination.
(a) This Warrant is exercisable from the date of issuance until
the Termination Date (as defined in this Section 5).
(b) Upon a merger or consolidation in which the Company is not
the survivor, an acquisition of all or substantially all of the assets of the
Company, a reorganization of the Company or a liquidation of the Company
(collectively, a "Reorganization"), in connection with which the holders of the
Company's capital stock will not receive stock or any other securities of any
other entity, this Warrant shall be canceled and all rights granted hereunder
shall terminate; provided, however, that the Company shall have delivered to the
Holder notice of the Reorganization no less than twenty (20) business days
before the date scheduled for the Reorganization.
(c) If not sooner canceled pursuant to the provisions of Sections
5(b), this Warrant shall be canceled and the rights granted hereunder shall
terminate on November 27, 1998, provided, that if such date occurs during the
period (a "Lockup Period") described in Section 1.6 of the Investors' Rights
Agreement (as defined in the Stock Purchase Agreement), such date shall be
postponed until the fifteenth (15th) business day following the Lockup Period.
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<PAGE> 4
(d) The date of termination of this Warrant as provided in this
Section 5 shall be referred to herein as the "Termination Date."
6. Restrictions on Transfer. Neither this Warrant nor any securities
purchased upon exercise of this Warrant may be transferred unless (a) such
transfer is registered under the Securities Act and any applicable state
securities or blue sky laws, (b) the Company has received a legal opinion from
counsel and in form reasonably satisfactory to the Company to the effect that
the transfer is exempt from the prospectus delivery and registration
requirements of the Securities Act and any applicable state securities and blue
sky laws, or (c) the Company otherwise satisfies itself that such transfer is
exempt from registration.
7. Legend. A legend setting forth or referring to the above restrictions
shall be placed on this Warrant, any replacement hereof and any certificate
representing a security issued pursuant to the exercise of this Warrant and a
stop transfer restriction or order may be placed on the books of the Company and
with any transfer agent until such securities may be legally sold or otherwise
transferred.
8. Adjustment of Unit Price and Number of Shares.
(a) In case the Company shall at any time subdivide its
outstanding shares of Series D Preferred Stock into a greater number of shares,
the Unit Price in effect immediately prior to such subdivision shall be
proportionately reduced (and the number of shares of Warrant Stock for which
this Warrant shall be exercisable shall be increased in inverse proportion to
such reduction), and conversely, in case the outstanding shares of Series D
Preferred Stock of the Company shall be combined into a smaller number of
shares, the Unit Price in effect immediately prior to such combination shall be
proportionately increased (and the number of shares of Warrant Stock for which
this Warrant shall be exercisable shall be decreased in inverse proportion to
such increase).
(b) Upon any adjustment of the Unit Price and number of shares
purchasable upon the exercise of this Warrant, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state the Unit Price resulting from such adjustment
and the increase or decrease, if any, in the number of shares purchasable at
such price upon the exercise of this Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
(c) If at any time or from time to time the holders of Series D
Preferred Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(x) Preferred Stock, or any shares of stock or other
securities whether or not such securities are at any time
directly or indirectly convertible into or exchangeable for
Preferred Stock, or any rights or options to subscribe
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<PAGE> 5
for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution (other than by conversion under
section 5.4 of the Company's Amended and Restated Articles of
Incorporation), or
(y) any cash paid or payable otherwise than as a cash
dividend, or
(z) Preferred Stock or other or additional stock or other
securities or property (including cash) by way of spinoff,
split-up, reclassification, combination of shares or similar
corporate rearrangement (other than shares of Preferred Stock
issued as a stock split, adjustments in respect of which shall be
covered by the terms of clause (a) above), or
if at any time:
(i) the Company shall declare any cash dividend upon its
Series D Preferred Stock;
(ii) the Company shall declare any dividend upon its
Series D Preferred Stock payable in stock or make any special
dividend or other distribution to the holders of its Series D
Preferred Stock;
(iii) the Company shall offer for subscription pro rata to
the holders of its Series D Preferred Stock any additional shares
of stock of any class or other rights;
(iv) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation;
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(vi) the Company shall take or propose to take any other
action, notice of which is actually provided to holders of the
Series D Preferred Stock;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the Company, (A) at least twenty (20) days
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for such events listed in this section 8(c) above or
for determining rights to vote (if applicable) in respect of any such events
listed above in this section 8(c), and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, or other action, at least twenty (20) days written
notice of the date when the same shall take place. Any notice given in
accordance with the foregoing clause (A) shall also specify, in the case
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<PAGE> 6
of any such dividend, distribution or subscription rights, the date on which the
holders of Series D Preferred Stock shall be entitled thereto. Any notice given
in accordance with the foregoing clause (B) shall also specify the date on which
the holders of Series D Preferred Stock shall be entitled to exchange their
Series D Preferred Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, or other action as the case may be.
(d) If the change in the outstanding Series D Preferred Stock of
the Company or any other event occurs as to which the other provisions of this
Section 8 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the Holder of the Warrant in accordance with the
essential intent and principles of such provisions, then the Board of Directors
of the Company shall make an adjustment in the number and class of shares
available under the Warrant, the Unit Price and/or the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such purchase rights as aforesaid. The adjustment shall be such as will
give the Holder of the Warrant upon exercise for the same aggregate Unit Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
9. Consolidation or Merger of the Company. If the Company is a party to
(a) any consolidation or merger with another corporation in which the Company is
not the survivor, (b) any consolidation or merger of another entity into the
Company in which the Company is the survivor but, in connection therewith, the
Company's equity securities are changed into or exchanged for stock or other
securities of any other entity, or (c) any capital reorganization or
reclassification of its Series D Preferred Stock or Common Stock, pursuant to
any of which transactions the holders of the Company's capital stock are
entitled to receive with respect to or in exchange for such capital stock, stock
or other securities, whether alone or together with any other consideration (all
such consideration being the "Allowed Consideration"), then, as a condition of
such transaction, lawful and adequate provisions shall be made whereby the
Holder hereof shall thereafter have the right to purchase and receive (in lieu
of the shares of the Warrant Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby)
such Allowed Consideration as may be issued or payable with respect to or in
exchange for the number of shares of such Warrant Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented hereby.
In any such case, appropriate provisions shall be made with respect to the
rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including, without limitation, provisions for adjustments of
the Unit Price and the number of shares purchasable and receivable upon the
exercise of this Warrant) shall thereafter be applicable, as nearly as may be
reasonably practicable (as determined in the good faith of the Company), in
relation to the Allowed Consideration thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation or merger unless,
prior to the consummation thereof, the successor corporation resulting from such
consolidation or merger shall assume by written instrument, executed and mailed
or delivered to the registered Holder hereof at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such Holder
such
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Allowed Consideration as, in accordance with the foregoing provisions, such
Holder may be entitled to purchase.
10. Issue Tax. The issuance of certificates for shares of Preferred
Stock upon the exercise of the Warrant shall be made without charge to the
Holder of the Warrant for any issue tax in respect thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Holder of the Warrant being exercised.
11. Closing of Books. The Company will at no time close its transfer
books against the transfer of any Warrant or of any shares of Series D Preferred
Stock issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
12. Holder as Owner. The Company may deem and treat the holder of record
of this Warrant as the absolute owner hereof for all purposes regardless of any
notice to the contrary.
13. No Rights as Shareholder. This Warrant shall not entitle the Holder
to any voting rights or to any other rights as a shareholder of the Company or
to any other rights whatsoever except the rights stated herein; and no cash
dividend or interest shall be payable or shall accrue in respect of this Warrant
or the Warrant Stock purchasable hereunder unless, until and to the extent that
this Warrant shall be exercised. No provisions hereof, in the absence of
affirmative action by the Holder to purchase shares of Preferred Stock, and no
mere enumeration herein of the rights or privileges of the Holder hereof, shall
give rise to any liability of such Holder for the Unit Price or as a shareholder
of the Company, whether such liability is asserted by the Company or by its
creditors.
14. Construction. The validity and interpretation of the terms and
provisions of this Warrant shall be governed by the laws of the State of
Washington. The descriptive headings of the several sections of this Warrant are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions thereof.
15. Expiration. This Warrant shall be void and all rights represented
hereby shall cease unless exercised on or before the Termination Date. All
restrictions set forth herein on the shares of capital stock issued upon
exercise of any rights hereunder shall survive such exercise and expiration of
the rights granted hereunder.
16. Exchange of Warrant. This Warrant is exchangeable upon the surrender
hereof by the Holder at the office of the Company for new Warrants of like tenor
but of different denominations representing in the aggregate the rights to
subscribe for and purchase the number of shares that may be subscribed for and
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by the
Holder at the time of such surrender.
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<PAGE> 8
17. Lost Warrant Certificate. If this Warrant is lost, stolen, mutilated
or destroyed, the Company shall issue a new Warrant of like denomination, tenor
and date as this Warrant, subject to the Company's right to require the Holder
to give the Company a bond or other satisfactory security sufficient to
indemnify the Company against any claim that may be made against it (including
any expense or liability) on account of the alleged loss, theft, mutilation or
destruction of this Warrant or the issuance of such new Warrant.
18. Waivers and Amendments. This Warrant or any provision hereof may be
changed, waived, discharged or terminated only by a statement in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
19. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be mailed by United States mail
first-class postage prepaid, or by registered or certified mail with return
receipt requested, addressed as follows:
If to the Holder:
To the address last furnished in writing to the Company by the
Holder.
If to the Company:
Progressive Networks, Inc.
1111 Third Avenue, Suite 500
Seattle, Washington 98101
Attention: President
Each of the foregoing parties shall be entitled to specify a different
address by giving five (5) days' advance written notice as aforesaid to the
other party.
20. Registration Rights. The Holder shall be entitled to registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Warrant Stock to the extent provided in, and subject to the terms and
conditions of, the Investors' Rights Agreement.
21. Investment Intent. By accepting this Warrant, the Holder represents
that he, she or it is acquiring this Warrant for investment and not with a view
to, or for sale in connection with, any distribution thereof.
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<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this certificate as of the
date first written above.
Progressive Networks, Inc.
By
---------------------------------
Its
-----------------------------
9
<PAGE> 10
ELECTION TO PURCHASE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant (the "Owner")
irrevocably exercises this Warrant for __________ shares of Series D Preferred
Stock of Progressive Networks, Inc. (the "Exercise Shares"), on the terms and
conditions specified in this Warrant, and requests that a certificate for the
Exercise Shares hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to
______________________________ whose address is
______________________________________, and, if such shares shall not include
all of the shares for which this Warrant is exercisable, that a new Warrant of
like tenor and date for the balance of the shares issuable hereunder (properly
reduced to reflect cashless exercise, if applicable) be delivered to the
undersigned.
The Owner wishes to utilize cashless exercise in payment of the exercise
price for the Exercise Shares and hereby authorizes the Company to adjust the
number of shares for which this Warrant may be exercised in the future to
properly reflect such cashless exercise:
[ ] Yes, for __________ shares [ ] No
Dated: ____________________
-----------------------------------
Signature of Registered Owner
Title:
------------------------------
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
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<PAGE> 1
EXHIBIT 10.6
NEITHER THE SECURITY EVIDENCED BY THIS WARRANT NOR THE SECURITIES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACT (COLLECTIVELY, THE
"SECURITIES LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE SOLD, OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS THE SECURITIES (I) ARE
REGISTERED UNDER THE SECURITIES LAWS OR (II) ARE EXEMPT FROM REGISTRATION UNDER
THE SECURITIES LAWS AND THE COMPANY IS PROVIDED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
No. 35 WARRANT TO PURCHASE 3,709,305
ISSUED: JULY 21, 1997 SHARES OF SERIES E PREFERRED STOCK
HOLDER: MICROSOFT CORPORATION
PROGRESSIVE NETWORKS, INC.
SERIES E PREFERRED STOCK PURCHASE WARRANT
THIS IS TO CERTIFY that, for value received and subject to the terms
and conditions of this Warrant, the person whose name appears as holder above,
or such other person to whom this Warrant may be transferred pursuant to Section
6 of this Warrant (the "Holder"), is entitled, at any time before the
termination of this Warrant as provided in Section 5 (the "Exercise Period"), to
subscribe for and purchase upon exercise of this Warrant Three Million Seven
Hundred Nine Thousand Three Hundred Five (3,709,305) fully paid and
nonassessable shares of Series E Preferred Stock (the "Warrant Stock") of
Progressive Networks, Inc., a Washington corporation (the "Company"), at a price
per share of $13.48 (the "Unit Price"). In the event, however, that pursuant to
the Company's Articles of Incorporation, as amended, an event causing conversion
of the Company's Series E Preferred Stock shall have occurred prior to the
exercise of this Warrant, in whole or in part, then this Warrant shall be
exercisable for the number of shares of Common Stock of the Company into which
the Series E Preferred Stock not purchased upon any prior exercise of the
Warrant would have been so converted (and, where the context requires, reference
to "Warrant Stock" shall be deemed to include such Common Stock).
This Warrant is subject to the following additional terms and
conditions:
1. Issuance of Warrant. This Warrant is issued in connection with
Holder's acquisition of shares of Series E Preferred Stock pursuant to the terms
of the Series E Preferred Stock Purchase Agreement dated July 21, 1997 (the
"Stock Purchase Agreement").
2. Method of Exercise.
(a) This Warrant may be exercised in whole at any time or from
time to time in part, but not as to a fractional share of Warrant Stock, by
delivering to the Company during
<PAGE> 2
the Exercise Period (i) the attached form of "Election to Purchase," duly
completed and executed by the Holder, (ii) this Warrant, and (iii) payment of
the Unit Price for each share of Warrant Stock for which the Warrant is
exercised in cash or by certified or official bank check payable to the order of
the Company or by wire transfer of immediately available funds to the account of
the Company. At the option of the Holder, in case of an exercise of this Warrant
other than in connection with an initial public offering, in lieu of paying the
Unit Price, the Holder may deliver this Warrant to the Company for cancellation
and receive shares of Warrant Stock in accordance with the following formula: in
exchange for each share of Warrant Stock issuable on exercise of the Warrant the
Holder delivers for cancellation, such Holder shall receive a fractional share
of Warrant Stock, such fraction to have a numerator equal to the Fair Market
Value per share of Warrant Stock at such time minus the Unit Price per share of
Warrant Stock at such time, and a denominator equal to the Fair Market Value per
share of Warrant Stock at such time. If the Holder receives notice of a proposed
initial public offering of the Company or an event described in Section 8(c)(i)
through (v) below, the Holder may make exercise of this Warrant contingent upon
consummation of such transaction (and, if such transaction is an initial public
offering, upon inclusion of the Warrant Stock as selling shareholder shares in
the offering) by so electing in writing in the Election to Purchase delivered to
the Company under this Section 2.
(b) For purposes of clause (a) of this Section 2, the "Fair
Market Value" per share of the Warrant Stock means: (i) the average of the
closing prices of the Company's Common Stock as quoted by NASDAQ or listed on
any exchange, whichever is applicable, as published in the Western Edition of
the Wall Street Journal for the five (5) trading days prior to the date of the
Holder's election hereunder or (ii) if applicable at the time of or in
connection with the exercise under clause (a) of this Section 2, the gross sales
price of one share of the Company's Common Stock pursuant to a registered public
offering or that amount which shareholders of the Company will receive for each
share of Common Stock pursuant to a merger, reorganization or sale of assets. If
the Company's Common Stock is not quoted by NASDAQ or listed on an exchange, the
"Fair Market Value" of the Warrant Stock shall be the price at which a willing
buyer would buy and a willing seller would sell the Warrant Stock on the date of
exercise of the warrant as agreed to by the Holder and the Company. If the
Holder and the Company cannot agree on Fair Market Value within ten (10)
business days of the Company's receipt of the Holder's Election to Purchase, the
Fair Market Value shall be determined by an independent appraiser selected by
the Company and reasonably acceptable to the Holder. The cost of the appraisal
shall be divided equally between the Company and the Holder.
3. Delivery of Stock Certificates. Within three (3) days after the
exercise of this Warrant (in full or in part), the Company at its expense
(except for the payment of any applicable issue taxes) shall issue in the name
of and deliver to the Holder (a) a certificate or certificates for the number of
fully paid and nonassessable shares of Warrant Stock to which the Holder shall
be entitled upon such exercise (in such denominations of Warrant Stock as may be
requested by the Holder hereof and registered in the name of such Holder or such
other name(s) as shall be designated by such Holder, subject to the limitations
contained in Section 6), and (b) unless this Warrant has expired, a new Warrant
representing the number of shares of Warrant Stock, if any, with respect to
which this Warrant shall not have been exercised. The Holder
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<PAGE> 3
shall for all purposes be deemed to have become the holder of record of such
shares of Warrant Stock on the date on which this Warrant is surrendered and
payment of the Warrant Price is made (or immediately upon consummation of a
Reorganization, in the case of an exercise that is contingent upon such an
event), irrespective of the date of delivery of the certificate or certificates
representing the Warrant Stock; provided, that if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of record of such shares of
Warrant Stock at the close of business on the next succeeding date on which the
stock transfer books are open.
4. Covenants as to Warrant Stock. The Company covenants and agrees that
all shares of Warrant Stock issued pursuant to the terms of this Warrant as well
as all shares of Common Stock issuable upon conversion of the Warrant Stock
(collectively, the "Reserved Shares") will, upon their issuance, be validly
issued and outstanding, fully paid and nonassessable. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved a sufficient number of the Reserved Shares to provide for the exercise
of the rights represented by this Warrant.
5. Vesting and Termination.
(a) This Warrant is exercisable from the date of issuance
until the Termination Date (as defined in this Section 5).
(b) If Microsoft Corporation, or any of its successors or
assigns ("Microsoft"), materially breaches any material warranty, term,
condition, or covenant of that certain Agreement between Microsoft and
Progressive Networks on Media Steaming Technology dated June 17, 1997, as
thereafter amended (the "Microsoft Agreement"), and such breach, other than of
the provisions of Section 8.2 of that Agreement, which the parties have agreed
cannot be cured, is not cured within forty-five (45) days after written notice
is given to Microsoft by the Company (the "Cure Period"), during which Cure
Period, or such shorter period ending on the date of cure if the breach is cured
prior to the end of such Cure Period, this Warrant shall not be exercisable,
this Warrant shall, immediately and automatically upon the breach (unless such
breach is cured during the Cure Period), be canceled and all rights granted
hereunder shall terminate, and, if applicable, any and all shares of Warrant
Stock or Common Stock issued as a result of any exercise of the rights
represented by this Warrant on or after the date of the breach, notwithstanding
that the date of discovery of such breach may be after such issuance or
issuances, shall be canceled, at the option of the Company, provided, however,
that in the event of such cancellation, the Company shall deliver written notice
of such cancellation to, and shall refund the Unit Price paid by, Microsoft with
respect to such shares and such cancellation shall be effective upon delivery to
Microsoft of the written notice and the Unit Price paid. If Microsoft disputes
that a material breach has occurred, whether a material breach has been cured,
or whether a material breach has been cured within the Cure Period, and the
parties submit such dispute to structured negotiation or binding arbitration as
provided in Section 11.3 of the Microsoft Agreement (the "Dispute Resolution
Period"), the parties agree that this Warrant shall not be exercisable during
the Dispute Resolution Period and thereafter unless and until the arbiter of the
dispute determines that Microsoft Corporation, or any of its successors or
assigns, has not breached the Microsoft Agreement or has cured the breach within
the Cure
3
<PAGE> 4
Period. The parties agree that this Section 5(b) shall survive any assignment of
this Warrant by Microsoft.
(c) Upon a merger or consolidation in which the Company is not
the survivor, an acquisition of all or substantially all of the assets of the
Company, a reorganization of the Company or a liquidation of the Company
(collectively, a "Reorganization"), in connection with which the holders of the
Company's capital stock will not receive stock or any other securities of any
other entity, this Warrant shall be canceled and all rights granted hereunder
shall terminate; provided, however, that the Company shall have delivered to the
Holder notice of the Reorganization no less than twenty (20) business days
before the date scheduled for the Reorganization.
(d) Upon closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), covering the offer and sale of Common Stock for
the account of the Company to the public (an "IPO"), this Warrant shall be
canceled and all rights granted hereunder shall terminate; provided, however,
that the Company shall deliver to the holder notice of the IPO no less than
fifteen (15) business days before the date scheduled for the closing of the IPO.
(e) If not sooner canceled pursuant to the provisions of
Sections 5(b), 5(c) or 5(d), this Warrant shall be canceled and the rights
granted hereunder shall terminate on January 21, 2000, provided, that if such
date occurs during the period (a "Lockup Period") described in Section 1.6 of
the Investors' Rights Agreement (as defined in the Stock Purchase Agreement) or
during the Dispute Resolution Period (as defined above), such date shall be
postponed until the fifteenth (15th) business day following the Lockup Period or
the Dispute Resolution Period, as applicable, provided that, in the event of the
latter, the arbiter of the dispute determines that Microsoft Corporation, or any
of its successors or assigns, has not breached the Microsoft Agreement or has
cured the breach within the Cure Period.
(f) The date of termination of this Warrant as provided in
this Section 5 shall be referred to herein as the "Termination Date."
6. Restrictions on Transfer. Neither this Warrant nor any securities
purchased upon exercise of this Warrant may be transferred unless (a) such
transfer is registered under the Securities Act and any applicable state
securities or blue sky laws, (b) the Company has received a legal opinion from
counsel and in form reasonably satisfactory to the Company to the effect that
the transfer is exempt from the prospectus delivery and registration
requirements of the Securities Act and any applicable state securities and blue
sky laws, or (c) the Company otherwise satisfies itself that such transfer is
exempt from registration.
7. Legend. A legend setting forth or referring to the above
restrictions, including those contained in Section 5(b) above, shall be placed
on this Warrant, any replacement hereof, and any certificate representing a
security issued pursuant to the exercise of this Warrant and a stop transfer
restriction or order may be placed on the books of the Company and with any
transfer agent until such securities may be legally sold or otherwise
transferred.
4
<PAGE> 5
8. Adjustment of Unit Price and Number of Shares.
(a) In case the Company shall at any time subdivide its
outstanding shares of Series E Preferred Stock into a greater number of shares,
the Unit Price in effect immediately prior to such subdivision shall be
proportionately reduced (and the number of shares of Warrant Stock for which
this Warrant shall be exercisable shall be increased in inverse proportion to
such reduction), and conversely, in case the outstanding shares of Series E
Preferred Stock of the Company shall be combined into a smaller number of
shares, the Unit Price in effect immediately prior to such combination shall be
proportionately increased (and the number of shares of Warrant Stock for which
this Warrant shall be exercisable shall be decreased in inverse proportion to
such increase).
(b) Upon any adjustment of the Unit Price and number of shares
purchasable upon the exercise of this Warrant, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state the Unit Price resulting from such adjustment
and the increase or decrease, if any, in the number of shares purchasable at
such price upon the exercise of this Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
(c) If at any time or from time to time the holders of Series
E Preferred Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(x) Preferred Stock, or any shares of stock or other
securities whether or not such securities are at any time
directly or indirectly convertible into or exchangeable for
Preferred Stock, or any rights or options to subscribe for,
purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution (other than by conversion under
section 5.4 of the Company's Amended and Restated Articles of
Incorporation), or
(y) any cash paid or payable otherwise than as a cash
dividend, or
(z) Preferred Stock or other or additional stock or
other securities or property (including cash) by way of
spinoff, split-up, reclassification, combination of shares or
similar corporate rearrangement (other than shares of
Preferred Stock issued as a stock split, adjustments in
respect of which shall be covered by the terms of clause (a)
above), or
if at any time:
(i) the Company shall declare any cash dividend upon
its Series E Preferred Stock;
5
<PAGE> 6
(ii) the Company shall declare any dividend upon its
Series E Preferred Stock payable in stock or make any special
dividend or other distribution to the holders of its Series E
Preferred Stock;
(iii) the Company shall offer for subscription pro
rata to the holders of its Series E Preferred Stock any
additional shares of stock of any class or other rights;
(iv) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation;
(v) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company; or
(vi) the Company shall take or propose to take any
other action, notice of which is actually provided to holders
of the Series E Preferred Stock;
then, in any one or more of said cases, the Company shall give, by first class
mail, postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the Company, (A) at least twenty (20) days
prior written notice of the date on which the books of the Company shall close
or a record shall be taken for such events listed in this Section 8(c) above or
for determining rights to vote (if applicable) in respect of any such events
listed above in this Section 8(c), and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, or other action, at least twenty (20) days written
notice of the date when the same shall take place. Any notice given in
accordance with the foregoing clause (A) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Series E Preferred Stock shall be entitled thereto. Any notice given
in accordance with the foregoing clause (B) shall also specify the date on which
the holders of Series E Preferred Stock shall be entitled to exchange their
Series E Preferred Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, or other action as the case may be.
(d) If the change in the outstanding Series E Preferred Stock
of the Company or any other event occurs as to which the other provisions of
this Section 8 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors of the Company shall make an adjustment in the number and class of
shares available under the Warrant, the Unit Price and/or the application of
such provisions, in accordance with such essential intent and principles, so as
to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of the Warrant upon exercise for the same aggregate Unit
Price the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
6
<PAGE> 7
9. Consolidation or Merger of the Company. If the Company is a party to
(a) any consolidation or merger with another corporation in which the Company is
not the survivor, (b) any consolidation or merger of another entity into the
Company in which the Company is the survivor but, in connection therewith, the
Company's equity securities are changed into or exchanged for stock or other
securities of any other entity, or (c) any capital reorganization or
reclassification of its Series E Preferred Stock, pursuant to any of which
transactions the holders of the Company's capital stock are entitled to receive
with respect to or in exchange for such capital stock, stock or other
securities, whether alone or together with any other consideration (all such
consideration being the "Allowed Consideration"), then, as a condition of such
transaction, lawful and adequate provisions shall be made whereby the Holder
hereof shall thereafter have the right to purchase and receive (in lieu of the
shares of the Warrant Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby) such Allowed
Consideration as may be issued or payable with respect to or in exchange for the
number of shares of such Warrant Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby. In any such case,
appropriate provisions shall be made with respect to the rights and interests of
the Holder of this Warrant to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Unit Price and the number
of shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be reasonably practicable (as
determined in the good faith of the Company), in relation to the Allowed
Consideration thereafter deliverable upon the exercise hereof. The Company will
not effect any such consolidation or merger unless, prior to the consummation
thereof, the successor corporation resulting from such consolidation or merger
shall assume by written instrument, executed and mailed or delivered to the
registered Holder hereof at the last address of such Holder appearing on the
books of the Company, the obligation to deliver to such Holder such Allowed
Consideration as, in accordance with the foregoing provisions, such Holder may
be entitled to purchase.
10. Issue Tax. The issuance of certificates for shares of Preferred
Stock upon the exercise of the Warrant shall be made without charge to the
Holder of the Warrant for any issue tax in respect thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the then Holder of the Warrant being exercised.
11. Closing of Books. The Company will at no time close its transfer
books against the transfer of any Warrant or of any shares of Series E Preferred
Stock issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
12. Holder as Owner. The Company may deem and treat the holder of
record of this Warrant as the absolute owner hereof for all purposes regardless
of any notice to the contrary.
13. No Rights as Shareholder. This Warrant shall not entitle the Holder
to any voting rights or to any other rights as a shareholder of the Company or
to any other rights whatsoever except the rights stated herein; and no cash
dividend or interest shall be payable or shall accrue in respect of this Warrant
or the Warrant Stock purchasable hereunder unless, until and to the
7
<PAGE> 8
extent that this Warrant shall be exercised. No provisions hereof, in the
absence of affirmative action by the Holder to purchase shares of Preferred
Stock, and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Unit Price or as
a shareholder of the Company, whether such liability is asserted by the Company
or by its creditors.
14. Construction. The validity and interpretation of the terms and
provisions of this Warrant shall be governed by the laws of the State of
Washington. The descriptive headings of the several sections of this Warrant are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions thereof.
15. Expiration. This Warrant shall be void and all rights represented
hereby shall cease unless exercised on or before the Termination Date. All
restrictions set forth herein on the shares of capital stock issued upon
exercise of any rights hereunder shall survive such exercise and expiration of
the rights granted hereunder.
16. Exchange of Warrant. This Warrant is exchangeable upon the
surrender hereof by the Holder at the office of the Company for new Warrants of
like tenor but of different denominations representing in the aggregate the
rights to subscribe for and purchase the number of shares that may be subscribed
for and purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by the
Holder at the time of such surrender.
17. Lost Warrant Certificate. If this Warrant is lost, stolen,
mutilated or destroyed, the Company shall issue a new Warrant of like
denomination, tenor and date as this Warrant, subject to the Company's right to
require the Holder to give the Company a bond or other satisfactory security
sufficient to indemnify the Company against any claim that may be made against
it (including any expense or liability) on account of the alleged loss, theft,
mutilation or destruction of this Warrant or the issuance of such new Warrant.
18. Waivers and Amendments. This Warrant or any provision hereof may be
changed, waived, discharged or terminated only by a statement in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
19. Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be mailed by United States mail
first-class postage prepaid, or by registered or certified mail with return
receipt requested, addressed as follows:
If to the Holder:
To the address last furnished in writing to the
Company by the Holder.
8
<PAGE> 9
If to the Company:
Progressive Networks, Inc.
1111 Third Avenue, Suite 500
Seattle, Washington 98101
Attention: President
With a copy to:
Progressive Networks, Inc.
1111 Third Avenue, Suite 500
Seattle, Washington 98101
Attention: General Counsel
Each of the foregoing parties shall be entitled to specify a different
address by giving five (5) days' advance written notice as aforesaid to the
other party.
20. Registration Rights. The Holder shall be entitled to registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Warrant Stock to the extent provided in, and subject to the terms and
conditions of, the Investors' Rights Agreement.
21. Investment Intent. By accepting this Warrant, the Holder represents
that it is acquiring this Warrant for investment and not with a view to, or for
sale in connection with, any distribution thereof.
IN WITNESS WHEREOF, the Company has executed this certificate as of the
date first written above.
Progressive Networks, Inc.
By /s/ Mark Klebanoff
------------------
Its CFO
9
<PAGE> 10
ELECTION TO PURCHASE
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant (the "Owner")
irrevocably exercises this Warrant for __________ shares of Series E Preferred
Stock of Progressive Networks, Inc. (the "Exercise Shares"), on the terms and
conditions specified in this Warrant, and requests that a certificate for the
Exercise Shares hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to _________________
______________________________________________________________ whose address is
_____________________________________________________________, and, if such
shares shall not include all of the shares for which this Warrant is
exercisable, that a new Warrant of like tenor and date for the balance of the
shares issuable hereunder (properly reduced to reflect cashless exercise, if
applicable) be delivered to the undersigned.
Dated: ____________________
-------------------------------------------
Signature of Registered Owner
-------------------------------------------
Title:
-------------------------------------------
(Street Address)
-------------------------------------------
(City) (State) (Zip Code)
10
<PAGE> 1
Exhibit 10.7
================================================================================
MIDCOM TOWER
AT
1111 THIRD AVENUE
LEASE AGREEMENT
BETWEEN
WRIGHT RUNSTAD PROPERTIES L. P.
LANDLORD
AND
PROGRESSIVE NETWORKS, INC.
TENANT
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. LEASE DATA AND EXHIBITS................................................1
(A) BUILDING...............................................................1
(B) PREMISES...............................................................1
(C) TENANT'S PRO RATA SHARE:...............................................1
(D) BASIC PLANS DELIVERY DATE:.............................................1
(E) FINAL PLANS DELIVERY DATE:.............................................1
(F) COMMENCEMENT DATE:.....................................................1
(G) EXPIRATION DATE:.......................................................1
(H) RENT:..................................................................1
(I) SECURITY DEPOSIT:......................................................1
(J) BASE YEAR:.............................................................2
(K) TENANT'S LEASING BROKER/AGENT:.........................................2
(L) PARKING:...............................................................2
(M) NOTICE ADDRESSES:......................................................2
(N) PAYMENT ADDRESS:.......................................................2
(O) EXHIBITS:..............................................................2
2. PREMISES:..............................................................2
3. COMMENCEMENT AND EXPIRATION DATES:.....................................2
(A) COMMENCEMENT DATE:.....................................................2
(B) DELAYS:................................................................3
(C) CONFIRMATION OF COMMENCEMENT DATE:.....................................3
(D) EXPIRATION DATE:.......................................................3
4. ACCEPTANCE OF PREMISES:................................................3
5. RENT AND ADDITIONAL RENT:..............................................3
6. SECURITY DEPOSIT:......................................................3
7. PARKING:...............................................................4
8. USES:..................................................................4
9. SERVICES AND UTILITIES:................................................4
(A) STANDARD SERVICES:.....................................................4
(B) NORMAL BUSINESS HOURS:.................................................5
(C) INTERRUPTION OF SERVICES:..............................................5
(D) ADDITIONAL SERVICES:...................................................5
(E) COSTS OF ADDITIONAL SERVICES:..........................................5
10. COSTS OF OPERATIONS AND REAL ESTATE TAXES:.............................6
(A) ADDITIONAL RENT:.......................................................6
(B) DEFINITIONS:...........................................................6
(C) ESTIMATED COSTS:.......................................................6
(D) ACTUAL COSTS:..........................................................7
(E) RECORDS AND ADJUSTMENTS:...............................................7
(F) PERSONAL PROPERTY TAXES:...............................................7
11. CARE OF PREMISES:......................................................7
12. ACCESS:................................................................8
13. DAMAGE OR DESTRUCTION:.................................................8
(A) DAMAGE AND REPAIR:.....................................................8
(B) DESTRUCTION DURING LAST YEAR OF TERM:..................................8
(C) TENANT IMPROVEMENTS:...................................................8
14. WAIVER OF SUBROGATION:.................................................9
15. INDEMNIFICATION:.......................................................9
16. INSURANCE:.............................................................9
(A) LIABILITY INSURANCE:...................................................9
(B) PROPERTY INSURANCE:....................................................9
(C) INSURANCE POLICY REQUIREMENTS:........................................10
(D) CERTIFICATE OF INSURANCE:.............................................10
(E) PRIMARY POLICIES:.....................................................10
17. ASSIGNMENT AND SUBLETTING:............................................10
(A) ASSIGNMENT OR SUBLEASE:...............................................10
(B) LANDLORD RIGHT TO TERMINATE PORTION OF LEASE:.........................10
(C) TENANT TRANSFER OF LEASE:.............................................10
(D) ASSIGNEE OBLIGATIONS:.................................................11
(E) SUBLESSEE OBLIGATIONS:................................................11
18. SIGNS:................................................................11
19. LIENS AND INSOLVENCY:.................................................11
(A) LIENS:................................................................11
(B) INSOLVENCY:...........................................................11
20. DEFAULT:..............................................................11
(A) CUMULATIVE REMEDIES:..................................................12
(B) TENANT'S RIGHT TO CURE:...............................................12
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
(C) ABANDONMENT:..........................................................12
(D) LANDLORD'S REENTRY:...................................................12
(E) RELETTING THE PREMISES:...............................................12
(F) TRADE FIXTURES:.......................................................13
21. PRIORITY:.............................................................13
22. SURRENDER OF POSSESSION:..............................................13
23. REMOVAL OF PROPERTY:..................................................13
24. NON-WAIVER:...........................................................14
25. HOLDOVER:.............................................................14
26. CONDEMNATION:.........................................................14
(A) ENTIRE TAKING:........................................................14
(B) CONSTRUCTIVE TAKING OF ENTIRE PREMISES:...............................14
(C) PARTIAL TAKING:.......................................................14
(D) AWARDS AND DAMAGES:...................................................15
27. NOTICES:..............................................................15
28. COSTS AND ATTORNEYS FEES:.............................................15
29. LANDLORD'S LIABILITY:.................................................15
30. ESTOPPEL CERTIFICATES:................................................15
31. TRANSFER OF LANDLORD'S INTEREST:......................................16
32. RIGHT TO PERFORM:.....................................................16
33. QUIET ENJOYMENT:......................................................16
34. CORPORATE AUTHORITY:..................................................16
35. HAZARDOUS MATERIALS:..................................................16
(A) TENANT OBLIGATIONS:...................................................16
(B) LANDLORD OBLIGATIONS:.................................................17
36. TELECOMMUNICATIONS LINES AND EQUIPMENT:...............................17
(A) LOCATION OF TENANT'S EQUIPMENT AND LANDLORD CONSENT:..................17
(B) LANDLORD'S COMMON SPACES:.............................................19
(C) INDEMNIFICATION:......................................................19
(D) LIMITATION OF LIABILITY:..............................................19
(E) ELECTROMAGNETIC FIELDS:...............................................20
37. GENERAL:..............................................................20
(A) HEADINGS:.............................................................20
(B) SUCCESSORS AND ASSIGNS:...............................................20
(C) PAYMENT OF BROKERS:...................................................20
(D) ENTIRE AGREEMENT:.....................................................20
(E) SEVERABILITY:.........................................................20
(F) OVERDUE PAYMENTS:.....................................................20
(G) FORCE MAJEURE:........................................................20
(H) RIGHT TO CHANGE PUBLIC SPACES:........................................21
(I) GOVERNING LAW:........................................................21
(J) BUILDING DIRECTORY:...................................................21
(K) BUILDING NAME:........................................................21
</TABLE>
2
<PAGE> 4
LEASE AGREEMENT
MIDCOM TOWER AT
1111 THIRD AVENUE
THIS LEASE made this 4TH day of MARCH, 1996, between WRIGHT RUNSTAD PROPERTIES
L. P., a Delaware limited partnership ("Landlord"), and PROGRESSIVE NETWORKS,
INC., a Washington corporation ("Tenant").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA AND EXHIBITS
The following terms as used herein shall have the meanings provided in this
Section l, unless otherwise specifically modified by provisions of this Lease:
(a) BUILDING
Known as MIDCOM TOWER AT 1111 THIRD AVENUE, or such other name as
Landlord may designate from time to time, situated on a portion of the real
property more particularly described in Section 2 hereof, with an address of
1111 Third Avenue, Seattle, Washington 98101.
(b) PREMISES
Consisting of the area on the FIFTH (5TH) floor of the Building, as
outlined on the floor plan attached hereto as Exhibit A, including tenant
improvements IN "AS IS" CONDITION.
(c) TENANT'S PRO RATA SHARE:
Landlord and Tenant agree that, for purposes of this Lease, the net
rentable area of the Premises is deemed to be AT LEAST 13,000 SQUARE FEET
INITIALLY and Tenant's Pro Rata Share of the Building is deemed to be AT LEAST
2.46% INITIALLY. THE NET RENTABLE AREA OF THE BUILDING IS DEEMED TO BE 528,282
SQUARE FEET. SEE ALSO EXHIBIT C.
"NET RENTABLE SQUARE FEET" AND "RENTABLE AREA" AS USED HEREIN SHALL MEAN
"RENTABLE AREA" AS DEFINED IN BOMA AMERICAN NATIONAL STANDARD Z65.1-1980
(REPRINTED MAY 1981).
(d) BASIC PLANS DELIVERY DATE:
NA
(e) FINAL PLANS DELIVERY DATE:
NA
(f) COMMENCEMENT DATE:
APRIL 1, 1996, OR UPON OCCUPANCY, IF EARLIER.
(g) EXPIRATION DATE:
APRIL 30, 2001, OR SUCH LATER DATE AS MAY BE ESTABLISHED BY TENANT'S
EXERCISE OF ITS OPTION(S) TO EXTEND THE TERM OF THIS LEASE PURSUANT TO SECTION 5
OF EXHIBIT C.
(h) RENT:
SEE EXHIBIT C, ITEM 2.
(i) SECURITY DEPOSIT:
$ NA
------------
1
<PAGE> 5
(j) BASE YEAR:
For purposes of this Lease, the Base Year shall be: 1996 FOR THE
INITIAL TERM OF THE LEASE. THE BASE YEAR FOR THE FIRST EXTENDED TERM SHALL
BE THE FIRST YEAR OF THE FIRST EXTENSION OPTION PERIOD, AND THE BASE YEAR
FOR THE SECOND EXTENDED TERM SHALL BE THE FIRST YEAR OF THE SECOND
EXTENSION OPTION PERIOD.
(k) TENANT'S LEASING BROKER/AGENT:
MARTIN SMITH INC.
(l) PARKING:
Tenant shall have the right to purchase ONE (1) permit to park
automobiles in the Building garage PER 1,200 NET RENTABLE SQUARE FEET ON WHICH
TENANT IS PAYING RENT. PARKING SHALL BE on an unassigned self-park (or executive
valet) basis (as designated by Landlord from time to time) at the prevailing
monthly rates established by Landlord from time to time.
(m) NOTICE ADDRESSES:
Landlord: Wright Runstad Properties L. P.
1111 Third Avenue, Suite 2730
Seattle, Washington 98101
Tenant: Progressive Networks, Inc.
1111 Third Avenue, Suite 500
Seattle, Washington 98101
(n) PAYMENT ADDRESS:
Wright Runstad Properties L. P.
P.O. Box 94023
Seattle, Washington 98124-9423
(o) EXHIBITS:
The following exhibits or riders are made a part of this Lease:
Exhibit A - Floor Plan of Premises
Exhibit C - Addendum to Lease
Exhibit D - Subordination Agreement
Exhibit E - Satellite Antenna locations
Exhibit F - Rate Schedule
2. PREMISES:
Landlord does hereby lease to Tenant, and Tenant does hereby lease from
Landlord, upon the terms and conditions herein set forth, the Premises described
in Section l(b) hereof as shown on Exhibit A attached hereto and incorporated
herein, together with rights of ingress and egress over common areas in the
Building located on the land ("Land") more particularly described as:
Lots 2, 3, 6 and 7; Block 14, C.D. Boren's Addition, City of Seattle, King
County, State of Washington.
3. COMMENCEMENT AND EXPIRATION DATES:
(A) COMMENCEMENT DATE:
2
<PAGE> 6
THE COMMENCEMENT DATE SHALL BE THE DATE SPECIFIED IN SECTION 1(F).
(B) DELAYS:
[INTENTIONALLY DELETED]
(C) CONFIRMATION OF COMMENCEMENT DATE:
Landlord shall confirm the COMMENCEMENT DATE to Tenant in writing.
(D) EXPIRATION DATE:
This Lease shall expire on the date specified in Section l(g).
4. ACCEPTANCE OF PREMISES:
[INTENTIONALLY DELETED]
5. RENT AND ADDITIONAL RENT:
STARTING MAY 1, 1996, Tenant shall pay Landlord without notice the Rent
stated in Section l(h) hereof and Additional Rent as provided in Section 9 and
Section 10 and any other payments due under this Lease without deduction or
offset in lawful money of the United States in advance on or before the first
day of each month at Landlord's Payment Address set forth in Section 1(n)
hereof, or to such other party or at such other place as Landlord may hereafter
from time to time designate in writing. Rent and Additional Rent for any partial
month at the beginning or end of the Lease term shall be prorated in proportion
to the number of days in such month. All amounts which Tenant assumes or agrees
to pay to Landlord pursuant to this Lease shall be deemed Additional Rent
hereunder and, in the event of nonpayment thereof, Landlord shall have all
remedies provided for in the case of nonpayment of Rent.
6. SECURITY DEPOSIT:
[INTENTIONALLY DELETED]
3
<PAGE> 7
7. PARKING:
Use of parking in the Building by Tenant shall be subject to such
reasonable rules and regulations as Landlord or its parking operator, or the
City of Seattle may publish from time to time. Tenant shall provide Landlord
with thirty (30) days prior written notice of the number of parking permits
required by Tenant, up to the maximum number specified in Section 1(l), and of
any changes in those requirements. Short-term hourly parking shall be offered on
a space available basis during Normal Business Hours except Saturdays [as
defined in Section 9(b)], and except Sundays or legal holidays, for Tenant's
clients and customers.
8. USES:
The Premises are to be used only for general office purposes, THE OPERATION
OF COMPUTER SERVERS, A VIDEO RECORDING STUDIO, A SOUND RECORDING STUDIO, AND
RELATED ACTIVITIES ("Permitted Uses"), and for no other business or purpose
without the prior written consent of Landlord, which consent may be withheld if
Landlord, in its sole discretion, determines that any proposed use is
inconsistent with or detrimental to the maintenance and operation of the
Building as a first-class office building or is inconsistent with any
restriction on use of the Premises, the Building, or the Land contained in any
lease, mortgage, or other instrument or agreement by which the Landlord is bound
or to which any of such property is subject. Tenant shall not commit any act
that will increase the then existing cost of insurance on the Building without
Landlord's consent. Tenant shall promptly pay upon demand the amount of any
increase in insurance costs caused by any act or acts of Tenant. Tenant shall
not commit or allow to be committed any waste upon the Premises, or any public
or private nuisance or other act which disturbs the quiet enjoyment of any other
tenant in the Building or which is unlawful. Tenant shall not, without the
written consent of Landlord, use any apparatus, machinery or device in or about
the Premises which will cause any substantial noise, vibration or fumes. If
Tenant shall permit smoking in the Premises, in compliance with any applicable
laws or regulations, Tenant shall be required to install, at Tenant's sole cost,
special tenant improvements designed to alleviate the spread of smoke outside
the Premises, including extending demising walls from structure to structure and
installing a dedicated exhaust system for the Premises in compliance with any
applicable laws or regulations. If any of Tenant's office machines or equipment
should disturb the quiet enjoyment of any other tenant in the Building, then
Tenant shall provide adequate insulation, or take other action as may be
necessary to eliminate the disturbance. Tenant shall comply with all laws
relating to its use or occupancy of the Premises and shall observe such
reasonable rules and regulations (not inconsistent with the terms of this Lease)
as may be adopted and made available to Tenant by Landlord from time to time for
the safety, care and cleanliness of the Premises or the Building, and for the
preservation of good order therein.
9. SERVICES AND UTILITIES:
(a) STANDARD SERVICES:
Landlord shall maintain the Premises and the public and common areas of the
Building in good order and condition consistent with the operation and
maintenance of a first-class office building in downtown Seattle, Washington.
Landlord shall furnish the Premises with electricity for normal office use,
including lighting and operation of low power usage office machines, water and
elevator service at all times during the term of the Lease. IN ADDITION,
LANDLORD SHALL PROVIDE ADDITIONAL ELECTRICAL SERVICE AT TENANT'S REQUEST ,
PROVIDED TENANT PAYS THE COST THEREOF. Landlord shall also provide lamp
replacement service for building standard light fixtures, toilet room supplies,
window washing at reasonable intervals, and customary building janitorial
service. No janitorial service shall be provided for
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Saturdays, Sundays or legal holidays. The costs of any janitorial or other
service provided by Landlord to Tenant which are in addition to the services
ordinarily provided MAJOR Building tenants shall be repaid by Tenant as
Additional Rent upon receipt of billings therefor. LANDLORD SHALL PROVIDE
SECURITY PERSONNEL AND SERVICES TYPICAL OF CLASS A BUILDINGS IN DOWNTOWN
SEATTLE.
(b) NORMAL BUSINESS HOURS:
From 7:00 a.m. to 6:00 p.m. on weekdays and from 8:00 a.m. to 1:00 p.m. on
Saturdays, excluding legal holidays ("Normal Business Hours"), Landlord shall
furnish to the Premises heat and air conditioning. If requested by Tenant,
Landlord shall furnish heat and air conditioning at times other than Normal
Business Hours and the cost of such services as estimated by Landlord shall be
paid by Tenant as Additional Rent. During other than Normal Business Hours,
Landlord may restrict access to the Building in accordance with the Building's
security system, provided that Tenant shall have at all times during the term of
this Lease (24 hours of all days) reasonable access to the Premises. LANDLORD
SHALL, AT THE REQUEST OF TENANT PROGRAM THE SECURITY ACCESS SYSTEMS TO RESTRICT
ELEVATOR ACCESS TO THOSE FLOORS ON WHICH TENANT IS THE SOLE OCCUPANT.
(c) INTERRUPTION OF SERVICES:
Landlord shall not be liable for any loss, injury or damage to person or
property caused by or resulting from any variation, interruption, or failure of
such services due to any cause whatsoever OTHER THAN LANDLORD'S GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT. No temporary interruption or failure of such services
incident to the making of repairs, alterations, or improvements, or due to
accident, strike or conditions or events beyond Landlord's reasonable control
shall be deemed an eviction of Tenant or relieve Tenant from any of Tenant's
obligations hereunder; provided, however, if such interruption or failure shall
continue for THREE (3) business days, Tenant's Rent hereunder shall thereafter
abate to the extent the Premises are thereby rendered untenantable for Tenant's
normal business operations until such services are restored. Landlord shall use
its best efforts in good faith to minimize any disruption of Tenant's use of the
Premises arising from any interruption or failure of services.
(d) ADDITIONAL SERVICES:
The Building mechanical system is designed to accommodate heating loads
generated by lights and equipment using up to 2.8 watts per square foot. Before
installing lights and equipment in the Premises which WILL CAUSE the aggregate
ACTUAL LOADS IN THE PREMISES TO EXCEED AN AVERAGE OF 2.8 WATTS PER SQUARE FOOT,
Tenant shall obtain the written permission of Landlord. Landlord may refuse to
grant such permission unless Tenant shall agree to pay the costs of Landlord for
installation of supplementary air conditioning capacity or electrical systems as
necessitated by such equipment or lights. LANDLORD HEREBY APPROVES TENANT'S
INSTALLATION OF ALL COMPUTERS, SOUND STUDIO EQUIPMENT AND SERVICES WHICH TENANT
REQUIRES FOR THE OPERATION OF ITS BUSINESS, PROVIDED, HOWEVER THAT IF THE ACTUAL
LOADS IN THE PREMISES ARE IN EXCESS OF 2.8 WATTS PER SQUARE FOOT, TENANT SHALL
PAY THE COST OF LANDLORD FOR INSTALLATION OF SUPPLEMENTARY AIR CONDITIONING
CAPACITY OR ELECTRICAL SYSTEMS AS NECESSITATED BY SUCH EQUIPMENT OR LIGHTS.
(e) COSTS OF ADDITIONAL SERVICES:
In addition, Tenant shall in advance, on the first day of each month during
the Lease term, pay Landlord as Additional Rent the reasonable amount estimated
by Landlord as the cost of furnishing electricity for the operation of such
equipment or lights and the reasonable amount estimated by Landlord as the costs
of operation and maintenance of supplementary air conditioning units
necessitated by Tenant's use of such equipment or lights. Landlord shall be
entitled to install and operate at Tenant's cost a monitoring/metering system in
the Premises to measure the added demands on electricity, heating, ventilation,
and air conditioning systems resulting from such equipment or lights and from
Tenant's after-hours heating, ventilation and air conditioning service
requirements. Tenant shall comply with Landlord's reasonable instructions for
the use of drapes, blinds and thermostats in the Building.
(f) LANDLORD SHALL PROVIDE AFTER-HOURS HVAC SERVICE TO EACH FLOOR ON WHICH THE
PREMISES ARE LOCATED WHICH CAN BE ACTIVATED BY TENANT BY A SWITCH ON EACH FLOOR
FOR A THREE HOUR (OR LESS) DURATION). TENANT SHALL REIMBURSE LANDLORD THE
REASONABLE COSTS OF INSTALLATION AND PROGRAMMING OF THE SWITCH SYSTEM AND WILL
PAY THE THEN-CURRENT PER HOUR COSTS, AS REASONABLY ESTIMATED BY LANDLORD
(CURRENTLY ESTIMATED TO BE $12.00 PER HOUR PER FLOOR), FOR AFTER-HOURS HVAC.
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10. COSTS OF OPERATIONS AND REAL ESTATE TAXES:
(A) ADDITIONAL RENT:
Tenant shall pay as Additional Rent its pro rata share of increases in
taxes and operating costs in excess of taxes and operating costs in the Base
Year ("Base Amounts"). Operating costs shall be adjusted to reflect 100%
occupancy in the Building.
(B) DEFINITIONS:
(i) For the purposes of this section, "Taxes" shall mean taxes and
assessments (including special district levies) on real and personal property
payable during any calendar year or fiscal year, based on the actual assessment
period, with respect to the Land, the Building and all property of Landlord,
real or personal, used directly in the operation of the Building and located in
or on the Building, together with any taxes levied or assessed in addition to or
in lieu of any such taxes or any tax upon leasing of the Building or the rents
collected (excluding any net income or franchise tax) ("Taxes").
(ii) For purposes of this Section, "Operating Costs" or "Costs" shall
mean all expenses of Landlord for maintaining, operating and repairing the Land
and Building and the personal property used in connection therewith, including
without limitation insurance premiums, utilities, REASONABLE management fees and
other expenses which in accordance with generally accepted accounting and
management practices would be considered an expense of maintaining, operating or
repairing the Building ("Operating Costs" or "Costs"); excluding, however: (I)
Costs of any special services rendered to individual tenants for which a
separate charge is collected; (II) leasing commissions and other leasing
expenses; (III) Costs of improvements required to be capitalized in accordance
with generally accepted accounting principals, except Operating Costs shall
include amortization of capital improvements (A) made subsequent to initial
development of the Building which are designed with a reasonable probability of
improving the operating efficiency of the Building, or providing savings in the
cost of operating the Building; or, (B) which are reasonably responsive to
requirements imposed with respect to the Building under any amendment to any
applicable building, health, safety, fire, nondiscrimination, or similar law or
regulation ("law"), or any new law, or any new interpretation of an existing law
("new interpretation"), which amendment, law or new interpretation is adopted or
arose after the Commencement Date of this Lease; (IV) INTEREST AND AMORTIZATION
OF PRINCIPAL OF MORTGAGES, AND OTHER DEBT COSTS OR GROUND LEASE PAYMENTS, IF
ANY; (V) LEGAL FEES IN CONNECTION WITH LEASING, TENANT DISPUTES, ENFORCEMENT OF
LEASES OR DEFENSE OF LANDLORD'S TITLE TO OR ANY INTEREST IN THE PREMISES, THE
BUILDING OR THE PROPERTY; (VI) COSTS OF IMPROVEMENTS OR ALTERATIONS TO TENANT
SPACES, INCLUDING BUT NOT LIMITED TO PERMIT, LICENSE AND INSPECTION FEES; (VII)
COSTS PAID BY ANY TENANT DIRECTLY TO THIRD PARTIES OR AS TO WHICH LANDLORD IS
OTHERWISE REIMBURSED BY ANY THIRD PARTY OR TENANT IN CONNECTION WITH ANY SERVICE
PROVIDED FOR ANY TENANT; (VIII) ANY COSTS EXPRESSLY EXCLUDED FORM OPERATING
COSTS ELSEWHERE IN THIS LEASE; (IX) COSTS OF ANY ITEMS TO THE EXTENT LANDLORD
RECEIVES REIMBURSEMENT FROM INSURANCE PROCEEDS OR FROM A THIRD PARTY (SUCH
PROCEEDS WILL BE DEDUCTED FROM OPERATING COSTS IN THE YEAR IN WHICH RECEIVED);
(X) COSTS INCURRED DUE TO A VIOLATION BY LANDLORD OR ANY OTHER TENANT OF ANY OF
THE TERMS AND CONDITIONS OF ANY LEASE OR LAW; (XI) OVERHEAD AND PROFIT
INCREMENTS OR OTHER SUMS PAID TO SUBSIDIARIES, AFFILIATES, OR OTHER PARTIES
RELATED TO LANDLORD, OR TO LANDLORD'S ASSET MANAGER OR PROPERTY MANAGER (FOR
ITEMS OTHER THAN THE PROPERTY MANAGEMENT FEE) FOR SERVICES, SUPPLIES OR OTHER
MATERIALS, TO THE EXTENT THAT THE COST OF THE SERVICES, SUPPLIES OR MATERIALS
EXCEED THE COSTS THAT WOULD HAVE BEEN PAID HAD THE SERVICES, SUPPLIES OR
MATERIALS BEEN PROVIDED BY UNAFFILIATED PARTIES ON A COMPETITIVE BASIS; (XII)
ADVERTISING OR PROMOTIONAL EXPENDITURES; AND, (XIII) SEPARATELY IDENTIFIABLE AND
DIRECT COSTS INCURRED IN THE DAY TO DAY OPERATION OF THE PARKING FACILITIES;
EXCLUDING ANY PORTION OF THE PROPERTY MANAGEMENT FEE ATTRIBUTABLE TO GROSS
PARKING REVENUES. For purposes of this Lease, a new interpretation shall mean
any interpretation, enforcement or application of a law enacted prior to the
Commencement Date that imposes requirements with respect to the Building that
Landlord in the exercise of sound business judgment and good faith at the time
of Landlord's execution of this Lease would not have deemed applicable to the
Building.
(iii) "Year" shall mean the calendar year.
(C) ESTIMATED COSTS:
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At the beginning of each year after the Base Year, Landlord shall furnish
Tenant a written statement of estimated Operating Costs and Taxes for such year;
a calculation of the amount, if any, by which such estimated Operating Costs and
Taxes will exceed the relevant Base Amounts; and a calculation of Tenant's Pro
Rata Share of any such amount. Tenant shall pay one-twelfth (1/12) of that
amount as Additional Rent for each month during the year. If at any time during
the year Landlord reasonably believes that the actual Operating Costs or Taxes
will vary from such estimated Operating Costs or Taxes by more than five percent
(5%), Landlord may by written notice to Tenant revise the estimate for such
year, and Additional Rent for the balance of such year shall be paid based upon
such revised estimates.
(D) ACTUAL COSTS:
Within ninety (90) days after the end of each year after the Base Year or
as soon thereafter as practicable, Landlord shall deliver to Tenant a written
statement setting forth Tenant's Pro Rata Share of the actual Operating Costs
and Taxes in excess of the Base Amounts during the preceding year. If the actual
Operating Costs in excess of the Base Amount or actual Taxes in excess of the
Base Amount, or both, exceed the estimates for each paid by Tenant during the
year, Tenant shall pay the amount of such excess to Landlord as Additional Rent
within thirty (30) days after receipt of such statement. If the actual Operating
Costs in excess of the Base Amount or actual Taxes in excess of the Base Amount,
or both, are less than the amount paid by Tenant to Landlord, then the amount of
such overpayment by Tenant shall be, at Landlord's option, credited against any
amounts owed by Tenant under this Lease, refunded by check to Tenant, or
credited against the next Rent payable by Tenant hereunder. Notwithstanding any
other provision of this Section 10, Tenant shall not receive any credit or
offset to that extent against any other amount payable under this Lease to the
extent actual Operating Costs or Taxes are less than the applicable Base Amount.
(E) RECORDS AND ADJUSTMENTS:
Landlord shall keep records showing all expenditures made in connection
with Operating Costs and Taxes, and such records shall be available for
inspection by Tenant within 60 days after receipt of the statement of actual
costs; Landlord and Tenant agree the results of any such audit or review shall
remain confidential. Tenant hereby waives any right to any adjustment of sums
paid under this Section 10 unless a claim in writing specifying the reasons
therefor is delivered to Landlord no later than TWELVE (12) months after the end
of the year for which the sums were paid. Operating Costs and Taxes shall be
prorated for any portion of a year at the beginning or end of the term of this
Lease. Notwithstanding this Section 10, the Rent payable by Tenant shall in no
event be less than the Rent specified in Section 1(h) hereof.
(F) PERSONAL PROPERTY TAXES:
Tenant shall pay all personal property taxes with respect to property of
Tenant located on the Premises or in the Building. "Property of Tenant" shall
include all improvements which are paid for by Tenant and "personal property
taxes" shall include all property taxes assessed against the property of Tenant,
whether assessed as real or personal property.
11. CARE OF PREMISES:
Landlord shall perform all normal maintenance and repairs reasonably
determined by Landlord as necessary to maintain the Premises and the Building as
a first-class office building; provided that Landlord shall not be required to
maintain or repair any property of Tenant or any appliances (such as
refrigerators, water heaters, microwave ovens, and the like) which are part of
the Premises. Tenant shall take good care of the Premises. Tenant shall not make
any alterations, additions or improvements ("Alterations") in or to the
Premises, or make changes to locks on doors, or add, disturb or in any way
change any plumbing or wiring (OTHER THAN LINES ADDRESSED SECTION 36)
("Changes") without first obtaining the written consent of Landlord, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD, CONDITIONED OR DELAYED, and, where
appropriate, in accordance with plans and specifications reasonably approved by
Landlord. Any Alterations or Changes required to be made to Tenant's Premises by
any amendment to any applicable building, health, safety, fire,
nondiscrimination, or similar law or regulation ("law"), or any new law shall be
made at Tenant's sole expense and shall be subject to the prior written consent
of Landlord. Tenant shall reimburse Landlord for any reasonable sums expended
for examination and approval of the architectural and mechanical plans and
specifications of the Alterations
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and Changes and direct OUT OF POCKET costs reasonably incurred during any
inspection or supervision of the Alterations or Changes. All damage or injury
done to the Premises or Building by Tenant or by any persons who may be in or
upon the Premises or Building with the express or implied consent of Tenant,
including but not limited to the cracking or breaking of any glass of windows
and doors, shall be paid for by Tenant. LANDLORD SHALL PERFORM ANY IMPROVEMENTS
TO THE BUILDING COMMON AREAS REQUIRED BY THE AMERICANS WITH DISABILITIES ACT AND
SUCH IMPROVEMENTS SHALL BE TREATED AS ANY OTHER EXPENSE MANDATED BY GOVERNMENTAL
JURISDICTION.
12. ACCESS:
Tenant shall permit Landlord and its agents to enter into and upon the
Premises at all reasonable times for the purpose of inspecting the same or for
the purpose of cleaning, repairing, altering or improving the Premises or the
Building. Upon reasonable notice, Landlord shall have the right to enter the
Premises for the purpose of showing the Premises to prospective tenants within
the period of one hundred eighty (180) days prior to the expiration or sooner
termination of the Lease term.
13. DAMAGE OR DESTRUCTION:
(A) DAMAGE AND REPAIR:
If the Building is damaged by fire or any other cause to such extent that
the cost of restoration, as reasonably estimated by Landlord, will equal or
exceed thirty percent (30%) of the replacement value of the Building (exclusive
of foundations) just prior to the occurrence of the damage, or if insurance
proceeds sufficient for restoration are for any reason unavailable, then
Landlord may no later than the sixtieth day following the damage, give Tenant a
notice of election to terminate this Lease. In the event of such election, this
Lease shall be deemed to terminate on the third day after the giving of said
notice, and Tenant shall surrender possession of the Premises within a
reasonable time thereafter, and the Rent and Additional Rent shall be
apportioned as of the date of said surrender and any Rent and Additional Rent
paid for any period beyond such date shall be repaid to Tenant. If the cost of
restoration as estimated by Landlord shall amount to less than thirty percent
(30%) of said replacement value of the Building and insurance proceeds
sufficient for restoration are available, or if Landlord does not elect to
terminate this Lease, Landlord shall restore the Building and the Premises (to
the extent of improvements to the Premises originally provided by Landlord
hereunder) with reasonable promptness, subject to delays beyond Landlord's
control and delays in the making of insurance adjustments by Landlord, and
Tenant shall have no right to terminate this Lease except as herein provided. To
the extent that the Premises are rendered untenantable, the Rent and Additional
Rent shall proportionately abate. No damages, compensation or claim shall be
payable by Landlord for inconvenience, loss of business or annoyance arising
from any repair or restoration of any portion of the Premises or of the
Building. Landlord shall use its best efforts to effect such repairs promptly.
NOTWITHSTANDING THE PROVISIONS OF SECTION 13(a) TO THE CONTRARY, WITHIN SIXTY
(60) DAYS FOLLOWING THE DATE OF SUCH DAMAGE OR DESTRUCTION, LANDLORD SHALL GIVE
NOTICE TO TENANT OF THE ESTIMATED DATE FOR COMPLETION OF SUCH REPAIRS WITH
RESPECT TO THE PREMISES OR THE BUILDING. IF RESTORATION OF TENANT'S PREMISES OR
THE BUILDING IS REASONABLY ESTIMATED TO EXCEED 180 DAYS FROM THE DATE OF THE
CASUALTY, THEN FOLLOWING TENANT'S RECEIPT OF THE ESTIMATED RESTORATION DATE,
TENANT SHALL HAVE THE OPTION TO TERMINATE THIS LEASE BY GIVING LANDLORD WRITTEN
NOTICE OF TERMINATION WITHIN 30 DAYS FOLLOWING THE RECEIPT OF SUCH NOTICE BY
TENANT FROM LANDLORD; SUCH TERMINATION TO BE EFFECTIVE 30 DAYS FOLLOWING
LANDLORD'S RECEIPT OF SUCH TERMINATION NOTICE FROM TENANT.
(b) DESTRUCTION DURING LAST YEAR OF TERM:
In case the Building shall be substantially destroyed by fire or other
cause at any time during the last twelve months of the term of this Lease,
either Landlord or Tenant may terminate this Lease upon written notice to the
other party hereto given within sixty (60) days of the date of such destruction.
(c) TENANT IMPROVEMENTS:
Landlord will not carry insurance of any kind on any improvements paid for
by Tenant or on Tenant's furniture or furnishings or on any fixtures, equipment,
improvements or
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appurtenances of Tenant under this Lease and Landlord shall not be obligated to
repair any damage thereto or replace the same.
14. WAIVER OF SUBROGATION:
Whether a loss or damage is due to the negligence of either Landlord or
Tenant, their agents or employees, or any other cause, Landlord and Tenant do
each hereby release and relieve the other, their agents or employees, from
responsibility for, and waive their entire claim of recovery for (i) any loss or
damage to the real or personal property of either located anywhere in the
Building or on the Land, including the Building itself, arising out of or
incident to the occurrence of any of the perils which are covered AND PAID by
their respective insurance policies, and (ii) any loss resulting from business
interruption at the Premises or loss of rental income from the Building, arising
out of or incident to the occurrence of any of the perils which are covered by a
business interruption insurance policy or loss of rental income insurance policy
held by Landlord or Tenant. Each party shall use best efforts to cause its
insurance carriers to consent to the foregoing waiver of rights of subrogation
against the other party. Notwithstanding the foregoing, no such release shall be
effective unless the aforesaid insurance policy or policies shall expressly
permit such a release or contain a waiver of the carrier's right to be
subrogated.
15. INDEMNIFICATION:
(a) Tenant shall indemnify and hold Landlord harmless from and against
liabilities, damages, losses, claims, and expenses, including attorneys fees,
arising FROM DAMAGE TO PROPERTY OR INJURY TO OR DEATH OF ANY PERSON TO THE
EXTENT CAUSED BY ANY NEGLIGENT ACT, NEGLIGENT OMISSION, OR WILLFUL MISCONDUCT,
of Tenant or its officers, contractors, licensees, agents, OR employees, in or
about the Building or Premises or arising from any breach or default under this
Lease by Tenant. The foregoing provisions shall not be construed to make Tenant
responsible for loss, damage, liability or expense resulting from injuries to
third parties caused by the negligence of Landlord, or its officers,
contractors, licensees, agents, employees, clients or customers or other tenants
of the Building.
(b) Landlord shall indemnify and hold Tenant harmless from and against all
liabilities, damages, losses, claims, and expenses, including attorneys' fees
arising FROM DAMAGE TO PROPERTY OR INJURY TO OR DEATH OF ANY PERSON TO THE
EXTENT CAUSED BY ANY NEGLIGENT ACT, NEGLIGENT OMISSION, OR WILLFUL MISCONDUCT,
of Landlord or its officers, contractors, licensees, agents, OR employees, in or
about the Building or Premises, or arising from any breach or default under this
Lease by Landlord. Landlord shall not be liable for any loss or damage to
persons or property sustained by Tenant or other persons, which may be caused by
theft, or by any act or neglect of Tenant or any other tenant or occupant of the
Building or any third parties.
16. INSURANCE:
(a) LIABILITY INSURANCE:
Tenant shall, throughout the term of this Lease and any renewal hereof, at
its own expense, keep and maintain in full force and effect, a policy of
commercial general liability (occurrence form) insurance, including contractual
liability insuring Tenant's activities upon, in or about the Premises or the
Building against claims of bodily injury or death or property damage or loss
with a combined single limit of not less than Three Million Dollars ($3,000,000)
per occurrence and Five Million Dollars ($5,000,000) in the aggregate. Landlord
and the Building manager shall be named as an additional insureds.
(b) PROPERTY INSURANCE:
Tenant shall, throughout the term of this Lease and any renewal thereof, at
its own expense, keep and maintain in full force and effect, what is commonly
referred to as "All Risk" or "Special" coverage insurance (excluding earthquake
and flood) on Tenant's leasehold improvements in an amount not less than one
hundred percent (100%) of the replacement value thereof.
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(c) INSURANCE POLICY REQUIREMENTS:
All insurance required under this Section 16 shall be with companies rated
AX or better by A.M. Best or otherwise reasonably approved by Landlord. No
insurance policy required under this Section 16 shall be cancelled or reduced in
coverage except after forty-five (45) days prior written notice to Landlord,
except after ten (10) days prior written notice to Landlord in the case of
non-payment of premium.
(d) CERTIFICATE OF INSURANCE:
Tenant shall deliver to Landlord prior to the Commencement Date, and from
time to time thereafter, copies of policies of such insurance or certificates
evidencing the existence and amounts of same and evidencing Landlord and the
Building manager as additional insureds thereunder. In no event shall the limits
of any insurance policy required under this Section 16 be considered as limiting
the liability of Tenant under this Lease. LANDLORD WILL PROVIDE A CERTIFICATE OF
INSURANCE TO TENANT UPON TENANT'S REQUEST, PROVIDED TENANT REIMBURSES LANDLORD
FOR ITS REASONABLE OUT-OF-POCKET COSTS INCURRED FOR PROVIDING SUCH CERTIFICATE.
(E) PRIMARY POLICIES:
All policies required under Section 16(a) shall be written as primary
policies and not contributing to or in excess of any coverage Landlord may
choose to maintain.
17. ASSIGNMENT AND SUBLETTING:
(A) ASSIGNMENT OR SUBLEASE:
Tenant shall not assign, mortgage, encumber or otherwise transfer this
Lease nor sublet the whole or any part of the Premises without in each case
first obtaining Landlord's prior written consent. SUCH consent shall not be
unreasonably withheld, except: (1) Landlord may withhold its consent if in
Landlord's judgment occupancy by any proposed assignee, subtenant, or other
transferee (i) is not consistent with the maintenance and operation of a
first-class office building due to the nature of the proposed occupant's
business or manner of conducting business or its experience or reputation in the
community, or (ii) is likely to cause disturbance to the normal use and
occupancy of the Building; (2) Landlord may withhold in its absolute and sole
discretion consent to any mortgage, hypothecation, pledge, or other encumbrance
of any interest in this Lease or the Premises by Tenant or any subtenant; (3)
Landlord may withhold its consent to the extent it deems necessary to comply
with any restriction on use of the Premises, the Building, or the Land contained
in any lease, mortgage, or other agreement or instrument by which the Landlord
is bound or to which any of such property is subject. No such assignment,
subletting or other transfer shall relieve Tenant of any liability under this
Lease. Consent to any such assignment, subletting or transfer shall not operate
as a waiver of the necessity for consent to any subsequent assignment,
subletting or transfer. Each request for an assignment or subletting must be
accompanied by a Processing Fee of $500 in order to reimburse Landlord for
expenses, including attorneys fees, incurred in connection with such request
("Processing Fee"). Tenant shall provide Landlord with copies of all
assignments, subleases and assumption instruments. TRANSFER OF STOCK OWNERSHIP
OFTENANT SHALL NOT BE DEEMED TO BE AN ASSIGNMENT OR TRANSFER OF THIS LEASE.
(b) LANDLORD RIGHT TO TERMINATE PORTION OF LEASE:
[INTENTIONALLY DELETED]
(c) TENANT TRANSFER OF LEASE:
If a Tenant is a corporation or partnership, any transfer of this Lease by
merger, consolidation or liquidation, shall constitute an assignment for the
purpose of this Section. If Tenant is a
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partnership, conversion of Tenant to a limited liability company or partnership
or to a corporation (or to another entity by which the parties in Tenant would
be relieved of liability to any creditors of Tenant) shall constitute an
assignment for purposes of this Section.
(d) ASSIGNEE OBLIGATIONS:
As a condition to Landlord's approval, any potential assignee otherwise
approved by Landlord shall assume in writing all obligations of Tenant under
this Lease and shall be jointly and severally liable with Tenant for rental and
other payments and performance of all terms, covenants and conditions of this
Lease.
(e) SUBLESSEE OBLIGATIONS:
Any sublessee shall assume all obligations of Tenant as to that portion of
the Premises which is subleased and shall be jointly and severally liable with
Tenant for rental and other payments and performance of all terms, covenants,
and conditions of this Lease with respect to such portion of the Premises.
18. SIGNS:
Tenant shall not place or in any manner display any sign, graphics, or
other advertising matter anywhere in or about the Premises or the Building at
places visible (either directly or indirectly) from anywhere outside the
Premises without first obtaining Landlord's written consent thereto, such
consent to be at Landlord's sole discretion. Any such consent by Landlord shall
be upon the understanding and condition that Tenant shall remove the same at the
expiration or sooner termination of this Lease and Tenant shall repair any
damage to the Premises or the Building caused thereby. Landlord shall not
unreasonably withhold its consent to normal Tenant signage within the Premises
which is consistent in Landlord's opinion with the Building's image and signage
and graphics program. Signage other than Building directory or building standard
elevator lobby directory signage is at Tenant's sole expense.
19. LIENS AND INSOLVENCY:
(a) LIENS:
Tenant shall keep its interest in this Lease, the Premises, the Land and
the Building free from any liens arising out of any work performed and materials
ordered or obligations incurred by or on behalf of Tenant and hereby indemnifies
and holds Landlord harmless from any liability from any such lien including
without limitation, liens arising from ANY TENANT IMPROVEMENT WORK UNDERTAKEN BY
TENANT. In the event any lien is filed against the Building, the Land or the
Premises by any person claiming by, through or under Tenant, Tenant shall, upon
request of Landlord and at Tenant's expense, immediately cause such lien to be
released of record or furnish to Landlord a bond, in form and amount and issued
by a surety reasonably satisfactory to Landlord, indemnifying Landlord, the Land
and the Building against all liability, costs and expenses, including attorneys
fees, which Landlord may incur as a result thereof. Provided that such bond has
been furnished to Landlord, Tenant, at its sole cost and expense and after
written notice to Landlord, may contest, by appropriate proceedings conducted in
good faith and with due diligence, any lien, encumbrance or charge against the
Premises arising from work done or materials provided to or for Tenant, if, and
only if, such proceedings suspend the collection thereof against Landlord,
Tenant and the Premises and neither the Premises, the Building nor the Land nor
any part thereof or interest therein is or will be in any danger of being sold,
forfeited or lost.
(b) INSOLVENCY:
If Tenant becomes insolvent or voluntarily or involuntarily bankrupt, or if
a receiver, assignee or other liquidating officer is appointed for the business
of Tenant, Landlord at its option may terminate this Lease and Tenant's right of
possession under this Lease and in no event shall this Lease or any rights or
privileges hereunder be an asset of Tenant in any bankruptcy, insolvency or
reorganization proceeding.
20. DEFAULT:
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(a) CUMULATIVE REMEDIES:
All rights of Landlord herein enumerated shall be cumulative, and none
shall exclude any other right or remedy allowed by law. In addition to the other
remedies provided in this Lease, Landlord shall be entitled to restrain by
injunction the violation or threatened violation of any of the covenants,
agreements or conditions of this Lease.
(b) TENANT'S RIGHT TO CURE:
Tenant shall have a period of TEN (10) business days from the date of
written notice from Landlord to Tenant within which to cure any default in the
payment of Rent, Additional Rent and other sums due hereunder. Tenant shall have
a period of THIRTY (30) days from the date of written notice from Landlord to
Tenant within which to cure any other default hereunder; provided, however, that
with respect to any such default capable of being cured by Tenant which cannot
be cured within THIRTY (30) days, the default shall not be deemed to be uncured
if Tenant commences to cure within THIRTY (30) days and for so long as Tenant is
diligently pursuing the cure thereof.
(c) ABANDONMENT:
Abandonment shall be defined as an absence from the Premises of five (5)
days or more while Tenant is in default or Landlord otherwise reasonably
determines that Tenant has abandoned the Premises and its interest under this
Lease. Any abandonment by Tenant shall be considered a default with no right to
cure, allowing Landlord to re-enter the Premises as hereinafter set forth.
(d) LANDLORD'S REENTRY:
Upon abandonment or an uncured default of this Lease by Tenant, Landlord,
in addition to any other rights or remedies it may have, at its option, may
enter the Premises or any part thereof, and expel, remove or put out Tenant or
any other persons who may be thereon, together with all personal property found
therein; and Landlord may terminate this Lease, or it may from time to time,
without terminating this Lease, relet the Premises or any part thereof for such
term or terms (which may be for a term less than or extending beyond the term
hereof) and at such rental or rentals and upon such other terms and conditions
as Landlord in its sole discretion may deem advisable, with the right to repair,
renovate, remodel, redecorate, alter and change the Premises, Tenant remaining
liable for any deficiency computed as hereinafter set forth. In the case of any
default, reentry and/or dispossession all Rent and Additional Rent shall become
due thereupon, together with such expenses as Landlord may reasonably incur for
attorneys fees, advertising expenses, brokerage fees and/or putting the Premises
in good order or preparing the same for re-rental, together with interest
thereon as provided in Section 37(f) hereof, accruing from the date of any such
expenditure by Landlord. No such re-entry or taking possession of the Premises
shall be construed as an election on Landlord's part to terminate this Lease
unless a written notice of such intention be given to Tenant.
(e) RELETTING THE PREMISES:
At the option of Landlord, rents received by Landlord from such reletting
shall be applied first to the payment of any indebtedness from Tenant to
Landlord other than Rent and Additional Rent due hereunder; second, to the
payment of THE PRO RATA SHARE, BASED ON THE REMAINING TERM OF TENANT'S LEASE
COMPARED TO THE TOTAL TERM OF THE NEW TENANT'S LEASE, OF any costs and expenses
of such reletting and including, but not limited to, attorneys fees, advertising
fees and brokerage fees, and to the payment of any repairs, renovations,
remodeling, redecoration, alterations and changes in the Premises; third, to the
payment of Rent and Additional Rent due and to become due hereunder, and, if
after so applying said Rents there is any deficiency in the Rent or Additional
Rent to be paid by Tenant under this Lease, Tenant shall pay any deficiency to
Landlord monthly on the dates specified herein. Any payment made or suits
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the right of Landlord to collect the deficiency for any
subsequent month. The failure of Landlord to relet the Premises or any part or
parts thereof shall not release or affect Tenant's liability hereunder, nor
shall Landlord be liable for failure to relet, or in the event of reletting, for
failure to collect the Rent thereof, and in no event shall Tenant be entitled to
receive any excess of net Rents collected over sums payable by Tenant to
Landlord hereunder. Notwithstanding any such reletting without termination,
Landlord may at any time elect to terminate this Lease for such previous breach
and default. Should Landlord terminate this Lease by reason of any default, in
addition to any other remedy it may have, it may recover from Tenant the then
present value of Rent and Additional Rent reserved in this Lease for the balance
of the
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Term, as it may have been extended, over the then fair market rental value of
the Premises for the same period, plus all court costs and attorneys fees
incurred by Landlord in the collection of the same.
(f) TRADE FIXTURES:
21. PRIORITY:
(a) Tenant agrees that this Lease shall be subordinate to any first
mortgage or deed of trust now existing upon the Premises or the Building created
by or at the instance of Landlord and to any and all advances to be made
thereunder and to interest thereon and all renewals, , or extensions thereof
("Landlord's Mortgage"). Upon demand by Landlord or the holder of any Landlord's
Mortgage ("Holder"), Tenant shall execute and deliver subordination and
attornment agreements in form and substance satisfactory to such Holder.
Notwithstanding the foregoing, upon demand of such Holder, such Landlord's
Mortgage shall be subordinate to this Lease; provided, however, that in such
event, notwithstanding such subordination, such Landlord's Mortgage shall be
superior to this Lease with respect to (i) the right, claim and lien of the
Landlord's Mortgage in, to and upon any award or other compensation for any
taking by eminent domain of any part of the Premises or the Building and the
right of disposition thereof in accordance with the provisions of the Landlord's
Mortgage; and upon any proceeds payable under any policies of fire and rental
insurance upon the Premises or the Building and to the right of disposition
thereof in accordance with the terms of the Landlord's Mortgage; (ii) any lien,
right or judgment which may have arisen at any time under the terms of the
Lease; and (iii) such other matters as may be specifically reserved by the
Holder of such Landlord's Mortgage in writing in connection with such
subordination.
(b) Upon request Tenant shall attorn to the Holder of any Landlord's
Mortgage or any person or persons purchasing or otherwise acquiring the Land,
Building or Premises at any sale or other proceeding under any Landlord's
Mortgage, PROVIDING THAT SUCH PERSON AGREES TO RECOGNIZE TENANT'S LEASE AND NOT
DISTURB TENANT'S QUIET ENJOYMENT OF THE PREMISES UNDER THE LEASE. Tenant shall
properly execute, acknowledge and deliver instruments which the holder of any
Landlord's Mortgage may reasonably require to effectuate the provisions of this
Section.
(c) IN THE EVENT ANY LANDLORD'S MORTGAGE IS HEREAFTER PLACED UPON THE
PREMISES OR THE BUILDING BY OR AT THE INSTANCE OF LANDLORD, UPON THE REQUEST OF
THE HOLDER THEREOF THIS LEASE SHALL BE SUBORDINATE TO SUCH MORTGAGE OR DEED OF
TRUST AND TO ANY AND ALL ADVANCES THEREUNDER, INTEREST THEREON AND ALL RENEWALS,
REPLACEMENTS, OR EXTENSIONS THEREOF, PROVIDED THAT SUCH HOLDER AND TENANT SHALL
ENTER INTO AN AGREEMENT FOR SUBORDINATION, ATTORNMENT, AND NON-DISTURBANCE BY
WHICH SUCH HOLDER SHALL AGREE TO RECOGNIZE THIS LEASE AND NOT DISTURB TENANT'S
OCCUPANCY UNDER THIS LEASE AS LONG AS TENANT IS NOT IN DEFAULT HEREUNDER BEYOND
ANY APPLICABLE PERIOD TO CURE, AND OTHERWISE UPON SUCH TERMS AND CONDITIONS AS
ARE THEN CUSTOMARILY IN USE BY INSTITUTIONAL LENDERS IN LIKE CIRCUMSTANCES AND
ARE REASONABLY ACCEPTABLE TO SUCH HOLDER AND TO TENANT. NOTWITHSTANDING THE
FOREGOING, UPON THE DEMAND OF SUCH HOLDER, A SUBSEQUENT LANDLORD'S MORTGAGE
SHALL BE SUBORDINATE TO THIS LEASE UPON THE TERMS AND CONDITIONS SET FORTH IN
THE THIRD SENTENCE OF SECTION 21(A) ABOVE.
22. SURRENDER OF POSSESSION:
Subject to the terms of Section 13 relating to damage and destruction, upon
expiration of the term of this Lease, whether by lapse of time or otherwise,
Tenant shall promptly and peacefully surrender the Premises to Landlord in as
good condition as when received by Tenant from Landlord or as thereafter
improved, reasonable use and wear and tear AND CASUALTY DAMAGE AND DESTRUCTION
excepted.
23. REMOVAL OF PROPERTY:
Tenant shall remove all of its movable personal property, telephone, data
and computer cabling, and trade fixtures paid for by Tenant which can be removed
without damage to the Premises at the
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expiration or earlier termination of this Lease, and shall pay Landlord any
damages for injury to the Premises or Building resulting from such removal. All
other improvements and additions to the Premises shall thereupon become the
property of Landlord. NOTWITHSTANDING THE FOREGOING, UPON THE EXPIRATION OR
SOONER TERMINATION OF THIS LEASE TENANT SHALL REMOVE ALL NON-STANDARD
IMPROVEMENTS (E.G. SOUND STUDIO, RAISED FLOORING IN A COMPUTER ROOM, SERVERS,
ETC.) MADE TO THE PREMISES BY TENANT; SUCH NON-STANDARD IMPROVEMENTS SHALL BE
IDENTIFIED BY LANDLORD AND TENANT UPON COMPLETION OF PLANS FOR THE INITIAL
PREMISES AND ANY FURTHER EXPANSIONS.
24. NON-WAIVER:
Waiver by Landlord or Tenant of any term, covenant or condition herein
contained or any breach thereof shall not be deemed to be a waiver of such term,
covenant, or condition or of any subsequent breach of the same or any other
term, covenant, or condition herein contained. The subsequent acceptance of any
payment hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any term, covenant or condition of this Lease,
other than the failure of Tenant to pay the amount so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
payment.
25. HOLDOVER:
If Tenant shall, with the written consent of Landlord, hold over after the
expiration of the term of this Lease, such tenancy shall be deemed a
month-to-month tenancy, which tenancy may be terminated as provided by
applicable law. During such tenancy, Tenant agrees to pay to Landlord the
greater of (a) the then quoted rates for similar space in the Building or (b)
ONE HUNDRED TEN PERCENT (110%) of the Rent and Additional Rent in effect upon
the date of such expiration as stated herein, and to be bound by all of the
terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of Rent and Additional Rent after such expiration or
earlier termination shall not result in a renewal of this Lease. The foregoing
provisions of this Section 25 are in addition to and do not affect Landlord's
right of re-entry or any rights of Landlord hereunder or as otherwise provided
by law. If Tenant shall hold over after the expiration or earlier termination of
this Lease without the written consent of Landlord, such occupancy shall be
deemed an unlawful detainer of the Premises subject to the applicable laws of
the state in which the Building is located and, in addition, Tenant shall be
liable for any costs, damages, losses and expenses incurred by Landlord as a
result of Tenant's failure to surrender the Premises in accordance with this
Lease.
26. CONDEMNATION:
(a) ENTIRE TAKING:
If all of the Premises or such portions of the Building as may be required
for the reasonable use of the Premises, are taken by eminent domain, this Lease
shall automatically terminate as of the date title vests in the condemning
authority and all Rent, Additional Rent and other payments shall be paid to that
date.
(b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES:
In the event of a taking of a material part of but less than all of the
Building, where Landlord shall reasonably determine that the remaining portions
of the Premises cannot be economically and effectively used by it (whether on
account of physical, economic, aesthetic or other reasons), or if, in the
opinion of Landlord, the Building should be restored in such a way as to alter
the Premises materially, Landlord shall forward a written notice to Tenant of
such determination not more than sixty (60) days after the date of taking. The
term of this Lease shall expire upon such date as Landlord shall specify in such
notice but not earlier than sixty (60) days after the date of such notice.
(c) PARTIAL TAKING:
In case of taking of a part of the Premises, or a portion of the Building
not required for the reasonable use of the Premises, then this Lease shall
continue in full force and effect and the Rent shall be equitably reduced based
on the proportion by which the floor area of the Premises is reduced, such Rent
reduction to be effective as of the date title to such portion vests in the
condemning authority. If a portion
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of the Premises shall be so taken which renders the remainder of the Premises
unsuitable for continued occupancy by Tenant under this Lease, Tenant may
terminate this Lease by written notice to Landlord within sixty (60) days after
the date of such taking and the term of this Lease shall expire upon such date
as Tenant shall specify in such notice not later than sixty (60) days after the
date of such notice.
(d) AWARDS AND DAMAGES:
Landlord reserves all rights to damages to the Premises for any partial,
constructive, or entire taking by eminent domain, and Tenant hereby assigns to
Landlord any right Tenant may have to such damages or award, and Tenant shall
make no claim against Landlord or the condemning authority for damages for
termination of the leasehold interest or interference with Tenant's business.
Tenant shall have the right, however, to claim and recover from the condemning
authority compensation for any loss to which Tenant may be put for Tenant's
moving expenses, business interruption or taking of Tenant's personal property
and leasehold improvements paid for by Tenant (not including Tenant's leasehold
interest) provided that such damages may be claimed only if they are awarded
separately in the eminent domain proceedings and not out of or as part of the
damages recoverable by Landlord.
27. NOTICES:
All notices under this Lease shall be in writing and delivered in person or
sent by registered or certified mail, or nationally recognized courier (such as
Federal Express, DHL, etc.), postage prepaid, to Landlord and to Tenant at the
Notice Addresses provided in Section 1(m) (provided that after the Commencement
Date any such notice may be mailed or delivered by hand to Tenant at the
Premises) and to the holder of any mortgage or deed of trust at such place as
such holder shall specify to Tenant in writing; or such other addresses as may
from time to time be designated by any such party in writing. Notices mailed as
aforesaid shall be deemed given on the date of such mailing.
28. COSTS AND ATTORNEYS FEES:
If Tenant or Landlord shall bring any action for any relief against the
other, declaratory or otherwise, arising out of this Lease, including any suit
by Landlord for the recovery of Rent, Additional Rent or other payments
hereunder or possession of the Premises, each party shall, and hereby does, to
the extent permitted by law, waive trial by jury and the losing party shall pay
the prevailing party a reasonable sum for attorneys fees in such suit, at trial
and on appeal, and such attorneys fees shall be deemed to have accrued on the
commencement of such action.
29. LANDLORD'S LIABILITY:
Anything in this Lease to the contrary notwithstanding, covenants,
undertakings and agreements herein made on the part of Landlord are made and
intended not as personal covenants, undertakings and agreements for the purpose
of binding Landlord personally or the assets of Landlord except Landlord's
interest in the Premises and Building, but are made and intended for the purpose
of binding only the Landlord's interest in the Premises and Building, as the
same may from time to time be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted (EXCEPT FOR THE
PURPOSE OF OBTAINING JURISDICTION OVER LANDLORD'S INTEREST IN THE BUILDING) or
enforceable against Landlord or its partners or their respective heirs, legal
representatives, successors, and assigns on account of the Lease or on account
of any covenant, undertaking or agreement of Landlord in this Lease contained.
30. ESTOPPEL CERTIFICATES:
Tenant shall, from time to time, upon written request of Landlord, execute,
acknowledge and deliver to Landlord or its designee a written statement prepared
by Landlord stating: The date this Lease was executed and the date it expires;
the date the term commenced and the date Tenant accepted the Premises; the
amount of minimum monthly Rent and the date to which such Rent has been paid;
and certifying to the extent true: That this Lease is in full force and effect
and has not been assigned, modified, supplemented or amended in any way (or
specifying the date and terms of agreement so affecting this Lease); that this
Lease represents the entire agreement between the parties as to this leasing;
that all conditions under this Lease to be performed by Landlord have been
satisfied; that all required
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contributions by Landlord to Tenant on account of Tenant's improvements have
been received; that on this date there are no existing claims, defenses or
offsets which Tenant has against the enforcement of this Lease by Landlord; that
the security deposit is as stated in the Lease; and such other matters as
Landlord may reasonably request. It is intended that any such statement
delivered pursuant to this paragraph may be relied upon by a prospective
purchaser of Landlord's interest or the holder of any mortgage upon Landlord's
interest in the Building. If Tenant shall fail to respond within FIFTEEN (15)
days of receipt by Tenant of a written request by Landlord as herein provided,
Tenant shall be deemed to have given such certificate as above provided without
modification and shall be deemed to have admitted the accuracy of any
information supplied by Landlord to a prospective purchaser or mortgagee and
that this Lease is in full force and effect, that there are no uncured defaults
in Landlord's performance, that the security deposit is as stated in the Lease,
and that not more than one month's Rent has been paid in advance.
31. TRANSFER OF LANDLORD'S INTEREST:
In the event of any transfers of Landlord's interest in the Premises or in
the Building, other than a transfer for security purposes only, AND PROVIDED THE
TRANSFEREE AGREES WITH TENANT TO ASSUME AND PERFORM ALL OF LANDLORD'S
OBLIGATIONS UNDER THE LEASE FROM AND AFTER THE DATE OF TRANSFER, the transferor
shall be automatically relieved of any and all obligations and liabilities on
the part of Landlord accruing from and after the date of such transfer and such
transferee shall have no obligation or liability with respect to any matter
occurring or arising prior to the date of such transfer. Tenant agrees to attorn
to the transferee.
32. RIGHT TO PERFORM:
If Tenant shall fail to pay any sum of money, other than Rent and
Additional Rent required to be paid by it hereunder, or shall fail to perform
any other act on its part to be performed hereunder, and such failure shall
continue for ten (10) days after notice thereof by Landlord, Landlord may, but
shall not be obligated so to do, and without waiving or releasing Tenant from
any obligations of Tenant, make such payment or perform any such other act on
Tenant's part to be made or performed as provided in this Lease. Any sums paid
by Landlord hereunder shall be immediately due and payable by Tenant to Landlord
and Landlord shall have (in addition to any other right or remedy of Landlord)
the same rights and remedies in the event of the nonpayment of sums due under
this Section as in the case of default by Tenant in the payment of Rent.
33. QUIET ENJOYMENT:
Tenant shall have the right to the peaceable and quiet use and enjoyment of
the Premises, subject to the provisions of this Lease, as long as Tenant is not
in default hereunder.
34. CORPORATE AUTHORITY:
If Tenant is a corporation, each individual executing this Lease on behalf
of Tenant represents and warrants that he or she is duly authorized to execute
and deliver this Lease on behalf of Tenant, in accordance with a duly adopted
resolution of the Board of Directors of Tenant and in accordance with the bylaws
of Tenant, and that this Lease is binding upon Tenant in accordance with its
terms. At Landlord's request, Tenant shall, within thirty (30) days after
execution of this Lease, deliver to Landlord a certified copy of a resolution of
the Board of Directors of Tenant authorizing or ratifying the execution of this
Lease.
35. HAZARDOUS MATERIALS:
(a) TENANT OBLIGATIONS:
(i) Tenant shall not dispose of or otherwise allow the release of any
hazardous waste or materials in, on or under the Premises or the Building, or
any adjacent property, or in any improvements placed on the Premises. Tenant
represents and warrants to Landlord that Tenant's intended use of the Premises
does not involve the use, production, disposal or bringing on to the Premises of
any hazardous
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waste or materials, except only ordinary and general office supplies typically
used in first-class downtown office buildings and only in such quantities or
concentrations as allowed under applicable laws, rules and regulations. As used
in this Section, the term "hazardous waste or materials" includes any substance,
waste or material defined or designated as hazardous, toxic or dangerous (or any
similar term) pursuant to any statute, regulation, rule or ordinance now or
hereafter in effect. Tenant shall promptly comply with all such statutes,
regulations, rules and ordinances, and if Tenant fails to so comply Landlord
may, after reasonable prior notice to Tenant (except in case of emergency)
effect such compliance on behalf of Tenant. Tenant shall immediately reimburse
Landlord for all costs incurred in effecting such compliance.
(ii) Tenant agrees to indemnify and hold harmless Landlord against any
and all losses, liabilities, suits, obligations, fines, damages, judgements,
penalties, claims, charges, cleanup costs, remedial actions, costs and expenses
(including, without limitation, consultant fees, attorneys' fees and
disbursements) which may be imposed on, incurred or paid by Landlord, or
asserted in connection with (i) any misrepresentation, breach of warranty or
other default by Tenant under this Lease, or (ii) the acts or omissions of
Tenant, or any subtenant or other person for whom Tenant would otherwise be
liable, resulting in the release of any hazardous waste or materials.
(b) LANDLORD OBLIGATIONS:
Landlord represents to Tenant that, to the best of Landlord's knowledge, no
hazardous waste or materials have been generated, stored or disposed of on the
Premises other than in compliance with all applicable laws. Landlord will hold
Tenant harmless from and indemnify Tenant against any actual costs resulting
from any breach of this representation or resulting from the release of
hazardous waste or materials on the Premises by Landlord or its employees,
agents or contractors. Landlord shall not be responsible for any hazardous waste
or materials resulting from the acts of other tenants or occupants of the
Building or other third parties, or for consequential damages arising from the
presence of any hazardous wastes or materials on the Premises or in the
Building.
36. TELECOMMUNICATIONS LINES AND EQUIPMENT:
(a) LOCATION OF TENANT'S EQUIPMENT AND LANDLORD CONSENT:
(i) TENANT MAY INSTALL, MAINTAIN, REPLACE, REMOVE AND USE COMMUNICATIONS
AND COMPUTER WIRES, CABLES AND RELATED DEVICES NECESSARY FOR THE OPERATION OF
TENANT'S BUSINESS (COLLECTIVELY, THE "LINES") WHICH: CONNECT TO THE
INTRABUILDING NETWORK CABLING ("INC"); INTERCONNECT TENANT'S PREMISES ON
MULTIPLE FLOORS IN THE BUILDING; OR, IN THE ABSENCE OF INC ADEQUATE TO SERVICE
TENANT'S BUSINESS, CONNECT TO LINES PROVIDED BY TENANT'S COMMUNICATIONS SERVICE
PROVIDER, AND LANDLORD SHALL NOT ASSESS ANY SURCHARGES FOR ACCESS TO INSTALL
SUCH LINES OTHER THAN PURSUANT TO EXHIBIT F. LANDLORD SHALL PROVIDE SPACE
NECESSARY TO ACCOMMODATE THE LINES SUBJECT TO LANDLORD'S CONSENT RIGHTS AND ALL
OTHER RIGHTS SPECIFIED HEREIN. TENANT MUST OBTAIN LANDLORD'S PRIOR WRITTEN
CONSENT, WHICH CONSENT MAY NOT BE UNREASONABLY WITHHELD, FOR TENANT'S INITIAL
WIRING PLAN FOR EACH FLOOR OF TENANT'S PREMISES AND FOR TENANT'S INITIAL WORK
AND ALL SUBSEQUENT WORK IN THE BUILDING COMMON AREAS. TENANT SHALL LOCATE ALL
ELECTRONIC TELECOMMUNICATIONS AND SWITCHING EQUIPMENT WITHIN THE PREMISES.
TENANT'S REQUEST FOR CONSENT TO TENANT'S INITIAL WIRING PLAN FOR EACH FLOOR OF
TENANT'S PREMISES AND TO TENANT'S INITIAL AND SUBSEQUENT WORK IN THE BUILDING
COMMON AREAS SHALL CONTAIN DETAILED PLANS, DRAWINGS AND SPECIFICATIONS
IDENTIFYING ALL WORK TO BE PERFORMED, THE TIME SCHEDULE FOR COMPLETION OF THE
WORK, THE IDENTITY OF THE ENTITY THAT WILL PROVIDE SERVICE TO THE LINES AND THE
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IDENTITY OF THE ENTITY THAT WILL PERFORM THE PROPOSED WORK (WHICH ENTITY SHALL
BE SUBJECT TO LANDLORD'S REASONABLE APPROVAL). LANDLORD SHALL HAVE FIVE (5)
BUSINESS DAYS IN WHICH TO EVALUATE THE REQUEST AFTER IT IS SUBMITTED BY TENANT.
(ii) LANDLORD MAY CONSIDER THE FOLLOWING FACTORS IN MAKING ITS
DETERMINATION OF CONSENT: (A) THE EXPERIENCE, QUALIFICATIONS AND PRIOR WORK
PRACTICE OF THE PROPOSED CONTRACTOR AND ITS ABILITY TO PROVIDE SUFFICIENT
INSURANCE COVERAGE FOR ITS WORK AT THE BUILDING; (B) WHETHER OR NOT THE PROPOSED
WORK WILL ADVERSELY AFFECT IN A MATERIAL WAY THE OPERATION OF ANY THEN EXISTING
LINES AT THE BUILDING; (C) WHETHER OR NOT TENANT IS IN DEFAULT OF ANY OF ITS
OBLIGATIONS UNDER THIS LEASE; (D) WHETHER TENANT'S PROPOSED SERVICE PROVIDER IS
WILLING TO ENTER INTO A TELECOMMUNICATIONS LICENSE AGREEMENT WITH LANDLORD,
INCLUDING, BUT NOT LIMITED TO, THE PAYMENT OF REASONABLE MONETARY COMPENSATION
FOR THE USE AND OCCUPATION OF THE BUILDING; AND (E) WHETHER THE WORK OR
RESULTING LINES WOULD ADVERSELY AFFECT IN A MATERIAL WAY THE STRUCTURAL
INTEGRITY OF THE LAND, BUILDING OR ANY SPACE IN THE BUILDING IN ANY MANNER. THE
PARTIES AGREE THAT THE RATES SHOWN ON EXHIBIT F ARE REASONABLE CHARGES FOR A
SERVICE PROVIDER'S USE AND OCCUPATION OF THE BUILDING. LANDLORD'S RATES SHALL
NOT EXCEED THE RATES GENERALLY CHARGED BY CLASS A BUILDINGS IN SEATTLE. TENANT
AND ITS SERVICE PROVIDERS SHALL NOT BE REQUIRED BY LANDLORD TO PAY COMPENSATION
FOR LINES WHICH INTERCONNECT TENANT'S PREMISES.
(iii) LANDLORD'S CONSENT TO TENANT'S INITIAL WIRING PLANS FOR EACH FLOOR OF
TENANT'S PREMISES, AND FOR TENANT'S WORK IN THE BUILDING COMMON AREAS OR
TENANT'S CONTRACTOR, OR REQUIREMENTS CONCERNING, THE LINES OR ANY EQUIPMENT
RELATED THERETO, THE PLANS, SPECIFICATIONS OR DESIGNS RELATED THERETO, THE
CONTRACTOR OR SUBCONTRACTOR, OR THE WORK PERFORMED HEREUNDER, SHALL NOT BE
DEEMED A WARRANTY AS TO THE ADEQUACY THEREOF, AND LANDLORD HEREBY DISCLAIMS ANY
RESPONSIBILITY OR LIABILITY FOR THE SAME. LANDLORD DISCLAIMS ALL RESPONSIBILITY
FOR THE CONDITION OR UTILITY OF THE LINES AND MAKES NO REPRESENTATION REGARDING
THE SUITABILITY OF THE LINES FOR TENANT'S INTENDED USE.
(iv) TENANT SHALL (A) PAY ALL COSTS IN CONNECTION WITH TENANT'S WORK ON THE
LINES; (B) COMPLY WITH ALL REQUIREMENTS AND CONDITIONS OF THIS SECTION; (C) USE,
MAINTAIN AND OPERATE THE LINES AND RELATED EQUIPMENT IN ACCORDANCE WITH AND
SUBJECT TO ALL LAWS GOVERNING THE LINES AND EQUIPMENT.
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TENANT SHALL FURTHER INSURE THAT (I) TENANT'S CONTRACTOR COMPLIES WITH THE
PROVISIONS OF THIS SECTION AND LANDLORD'S REASONABLE REQUIREMENTS GOVERNING ANY
WORK PERFORMED; (II) TENANT'S CONTRACTOR PROVIDES ALL INSURANCE REQUIRED BY
LANDLORD; (III) ANY WORK PERFORMED SHALL COMPLY WITH ALL LAWS; AND (IV) AS SOON
AS THE WORK IN COMPLETED, TENANT SHALL SUBMIT "AS-BUILT" DRAWINGS TO LANDLORD.
[INTENTIONALLY OMITTED]
(b) LANDLORD'S COMMON SPACES:
LANDLORD SHALL PROVIDE ALL ACCESS FOR THE LINES THROUGH BUILDING COMMON
SPACES NECESSARY FOR TENANT TO INSTALL THE LINES. LANDLORD WILL PERMIT TENANT
ACCESS TO THE LINES TO ALLOW TENANT TO INSTALL, INSPECT, MAINTAIN AND REPAIR THE
LINES IN THE COMMON AREAS, FOLLOWING REASONABLE NOTICE FROM TENANT TO LANDLORD'S
MANAGEMENT OFFICE AND SUBJECT TO LANDLORD'S CONSENT RIGHTS AND ALL OTHER RIGHTS
SPECIFIED HEREIN.
(c) INDEMNIFICATION:
In addition to any other indemnification obligations under this Lease,
Tenant shall indemnify and hold harmless Landlord and its employees, agents,
officers, and contractors from and against any and all claims, demands,
penalties, fines, liabilities, settlements, damages, costs or expenses
(including reasonable attorneys' fees) arising out of or in any way related to
the acts and omissions of Tenant, Tenant's officers, directors, employees,
agents, contractors, subcontractors, subtenants, and invitees with respect to:
(i) any Lines or equipment related thereto serving Tenant in the Building; (ii)
any personal injury (including wrongful death) or property damage arising out of
or related to any Lines or equipment related thereto serving Tenant in the
Building; (iii) any lawsuit brought or threatened, settlement reached, or
governmental order, fine or penalty relating to such Lines or equipment related
thereto; and (iv) any violations or Laws or demands of governmental authorities,
or any reasonable policies or requirement of Landlord, which are based upon or
in any way related to such Lines or equipment. This indemnification and hold
harmless agreement shall survive the termination of this Lease.
(d) LIMITATION OF LIABILITY:
Except to the extent arising from the negligence OF, BREACH OF THIS LEASE
BY, or willful misconduct of Landlord or Landlord's agents or employees,
Landlord shall have no liability for damages arising from, and Landlord does not
warrant that the Tenant's use of any Lines will be free from the following
(collectively called "Line Problems"): (I) any shortages, failures, variations,
interruptions, disconnections, loss or damage caused by the installation,
maintenance, or replacement, use or removal of Lines by or for other tenants or
occupants at the Building, by any failure of the environmental conditions or the
power supply for the Building to conform to any requirement of the Lines or any
associated equipment, or any other problems associated with any Lines by any
other cause; (ii) any failure of any Lines to satisfy Tenant's requirements; or
(iii) any eavesdropping or wire-tapping by unauthorized parties. Landlord in no
event shall be liable for damages by reason of loss of profits, business
interruption or other consequential damage arising from any Line Problems. Under
no circumstances shall any Line Problems be deemed an actual or constructive
eviction of Tenant, render Landlord liable to Tenant for abatement of Rent, or
relieve Tenant from performance of Tenant's obligations under this Lease.
19
<PAGE> 23
(e) ELECTROMAGNETIC FIELDS:
If Tenant at any time uses any equipment that may create an electromagnetic
field exceeding the normal insulation ratings of ordinary twisted pair riser
cable or cause radiation higher than normal background radiation, Landlord
reserves the right to require Tenant to appropriately insulate the Lines
therefore (including riser cables) to prevent such excessive electromagnetic
fields or radiation.
37. GENERAL:
(a) HEADINGS:
Titles to Sections of this Lease are not a part of this Lease and shall
have no effect upon the construction or interpretation of any part hereof.
(b) SUCCESSORS AND ASSIGNS:
All of the covenants, agreements, terms and conditions contained in this
Lease shall inure to and be binding upon the Landlord and Tenant and their
respective, successors and assigns.
(c) PAYMENT OF BROKERS:
Landlord shall pay the commissions due those real estate brokers or agents
named in Section 1(k). If Tenant has dealt with any other person or real estate
broker with respect to leasing or renting space in the Building, Tenant shall be
solely responsible for the payment of any fee due said person or firm and Tenant
shall indemnify and hold Landlord harmless against any liability in respect
thereto, including Landlord's attorneys' fees and costs in defense of any such
claim.
(d) ENTIRE AGREEMENT:
This Lease contains all covenants and agreements between Landlord and
Tenant relating in any manner to the leasing, use and occupancy of the Premises,
to Tenant's use of the Building and other matters set forth in this Lease. No
prior agreements or understanding pertaining to the same shall be valid or of
any force or effect and the covenants and agreements of this Lease shall not be
altered, modified or added to except in writing signed by Landlord and Tenant.
(e) SEVERABILITY:
Any provision of this Lease which shall be held invalid, void or illegal
shall in no way affect, impair or invalidate any other provision hereof and the
remaining provisions hereof shall nevertheless remain in full force and effect.
(f) OVERDUE PAYMENTS:
Tenant acknowledges that a late payment of Rent or other sums due hereunder
will cause Landlord to incur costs not contemplated by this Lease. Such costs
may include, but not be limited to, processing and accounting charges, and
penalties imposed by terms of any contracts, mortgages or deeds of trust
covering the Building. Therefore, in the event Tenant shall fail to pay any
Rent, Additional Rent or other sums payable by Tenant under this Lease for five
(5) days after TENANT'S RECEIPT OF LANDLORD'S WRITTEN NOTICE THAT such amount is
PAST due, then Tenant shall pay Landlord, as Additional Rent, a late charge
("Late Charge") equal to 5% of such amount owing, but not in excess of the
highest rate permitted by law. In addition to any Late Charges which may be
incurred hereunder, any Rent, Additional Rent or other sums payable by Tenant
under this Lease which are more than thirty (30) days past due, shall bear
interest at a rate equal to FOUR PERCENTAGE POINTS ABOVE THE PRIME RATE OF
INTEREST PUBLISHED OR ANNOUNCED FROM TIME TO TIME BY SEATTLE FIRST NATIONAL BANK
OR ITS SUCCESSOR per annum but not in excess of the highest lawful rate
permitted under applicable laws, calculated from the original due date thereof
to the date of payment ("Overdue Fee"); provided, however, the minimum Overdue
Fee shall be $100.00.
(g) FORCE MAJEURE:
Except for the payment of Rent, Additional Rent and other sums payable by
Tenant, time periods for Tenant's or Landlord's performance under any provisions
of this Lease shall be extended for periods of time during which Tenant's or
Landlord's performance is prevented due to circumstances beyond Tenant's or
Landlord's reasonable control.
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<PAGE> 24
(h) RIGHT TO CHANGE PUBLIC SPACES:
Landlord shall have the right at any time, without thereby creating an
actual or constructive eviction or incurring any liability to Tenant therefor,
to change the arrangement or location of such of the following as are not
contained within the Premises or any part thereof: entrances, passageways, doors
and doorways, corridors, stairs, toilets and other like public service portions
of the Building. Nevertheless, in no event shall Landlord diminish any service,
change the arrangement or location of the elevators serving the Premises, make
any change which shall diminish the area of the Premises, make any change which
shall interfere with access to the Premises or change the character of the
Building from that of a first-class office building.
(I) GOVERNING LAW:
This Lease shall be governed by and construed in accordance with the laws
of the State of Washington.
(J) BUILDING DIRECTORY:
Landlord shall maintain in the lobby of Building a directory which shall
include the name of Tenant and any other names reasonably requested by Tenant in
proportion to the number of listings given to comparable tenants of the
Building.
(K) BUILDING NAME:
The Building shall be known by such name as Landlord may designate from
time to time.
###
IN WITNESS WHEREOF this Lease has been executed the day and year first above set
forth.
TENANT: PROGRESSIVE NETWORKS, INC.
a Washington corporation
By:/s/ Andrew F. Sharpless
-----------------------------------------
Its: SVP
-------------------------------------
TENANT CORPORATE ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 21st day of MARCH, 1996, before me, the
undersigned, a notary public in and for the state of WASHINGTON , duly
commissioned and sworn, personally appeared ANDREW F. SHARPLESS, to me known to
be the SENIOR VICE PRESIDENT respectively, of Progressive Networks, Inc., the
corporation that executed the within and foregoing instrument, and acknowledged
the said instrument to be the free and voluntary act and deed of said
corporation for the uses and purposes therein mentioned, and on oath stated that
they were authorized to execute said instrument, and that the seal affixed, if
any, is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature /s/ JUDITH K. HOYLE
--------------------------------------------
Printed Name JUDITH K. HOYLE
---------------------------------------------
Notary public in and for the state of WASHINGTON,
residing at SEATTLE
My appointment expires 11-6-99
21
<PAGE> 25
LANDLORD: WRIGHT RUNSTAD PROPERTIES L.P.
a Delaware limited partnership
By: WRIGHT RUNSTAD ASSET MANAGEMENT L.P.,
a Washington limited partnership
By: WRAM, Inc.
a Washington corporation
By: /s/ H. JON RUNSTAD
-----------------------------------
Its H. JON RUNSTAD
-----------------------------------
CHAIRMAN AND
CHEIF EXECUTIVE OFFICER
LANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that I know or have satisfactory evidence that H. JON
RUNSTAD, is the person who appeared before me, and said person acknowledged that
he signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as the CHAIRMAN AND CEO of WRAM, Inc., a
corporation, to me known to be the general partner of WRIGHT RUNSTAD ASSET
MANAGEMENT L.P., a limited partnership, to me known to be the general partner of
WRIGHT RUNSTAD PROPERTIES L.P., the limited partnership that executed the within
and foregoing instrument, and acknowledged the said instrument to be the free
and voluntary act and deed of said corporation and partnerships for the uses and
purposes therein mentioned, and on oath stated that said individual was
authorized to execute said instrument.
WITNESS my hand and official seal this 22nd day of March, 1996.
Signature /s/ CORLISS J. PERDAEMS
------------------------------------------------
Printed Name CORLISS J. PERDAEMS
--------------------------------------------
Notary public in and for the state of Washington,
residing at SEATTLE
--------------------------------------------
My appointment expires 3/29/96
----------------------------------
22
<PAGE> 1
Exhibit 10.8
THIS SUBLEASE (the "Sublease") is entered into as of the date set forth
in Section 1.1(e) below, by and between the Sublandlord and the Subtenant set
forth below.
W I T N E S S E T H
1. SUBLEASE SUMMARY AND DEFINITIONS
1.1. The Sublease provisions and definitions set forth in this SECTION
1.1 in summary form are solely to facilitate convenient reference by the
parties. If there is any conflict between this Section and any other provisions
of this Sublease, the latter shall control.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Sublandlord's LEGENT CORPORATION
Name and C/O COMPUTER ASSOCIATES
Address: INTERNATIONAL, INC.
1 Computer Associates Plaza
Islandia, N.Y. 11788-7000
Attn: Senior Vice President-Facilities
(b) Sublandlord's Delaware
State of
Incorporation:
(c) Subtenant's Name PROGRESSIVE NETWORKS, INC.
and Address: 1111 Third Avenue, Suite 2900
Seattle, WA 98101
Attn: ____________________
(d) Subtenant's State
of Incorporation:
(e) Sublease Date: March ____, 1996
(f) Overlandlord's Wright Runstad Properties L.P.
Name and 1111 Third Avenue, Suite 2730
Address: Seattle, Washington 98101
(g) Overlease: Lease Agreement dated July 27, 1993
(h) Unincorporated Articles: 1(d), 1(e), 1(g), 1(h), 3(b), 3(c),
provisions of the 4, 8(a)(iii), 9(a)(iii), 36(c), 36(g)
Overlease:
Exhibits: B, paragraphs 4, 5, 6, and 12 of
Exhibit C.
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
(i) Building: 1111 THIRD AVENUE
SEATTLE, WASHINGTON
(j) Premises: 17,244 comprising the entire 29th floor
(k) Sublease April 1, 1996
Commencement
Date:
(l) Sublease Expiration October 31, 1998
Date:
(m) Base Rent:
</TABLE>
<TABLE>
<CAPTION>
Annual Rent
per Rentable Monthly Annual
Yearly Periods Square Foot Base Rent Base Rent
- -------------- ----------- --------- ---------
<S> <C> <C> <C>
Sublease Term $12.50 $17,962.50 $215,550.00
</TABLE>
<TABLE>
<S> <C> <C>
(n) Prepaid Base Rent: $17,962.50
(o) Operating Included in Base Rent; Base Year - 1996 for
Expenses/taxes: increases
(p) Subtenant's 3.26%
Proportionate
Share:
(q) Electric Charge: Included in Base Rent - See Article 14
(r) Security Deposit: $215,550.00 - See Article 16 for terms.
(s) Alterations: "As Is"
(t) Brokers: For Sublandlord: Cushman & Wakefield
For Subtenant: Martin Smith
(u) Parking: Per Overlease at Subtenant's cost.
(v) Furniture: See Article 21
(w) Termination Right On or after May 1, 1998 by payment of fee. See Article 22.
</TABLE>
2. SUBLEASE GRANT
2.1. By lease (hereinafter referred to as the "Overlease") described
above, the
<PAGE> 3
Overlandlord leased to Sublandlord certain space (hereinafter called
the "Leased Space") in the Building in accordance with the terms of the
Overlease. A copy of the Overlease is annexed hereto as EXHIBIT A.
2.2. In consideration of the obligation of Subtenant to pay rent as
herein provided and in consideration of the other terms, covenants and
conditions hereof, Sublandlord hereby leases to Subtenant and Subtenant hereby
hires from Sublandlord, upon and subject to the provisions of this Sublease and
the Overlease, the square feet of rentable area as set forth in SECTION 1.1
herein and as shown hatched on EXHIBIT B annexed hereto and made a part hereof
(hereinafter called the "Premises").
3. SUBLEASE TERM
3.1. Subject to the other provisions hereof, this Sublease shall
continue in full force and effect for a primary term beginning on the Sublease
Commencement Date and ending on the Sublease Expiration Date as defined above.
Such term, as it may be extended or modified only by written agreement of the
parties or pursuant to an express provision of this Sublease, is herein called
the "Sublease Term."
4. RENT
4.1. Subtenant, in consideration of this Sublease agrees to pay to
Sublandlord as rent ("Base Rent") the amounts set forth in SECTION 1.1 hereof.
Base rent is payable in advance and without demand, at Sublandlord's office (or
such other location as Sublandlord shall designate) by check in equal monthly
installments, on the first day of each month during the Sublease Term without
any set-off, off-set, abatement or reduction whatsoever. Subtenant's failure to
receive an invoice from Sublandlord for the rent shall not relieve Subtenant
from its obligation of timely payment hereunder. The Prepaid Base Rent shall be
paid upon Subtenant's execution of this Sublease.
4.2. As used in this Sublease, "Rent' shall mean the Base Rent, the
Operating Expense reimbursements pursuant to SECTION 1.1, and all other monetary
obligations provided for in this Sublease to be paid by Subtenant, all of which
constitute rental in consideration for this Sublease.
4.3. In the event the rent is not paid when due as aforesaid, interest
shall accrue thereon at the lesser of 12% per annum or the maximum rate
permitted by law. In addition, if the rent is not paid by the tenth day of any
given month, Subtenant shall pay as a penalty to Sublandlord an additional
amount equal to five percent (5%) of the rent which is due, but not less than
$100.
5. ASSIGNMENT OR UNDERLETTING
5.1. Subtenant shall not (a) assign this Sublease, nor (b) permit this
Sublease to be
3
<PAGE> 4
assigned by operation of law or otherwise, nor (c) underlet all
or any desk space therein to be occupied by any person(s), without first
obtaining Overlandlord's consent and all other required consents to such
assignment or subletting as set forth in and pursuant to the Overlease.
Notwithstanding anything hereinbefore contained in SECTION 5.1 hereof,
in the event Subtenant desires Sublandlord's consent to an assignment of this
Sublease or an underletting of all of the Premises, Subtenant by notice in
writing (a) shall notify Sublandlord of the name of the proposed assignee or
undertenant, furnish such information as to the proposed assignee's or
undertenant's financial responsibility and standing as Sublandlord may require,
and advise Sublandlord of the covenants, agreements, terms, provisions and
conditions contained in the proposed assignment or underlease and (b) shall
offer to vacate the Premises and to Surrender the same to Sublandlord as of a
date (hereafter called the "Surrender Date") specified in said offer which shall
be the last day of any calendar month during the term hereof, provided, however,
that the Surrender Date shall not be earlier than the date occurring 120 days
after the giving of such notice nor be later than the effective date of the
proposed assignment or the commencement date of the term of the proposed
underlease. Sublandlord may accept such offer by notice to Subtenant given
within 60 days after the receipt of such notice from Subtenant. If Sublandlord
accepts such offer, Subtenant shall surrender to Sublandlord, effective as of
the Surrender Date, all Subtenant's right, title and interest in and to the
entire Premises. If the Premises be so surrendered by Subtenant, this Sublease
shall be canceled and terminated as of the Surrender Date with the same force
and effect as if the Surrender Date were the date hereinbefore specified for the
expiration of the full term of this Sublease.
5.2. In the event Sublandlord does not accept such offer of Subtenant
referred to in SECTION 5.1 hereof, Sublandlord covenants not to unreasonably
withhold its consent to such proposed assignment or underletting by Subtenant of
the Premises to the proposed assignee or undertenant on said covenants,
agreements, terms, provisions and conditions set forth in notice to Sublandlord
referred to in SECTION 5.1 hereof, provided that:
(a) Sublandlord shall have the right, upon five (5) days prior
written notice to Subtenant, to require Subtenant thereafter to
pay to Sublandlord a sum equal to: (i) one half of any rent or
other consideration paid to Subtenant by any undertenant which
is in excess of the fixed annual rent and additional rent then
being paid by Subtenant to Sublandlord pursuant to the terms of
this Sublease, and (ii) any other profit or gain realized by
Subtenant from any such assignment or underletting in
connection with any underletting; all sums payable hereunder by
Subtenant shall be paid to Sublandlord as additional rent
immediately upon receipt thereof by Subtenant and, if requested
by Sublandlord, Subtenant shall promptly enter into a written
agreement with Sublandlord setting forth the amount of
additional rent to be paid to Sublandlord pursuant to this
Section;
(b) There shall be no default by Subtenant under any of the
terms, covenants
4
<PAGE> 5
and conditions of this Sublease at the time that Sublandlord's
consent to any such assignment or underletting is requested and
on the effective date of the assignment or the proposed
underlease;
(c) Subtenant shall reimburse Sublandlord for any reasonable
expenses that may be incurred by Sublandlord in connection with
the proposed assignment or underlease, including without
limitation the reasonable costs of making investigations as to
the acceptability of a proposed assignee or undertenant and
reasonable legal expenses incurred in connection with the
granting of any requested consent to the assignment or
underlease;
(d) Subtenant shall not be relieved of its obligations under
this Sublease in the event of an assignment or subletting.
5.3. Any transfer of this Sublease by merger, consolidation or
liquidation, or any change in the ownership of, or power to
vote, the majority of its outstanding voting stock, shall not
constitute an assignment for the purpose of this Section, so
long as the resulting subtenant has a financial net worth,
determined in accordance with generally accepted accounting
practices, reasonably adequate to satisfy the obligations of
Subtenant under this Sublease.
6. TERMS OF THE OVERLEASE
6.1. Except as herein otherwise expressly provided and except for the
obligation to pay rent and additional rent under the Overlease, all of the
terms, covenants, conditions and provisions in the Overlease are hereby
incorporated in, and made a part of this Sublease, and such rights and
obligations as are contained in the Overlease are hereby imposed upon the
respective parties hereto; the Sublandlord herein being substituted for the
Landlord in the Overlease, and the Subtenant herein being substituted for the
Tenant named in the Overlease; provided, however, that the Sublandlord herein
shall not be liable for any defaults by Overlandlord and, if Overlandlord is not
the fee owner, the owner in fee of the land and Building of which the Premises
are a part; provided however that Sublandlord shall use reasonably diligent
efforts to cooperate with Subtenant in causing Overlandlord to cure its defaults
and to perform its obligations under the Overlease. If the Overlease shall be
terminated for any reason during the term hereof, then and in that event this
Sublease shall thereupon automatically terminate and Sublandlord shall have no
liability to Subtenant by reason thereof. Upon the termination of this Sublease,
whether by forfeiture, lapse of time or otherwise, or upon the termination of
Subtenant's right to possession, Subtenant will at once surrender and deliver up
the Premises in good condition and repair, reasonable wear and tear excepted.
6.2. This Sublease is subject to, and Subtenant accepts this Sublease
subject to, any amendments and supplements to the Overlease hereafter made
between Overlandlord and Sublandlord, provided that any such amendment or
supplement to the Overlease will not prevent
5
<PAGE> 6
or adversely affect the use by Subtenant of the Premises in accordance with the
terms of this Sublease, increase the obligations of Subtenant or decrease its
rights under the Sublease or in any other way materially adversely affect
Subtenant. Sublandlord shall notify Subtenant of any such amendments or
supplements which affect Subtenant.
6.3. This Sublease is subject and subordinate to the Overlease and, to
the same extent as the Overlease is subject and subordinate, to all ground or
underlying leases and to all mortgages which may now or hereafter affect such
leases or the real property of which the Premises are a part and all renewals,
modifications, replacements and extensions of any of the foregoing. This SECTION
6.3 shall be self-operative and no further instrument of subordination shall be
required. To confirm such subordination, Subtenant shall execute promptly any
certificate that Sublandlord may request.
7. CONDITION OF PREMISES
7.1. Subtenant has examined the Premises, is aware of the physical
condition thereof, and agrees to take the same "as is" (unless otherwise
provided in SECTION 15 herein) with the understanding that there shall be no
obligation on the part of Sublandlord to incur any expense whatsoever in
connection with the preparation of the Premises for Subtenant's occupancy
thereof. Any work performed by Subtenant shall be in accordance with the terms
of the Overlease and SECTION 15 herein.
8. USE OF PREMISES
8.1. Subtenant agrees that the Premises shall be occupied only as
executive, administrative and general offices for Subtenant's business.
9. CONSENT OF OVERLANDLORD
9.1. This Sublease is conditioned upon the consent thereto by
Overlandlord which consent shall be evidenced by Overlandlord's signature
appended hereto or a separate consent in the form utilized by Overlandlord for
such purposes. Subtenant shall be solely responsible for any fees or charges
imposed by the Overlandlord in connection with the obtaining of such consent.
Provided Overlandlord's consent does not materially affect the terms of this
Sublease, Subtenant shall immediately execute any documents requested by
Overlandlord in order to obtain Overlandlord's approval.
9.2. Sublandlord makes no representation with respect to obtaining
Overlandlord's approval of this Sublease and, in the event that Overlandlord
notifies Sublandlord that Overlandlord will not give such approval, Sublandlord
will so notify Subtenant and, upon receipt of such notification by Sublandlord
of the disapproval by Overlandlord, this Sublease shall be deemed to be null and
void and without force or effect, and Sublandlord and Subtenant shall have no
further obligations or liabilities to the other with respect to this Sublease.
9.3. Except as otherwise specifically provided herein, wherever in this
Sublease
6
<PAGE> 7
Subtenant is required to obtain Sublandlord's consent or approval, Subtenant
understands that Sublandlord may be required to first obtain the consent or
approval of Overlandlord. If Overlandlord should refuse such consent or approval
in spite of Sublandlord's reasonably diligent efforts to obtain such consent or
approval, Sublandlord shall be released of any obligation to grant its consent
or approval whether or not Overlandlord's refusal, in Subtenant's opinion, is
arbitrary or unreasonable.
10. DEFAULT
10.1. Subtenant acknowledges that the services to be rendered to the
Premises are to be rendered by Overlandlord. Anything in this Sublease to the
contrary notwithstanding, if there exists a breach by Sublandlord of any of its
obligations under this Sublease because of a corresponding breach by
Overlandlord under the Overlease of its obligations under the Overlease, then
and in such event, Subtenant's sole remedy against Sublandlord in the event of
any breach of obligations under this Sublease shall be the right to pursue a
claim in the name of Sublandlord against Overlandlord, and Sublandlord agrees
that it will, at Subtenant's expense, cooperate with Subtenant in the pursuit of
such claim.
10.2. Anything contained in any provisions of this Sublease to the
contrary notwithstanding, Subtenant agrees, with respect to the Premises, to
comply with and remedy any default claimed by Overlandlord and caused by
Subtenant, within the period allowed to Sublandlord as tenant under the
Overlease, even if such time period is shorter than the period otherwise allowed
in the Overlease, due to the fact that notice of default from Sublandlord to
Subtenant is given after the corresponding notice of default from Overlandlord.
Sublandlord agrees to forward promptly to Subtenant by facsimile, upon receipt
thereof by Sublandlord, a copy of each notice of default received by Sublandlord
in its capacity as tenant under the Overlease. Subtenant agrees to forward
promptly to Sublandlord by facsimile, upon receipt thereof, copies of any
notices received by Subtenant with respect to the Premises from Overlandlord or
from any governmental authorities.
10.3. If and whenever there shall occur any event of default of this
Sublease, which Subtenant fails to cure after ten (10) days notice of default in
the event of a monetary default and thirty (30) days notice in the event of a
non-monetary default, Sublandlord may, at Sublandlord's option, in addition to
any other remedy or right given under the Overlease or by law or equity, do any
one or more of the following:
(a) Terminate this Sublease without notice to Subtenant, in
which event Subtenant shall immediately surrender possession of
the Premises to Sublandlord;
(b) Terminate Subtenant's right to possession of the Premises
under this Sublease without terminating the Sublease itself, by
written notice to Subtenant, in which event Subtenant shall
immediately surrender possession of the Premises to Sublandlord;
7
<PAGE> 8
(c) Enter upon and take possession of the Premises and expel or
remove Subtenant and any other occupant therefrom, with or
without having terminated this Sublease;
(d) Alter locks and other security devices at the Premises with
or without having terminated this Sublease or Subtenant's right
to possession under the Sublease;
(e) Enter upon the Premises, and do whatever Subtenant is
obligated to do under the terms of this Sublease; and Subtenant
agrees to reimburse Sublandlord on demand for any direct or
indirect expenses which Sublandlord or Overlandlord may incur in
thus effecting compliance with Subtenant's obligations under
this Sublease, and Subtenant further agrees that Sublandlord
shall not be liable for any damages resulting to Subtenant from
such action.
10.4. It is hereby expressly stipulated by Sublandlord and Subtenant
that any of the above listed actions including, without limitation, termination
of this Sublease, termination of Subtenant's right to possession, and re-entry
by Sublandlord, will not affect the obligations of Subtenant for the unexpired
Sublease Term, including the obligations to pay unaccrued monthly rentals and
other charges provided in this Sublease for the remaining portion of the
Sublease Term. If an event of default occurs, Sublandlord is entitled to seek
damages, to seek specific performance, to recover possession of the Premises by
agreement with Subtenant or by an unlawful detainer action, and any other
remedies set forth in the Overlease, or otherwise available to Sublandlord at
law or in equity.
10.5. Exercise by Sublandlord of any one or more remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises by Subtenant, whether by agreement or by operation of
law, it being understood that such surrender can be effected only by the written
agreement of Sublandlord and Subtenant. No lawful exercise of dominion by
Sublandlord over the property of Subtenant or others at the Premises shall be
deemed unauthorized or constitute a conversion, Subtenant hereby consenting,
after any event of default, to any lawful exercise of dominion over Subtenant's
property within the Premises. All claims for damages by reason of such re-entry
and/or repossession and/or alteration of locks or other security devices
pursuant to a judgment obtained in an unlawful detainer action are hereby
waived, as are all claims for damages by reason of any distress warrant,
forcible detainer proceedings, sequestration proceedings or other legal process.
11. SUBLANDLORD REPRESENTATION
11.1. Sublandlord represents and warrants (a) that it is the holder of
the interest of the tenant under the Overlease, and (b) that the Overlease is in
full force and effect, and (c) that Sublandlord will pay all Base Rent and
Additional Rent owed by it to Overlandlord under the Overlease in a timely
manner.
8
<PAGE> 9
12. BROKERS
12.1. Subtenant covenants, represents and warrants that Subtenant has
had no dealings or communications with any broker or agent in connection with
the consummation of this Sublease other than those set forth in SECTION 1.1
hereof, and Subtenant covenants and agrees to pay, hold harmless and indemnify
Sublandlord from and against any and all cost, expense (including reasonable
attorneys' fees) or liability for any compensation, commissions or charges
claimed by any broker or agent other than such brokers with respect to this
Sublease or the negotiation thereof. Sublandlord shall pay all fees and
commissions owed to Cushman & Wakefield and to Martin Smith, Inc.
13. OPERATING EXPENSES/TAXES
13.1. All charges for standard Operating Expenses and Property Taxes, as
defined in the Overlease, incurred during normal business hours for the Base
Year set forth in Subsection 1.1(o) hereof shall be included in the rent paid
herein. Any additional charges attributable to increases in operating expenses
and taxes above Base Year amounts and charged by Overlandlord shall be paid by
Subtenant to Sublandlord as additional rent upon receipt of an invoice for such
charges.
14. ELECTRIC CHARGE
14.1. All charges for standard electric incurred during normal business
hours are included. Any additional charges will be paid by Subtenant.
15. ALTERATIONS
15.1. In the event Subtenant is permitted to perform alterations in the
Premises hereunder, Subtenant may make no changes, alterations, additions,
improvements or decorations in, to or about the Premises without submitting
detailed plans and construction schedules to Overlandlord and Sublandlord and
receiving Overlandlord's prior written consent to such plans. Subtenant shall
make no changes, alterations, additions, improvements or decorations which would
result in Overlandlord charging Sublandlord for the cost of same, including any
removal costs associated therewith and Subtenant shall comply with all laws and
regulations relating to such construction including, but not limited to, receipt
of certificates of occupancy, permits and ADA requirements, and shall be
responsible for all costs associated therewith. Sublandlord may impose
reasonable guidelines as may be necessary to protect its occupancy and rights
provided in the Overlease, including placing reasonable restrictions on times
when certain types of work may be performed in order to prevent undue intrusion
and noise to Sublandlord or other tenants in the Premises.
16. SECURITY DEPOSIT
16.1. As security for the faithful performance and observance by
Subtenant of the terms, provisions, covenants and conditions of this Sublease,
Subtenant is simultaneously herewith delivering to Sublandlord's parent
corporation, Computer Associates International, Inc., a check in the amount set
forth in SECTION 1.1. The security deposit will be held by Computer
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Associates International, Inc. in an interest bearing account. After September,
1996, the monthly rent will be drawn by Sublandlord from the security deposit in
lieu of Subtenant's payments, until July 31, 1997. Rent for August, 1998 shall
be drawn from the security deposit. The last month of rent will remain in the
account and PROGRESSIVE NETWORK SUBLEASE as of March 18, 1996 will be applied
towards the monthly rent for the last month of the Sublease Term or earlier
termination. The security deposit shall bear 6% interest, which interest shall
be remitted to Subtenant at the expiration or earlier termination of this
Sublease, less any amounts applied to cure Subtenant's defaults.
16.2. In the event Subtenant defaults in respect of any of the terms,
provisions, covenants and conditions of this Sublease, including, but not
limited to, the payment of annual fixed rent and additional rent, Sublandlord
may use, apply or retain the whole or any part of the security so deposited to
the extent required for the payment of any annual fixed rent and additional rent
or any other sum as to which Subtenant is in default or for any sum which
Sublandlord may expend or may be required to expend by reason of Subtenant's
default in respect of any of the terms, provisions, covenants, and conditions of
this Sublease, including, but not limited to, any damages or deficiency accrued
before or after summary proceedings or other re-entry by Landlord.
16.3. In the event that Subtenant defaults in respect of any of the
terms, provisions, covenants and conditions of the Sublease and Sublandlord
utilizes all or any part of the security but does not terminate this Sublease as
provided herein, Sublandlord may in addition to exercising its rights as
provided in SECTION 16.2, retain the unapplied and unused balance of the
principal amount of the security as security for the faithful performance and
observance by Subtenant thereafter of the terms, provisions and conditions of
this Sublease and may use, apply or retain the whole or any part of said balance
to the extent required for payment of rent, additional rent, or any other sum as
to which Subtenant is in default or for any sum which Sublandlord may expend or
be required to expend by reason of Subtenant's default in respect of any of the
terms, covenants, and conditions of this Sublease. In the event Sublandlord
applies or retains any portion or all of the security delivered hereunder,
Subtenant shall forthwith restore the amount so applied or retained so that at
all times the amount deposited shall be no less than the security required by
SECTION 16.2.
16.4. Provided Subtenant is not then in default of any of the terms,
provisions, covenants and conditions of this Sublease, the security deposit,
less any amounts paid to Sublandlord as provided in Sections 16.1, 16.2 and
16.3, shall be returned to Subtenant (i) after the Sublease Expiration Date and
after delivery of entire possession of the Premises to Overlandlord, or (ii)
upon Sublandlord's receipt of an equivalent amount of security from an assignee
or undertenant pursuant to an assignment or underletting permitted by SECTION 5
of this Sublease, or (iii) upon the termination of this Sublease pursuant to
Article 22 hereof. In the event of an assignment of the Overlease by
Sublandlord, Sublandlord shall have the right to transfer any interest it may
have in the security to the assignee and Sublandlord shall thereupon be released
by Subtenant from all liability for the return of such security, provided such
assignee
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assumes any responsibilities of Sublandlord with respect to such security, and
Subtenant agrees to look solely to the new sublandlord for the return of said
security; and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new sublandlord. Subtenant
further covenants that it will not assign or encumber or attempt to assign or
encumber (except to an assignee of Subtenant's interest in this Sublease) the
monies deposited herein as security and that neither Sublandlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
17. QUIET ENJOYMENT
17.1. So long as Subtenant pays all of the rent and additional rent due
under this Sublease and performs all of Subtenant's other obligations hereunder,
Subtenant shall peacefully and quietly have, hold and enjoy the Premises
subject, however, to the terms, provisions and obligations of this Sublease and
the Overlease.
17.2. In the event Subtenant does not completely vacate the Premises by
the Sublease Expiration Date or earlier termination of this Sublease, Subtenant
shall indemnify and hold harmless Sublandlord in respect of any and all holdover
charges or penalties imposed under the Overlease upon Sublandlord in respect of
the entire Leased Space and in respect of any and all costs, liabilities or
expenses (including attorneys fees) suffered by Sublandlord in respect of same,
as and when such costs, liabilities or expenses are incurred. In this regard,
Subtenant shall, if requested by Sublandlord, in Sublandlord's sole discretion,
defend Sublandlord against any action or proceeding brought against Sublandlord
which arises out of said holdover.
18. INTENTIONALLY OMITTED
19. NO WAIVER
19.1. The failure of Sublandlord to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of this Sublease
or of any of the Rules and Regulations set forth or hereafter adopted by
Sublandlord, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. The receipt by Sublandlord of rent with knowledge of the breach of
any covenant of this Sublease shall not be deemed a waiver of such breach and no
provision of this Sublease shall be deemed to have been waived by Sublandlord
unless such waiver be in writing signed by Sublandlord. No payment by Subtenant
or receipt by Sublandlord of a lesser amount than the monthly rent herein
stipulated shall be deemed to be other than on account of the earliest
stipulated base rent, additional rent or other charge, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Sublandlord may accept such check
or payment without prejudice to Sublandlord's right to recover the balance of
such base rent, additional rent or other charge, or pursue any other remedy in
this Sublease provided. No act or thing done by Sublandlord or Sublandlord's
agents during the term hereby demised shall be deemed an acceptance of a
surrender of the demised premises and no agreement to accept such surrender
shall be valid
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unless in writing signed by Sublandlord. No employee of Sublandlord or
Sublandlord's agent shall have any power to accept the keys of the demised
premises prior to the termination of the Sublease and the delivery of keys to
any such agent or employee shall not operate as a termination of the Sublease or
a surrender of the demised premises.
20. NOTICES
20.1. Any notice, demand or communication which, under the terms of this
Sublease or under any statute or municipal regulation must or may be given or
made by the parties hereto, shall be in writing and given or made by mailing the
same by registered or certified mail, return receipt requested to the address
and person designated in Section 1.1 (a) and (c) herein.
Either party, however, may designate such new or other address to which
such notices, demands or communications thereafter shall be given, made or
mailed by notice (given in the manner prescribed herein). Any such notice,
demand or communication shall be deemed given or served, as the case may be, on
the date of the posting thereof. In the event Subtenant's address is not set
forth above, notice to Subtenant shall be deemed sufficient if sent to the
Premises.
21. FURNITURE
21.1. Subtenant shall be entitled to use the existing furniture located
in the Premises as of the Sublease Date (the "Furniture") at no additional
charge. At the end of the Sublease Term, Subtenant shall purchase the Furniture
from Sublandlord by paying to Sublandlord the sum of $100.00, at which time
title to the Furniture, in its "as is" condition, will be transferred to
Subtenant.
22. TERMINATION RIGHT
22.1. Subtenant may, provided Subtenant is not then in default under
this Sublease, terminate this Sublease in accordance with the terms and payment
of the fees set forth in paragraph 1 of the First Amendment to Lease Agreement
between Overlandlord and Landlord, provided that Subtenant gives Sublandlord
nine (9) months plus ten (10) business days prior written notice of such
termination, notwithstanding the nine (9) month provision referenced therein.
23. MISCELLANEOUS
23.1. Where applicable, Subtenant shall be responsible for all
additional costs incurred as a result of this Sublease including, but not
limited to, security cards, keys and parking cards.
23.2. This Sublease may not be changed orally, but only by an agreement
in writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
23.3. This Sublease shall not be binding upon Sublandlord unless and
until it is signed
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by Sublandlord and delivered to Subtenant. This SECTION 21.3 shall not be deemed
to modify the provisions of SECTION 9 hereof.
23.4. This Sublease constitutes the entire agreement between the parties
and all representations and understandings have been merged herein.
23.5. This Sublease shall inure to the benefit of all of the parties
hereto, their successors and (subject to the provisions hereof) their assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
of the day and year first above written.
ATTEST: LEGENT CORPORATION, Sublandlord
/s/ [SIG] By /s/ PETER A. SCHWARTZ
- ------------------------------------ ---------------------------------
ATTEST: PROGRESSIVE NETWORKS, INC., Subtenant
/s/ JUDITH HOYLE By /s/ ANDREW S. SHARPLESS
- ------------------------------------ ---------------------------------
ACKNOWLEDGED AND AGREED:
Wright Runstad Properties L.P., Overlandlord
By_____________________________
STATE OF NEW YORK
COUNTY OF SUFFOLK SUFFOLK ,ss:
---------------
BEFORE ME, a Notary Public in and for the said State and County,
personally appeared PETER A. SCHWARTZ, who acknowledged the signing of the
------------------
foregoing document and that the same is the free act and deed of such signatures
(and if a corporation or a partnership and the officers or partners signing the
same) for the uses and purposes therein mentioned.
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IN WITNESS WHEREOF, I have hereunto signed my name and affixed my
official seal on the 18th day of March, 1996.
---- ------
/s/ ANNE M. JONES
--------------------------------------------
Notary Public
My Commission Expires_______________________
[Notary Seal]
STATE OF WASHINGTON
COUNTY OF __________, ss:
BEFORE ME, a Notary Public in and for the said State and County,
personally appeared ____________________, who acknowledged the signing of the
foregoing document and that the same is the free act and deed of such signatures
(and if a corporation or a partnership and the officers or partners signing the
same) for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed my
official seal on the ____ day ____________, of 1996.
--------------------------------------------
Notary Public
My Commission Expires_______________________
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Consent By Lessor
The undersigned, the Overlandlord, joins in the execution of this
Sublease solely to evidence its consent to the subletting of the
Premises described herein, as such consent is required pursuant to the
Overlease. However, by this consent Overlandlord does not approve or
disapprove this Sublease, and neither the execution of this Sublease nor
anything done pursuant to the provisions thereof shall be deemed or
construed to modify the Overlease. It is understood that Legent
Corporation remains liable for its obligations under the Overlease. This
consent shall not be deemed to increase the obligations or liabilities
of the Overlandlord, nor to reduce the Overlandlord's rights and
remedies under the Overlease. This consent shall not be deemed a consent
to any other or further subletting.
LANDLORD: WRIGHT RUNSTAD PROPERTIES L.P.
a Delaware limited partnership
By: WRIGHT RUNSTAD ASSET MANAGEMENT L.P.,
a Washington limited partnership
By: WRAM Inc.
a Washington corporation
By: /s/ DOUGLAS E. NORBERG
-----------------------------------
Its President
------------------------------
LANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that I know or have satisfactory evidence that Douglas
-------
E. Norberg is the person who appeared before me, and said person acknowledged
- ----------
that he signed this instrument, on oath stated that he was authorized to execute
the instrument and acknowledged it as the President of WRAM Inc., a corporation,
---------
to me known to be the general partner of WRIGHT RUNSTAD ASSET MANAGEMENT L.P., a
limited partnership, to me known to be the general partner of WRIGHT RUNSTAD
PROPERTIES L.P., the limited partnership that executed the within and foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation and partnerships for the uses and purposes
therein mentioned, and on oath stated that said individual was authorized to
execute said instrument.
WITNESS my hand and official seal this 21st day of March, 1996.
---- ----- ----
Signature /s/ JUDITH K. HOYLE
----------------------------------------
Printed Name Judith K. Hoyle
-------------------------------------
Notary public in and for the State of Washington,
residing at Seattle
--------------------------------------
My appointment expires 11-6-99
---------------------------
<PAGE> 1
Exhibit 10.9
ANTENNA SITE LICENSE AGREEMENT
This License Agreement (the "Agreement") is made as of this 12th day of August,
1997, between Wright Runstad & Company , a Washington corporation, with its
principal office at 1111 Third Avenue, Suite #2730, Seattle, Washington 98101
("Licensor"), and Progressive Networks, a Washington corporation, with its
principle office at 1111 Third Avenue, Suite
2900, ("Licensee").
RECITALS
A. Licensor is the owner of the building commonly known as 1111 Third
Avenue Building, located at the address of 1111 Third Avenue, Seattle,
Washington, and more particularly described as Lots 2,3, 6 and 7: Block 14, C.D.
Boren's Addition, City of Seattle, King County, State of Washington in the
records of King County, State of Washington. (the "Building").
B. Licensee represents and warrants to Licensor that Licensee is
authorized to operate a rooftop antenna and associated equipment for
telecommunications purposes from the Building under the conditions described
herein.
C. Licensee desires access to, and limited use of, specified portions of
the roof and interior spaces of the Building for the purpose of installing,
maintaining, and operating the roof-mounted antenna system that is specified
below and that can be briefly described as, and is further detailed in Exhibit
G, attached hereto and incorporated by reference:
C-band satellite receiving system to provide reception of video and audio
signals for the purpose of enabling live re-transmission of those signals over
the internet.
This system shall consist solely of:
i) antenna equipment and related cabling elements with the size,
engineering structure, broadcast frequencies, and operating characteristics
specified in Exhibit A ("Antenna Characteristics") and with the physical space
and access requirements specified in Exhibit B ("Rooftop Plan"),
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ii) related cabling systems with the physical, bandwidth, and signal
transfer characteristics specified in Exhibit C ("Pathway Needs"), and
D. Licensor is the Landlord and Licensee is the Tenant pursuant to that
Lease Agreement (the "Lease") dated March 4, 1996 for certain premises located
in the Building.
This system is collectively referred to herein as the "Antenna Facilities" and
shall consist solely of those elements specified in Exhibits A, B, C, and D,
attached hereto and made a part hereof.
NOW THEREFORE, in consideration of the mutual covenants herein expressed and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Licensee and Licensor agree as follows:
1. Grant
(a) Licensor hereby grants permission (the "License") to Licensee
to install, maintain, operate and remove the Antenna Facilities (at its sole
expense and risk) upon the Rooftop Space, in the Pathway to be designated by
Licensor, and in the Equipment Room.
(b) The License granted herein is not exclusive. Licensor hereby
reserves the right to grant, renew or extend similar licenses to others.
(c) Licensor and Licensee acknowledge and agree that the
relationship between them is solely that of independent contractors, and nothing
herein shall be construed to constitute the parties as employer/employee,
partners, joint ventures, co-owners, or otherwise as participants in a joint or
common undertaking. Neither party, nor its employees, agents, or
representatives, shall have any right, power or authority to act or create any
obligation, express or implied, on behalf of the other. Licensee hereby accepts
and assumes full and exclusive liability for, and shall hold Licensor harmless
from, the Payment of all contributions required under state and federal law
providing for state and federal payroll taxes or contributions for unemployment
insurance or old age pensions, or annuities which are measured by wages,
salaries, or other remuneration paid to Licensee or by Licensee to its employees
for any and all activities in connection with this Agreement.
(d) Licensee's Antenna Equipment is to be installed, maintained,
operated and removed by Licensee, in and from the Rooftop Spaces, the Pathway,
and the Equipment Room, as described in Exhibits A, B, C and D, attached hereto.
Licensor shall not be liable for damage to Licensee's Antenna Equipment or for
theft, misappropriation or loss thereof, unless due to the negligence or willful
misconduct of Licensor, its employees or agents.
(e) Licensor shall have the absolute right to limit the type,
size and location of Licensee's future Antenna Equipment located in or on the
Building, and may, at Licensor's
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expense, relocate Licensee's Antenna Equipment or require Licensee to relocate
Licensee's Antenna Equipment in the Building or upon the rooftop from time to
time during the term of this Agreement in its sole, reasonable discretion.
Should such a request be made, Licensor agrees to allow Licensee reasonable
time, not to exceed ninety (90) days for such relocation, or one hundred twenty
(120) days if begun within ninety (90) days but not yet completed within ninety
(90) days. Licensor shall allow Licensee to perform a standard cut-over
procedure, if required by said relocation, which will insure that the relocated
equipment is operational for service prior to discontinuing service from old
service location.
(f) Licensor shall provide approximately 515.5 square feet of
floor space upon the rooftop in the location designated on Appendix B (Rooftop
Plan) and shall provide physical access to that space to the degree specified as
necessary on Appendix B.
(g) Licensor shall provide Licensee with access to, and use of,
riser shafts, and conduits (the "Pathway") to the degree necessary to install
and maintain the cabling systems designated in Exhibit C (Pathway Needs).
(h) Licensee is expressly forbidden to use its equipment located
within the Building to program or control the operations of any other antenna
located upon other properties without the express written permission of the
Licensor. Additional fees may be required, as agreed to between the parties, for
using Licensee's Antenna Facilities as a control point for other properties
outside the Building.
(i) Licensor makes no warranty or representation that the
Rooftop, the Pathways within the Building, and the Equipment Room are suitable
for the Licensee's use, it being assumed that Licensee has satisfied itself
thereof. Licensee has inspected the Rooftop, the Pathways within the Building
and the Equipment Room and accepts the same "as is" and agrees that Licensor is
under no obligation to perform any work or provide any materials to prepare the
Equipment Room or the Building for Licensee.
2. Fees
Licensee shall pay to Licensor according to the following equipment
schedule:
Equipment: (4) 12-foot diameter dish $840.00 mo. (each)
(1) 10-foot diameter dish $700.00 mo.
(1) 1.2 m dish $400.00 mo.
(a) Base License Fee: Licensee shall pay to Licensor an annual fee of
Fifty Three Thousand Five Hundred Twenty, ($53,520.00), each year of the
agreement, adjusted annually on the commencement date by the percentage increase
in the Consumer Price Index (CPI) over the rate in the prior year, but which
increase shall not be less than 5% nor more than 10% in any given year. The
annual fee shall be payable in advance in twelve (12) monthly payments,
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or part thereof, commencing on the date herein shown as the date of this
Agreement. All payments shall be made to Licensor at the address given in
Section 18 of this Agreement. Licensor and Licensee agree to use their good
faith efforts to refrain from disclosing the financial terms of this agreement.
Either party may disclose the financial terms of this agreement to persons other
than those employees, consultants and advisors when required by law, regulation,
or prior agreement or for purposes of a stock sale or asset sale. No recourse,
action or penalty shall be associated with the good faith effort of
non-disclosure herein embodied.
(b) Modified License Fee: The Base License Fee set out in this section
is based upon the type and quantity of service currently expected to be provided
by the Antenna Facilities described in Exhibits A and C, including the
frequencies, bandwidth, and compression technologies designated in that Exhibits
A and C. Changes in the type and quantity of service provided by the Antenna
Facilities may increase the value of the Antenna Facilities in the future. To
the degree that such changes in type and quantity of service are material,
Licensor and Licensee understand and mutually agree that such an increase in the
expected value of the Antenna Facilities may be reflected in an adjustment to
the Base License Fee. Such an adjustment may be defined at the time at which
Licensor seeks Licensee's approval for modifications to the Antenna Facilities
described in Attachments A or C.
3. Term
The term hereof shall commence as of the day first written above
("Commencement Date"). The term hereof shall be coterminous with the Main Lease
between Progressive Networks, Inc. and Wright Runstad & Company, beginning on
the Commencement Date, subject to extension or earlier termination in accordance
with the provisions hereof.
The Licensee reserves the right to cancel this Agreement at any
time upon giving ninety (90) days written notice to the Licensor. If Licensee
elects to remove any or all of the Antenna Facilities equipment, the annual fee
will be reduced by the corresponding fee as defined in this agreement.
4. Use
Licensee shall use the Antenna Facilities solely for the purposes
of providing the services detailed in Exhibit A of this Agreement and which it
has received all necessary approvals from either the local public utility
governing body, or the Federal Communications Commission (the "FCC"). For these
sole purposes License, subject to the following two sentences, grants Licensor
the right to install, maintain, operate, replace, and remove equipment including
cabinets, racks, conduits, and/or cables, and antennas.
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5. Electric Utilities
Licensee shall pay the costs associated with installation of a
separate electrical panel and meter for the Antenna Facilities and shall be
responsible for the electrical costs attributable to such Facilities. Licensor
shall use reasonable efforts to notify Licensee in advance of any planned
utility outages which may interfere with Licensee's use. Licensee further agrees
that the Licensor has no obligation or responsibility to provide emergency or
"backup" power to Licensee, and Licensee acknowledges that any such provision of
emergency or "backup" power shall be the sole responsibility of Licensee.
6. Construction
(a) Prior to the commencement of any work, Licensee shall, at its
sole cost and expense, prepare and deliver to Licensor working drawings, plans
and specifications (Exhibits A, B, C, and D) detailing the location and size of
the Licensee's Antenna Facilities and specifically describing the proposed
construction and work. No work shall commence until Licensor has approved, in
writing, Exhibits A, B, C and D. Such approval will not be unreasonable
withheld, conditioned or delayed. Approval or disapproval and required changes
shall be delivered to Licensee within 20 working days after the receipt of such
plans from Licensee.
(b) Licensee will ensure that the installation, maintenance and
operation of Licensee's Antenna Facilities will not penetrate the rooftop and in
no way damage the Building, interfere with the use of the Building or interfere
with the operation of communications devices by Licensor or by other
pre-existing lessees or licensees of the Licensor. In order to avoid such
interference, Licensee shall, at its own expense, prepare and conduct an
evaluation of the potential for such interference before installing and
operating the Antenna Facilities, and shall submit a copy of such findings to
Licensor within ten days. In addition, following the installation of the Antenna
Facilities, Licensee shall, at its own expense, prepare and conduct an
evaluation of the potential for such interference within ninety-six (96) hours
if requested to do so by Licensor, whether upon Licensor's own behalf or as a
result of concerns expressed by any pre-existing lessees or licensees. Licensor
shall have the right to engage outside consultants to resolve interference
issues arising between Licensees operating equipment on the roof, and between
Licensor's Licensees and off premises operators. Licensor shall have the
absolute right to require all its Licensees to implement any such consultant's
recommendations for resolution of interference problems. If such damage or
interference is occurring, Licensee shall correct the same within seventy-two
(72) hours of receipt of written notice thereof. Licensor reserves the right to
disconnect power to any such Licensee's Equipment which Licensee fails to
correct after proper notification and waiting period.
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(c) At the conclusion of the License term, Licensee agrees, at
its sole cost and expense, if requested by Licensor, to refinish any damaged
surface of the Building that may have been be involved in any or all parts of
the installation of the Antenna Facilities proposed hereunder and which have
been damaged by Licensee, or any of its agents, representatives, employees,
contractors, subcontractors, or invitees, excepting damage caused by ordinary
wear and tear or by others.
(d) Licensee warrants that the installation of Licensee's
Equipment shall be in strict compliance with Exhibits A, B, C and D as attached
hereto, or as they may be amended from time to time.
(e) Licensee agrees that installation and construction shall be
performed in a neat, responsible, and workmanlike manner, using generally
accepted construction standards.
(f) Licensee shall obtain, at its sole cost and expense, prior to
construction and work, any necessary federal, state, and municipal permits,
licenses and approvals, copies of which to be delivered to Licensor prior to
commencement of construction and work.
(g) In addition to the commitment not to interfere with
communications equipment set out in sub-section (b) above, Licensee shall not
disrupt, adversely affect or interfere with other providers of services in the
Building or with any occupant's use and enjoyment of it's leased or licensed
premises or the common areas of the Building. Licensee shall correct such
interference within three (3) days after receiving written notice of such
interference and after such interference has been positively identified as being
caused by Licensee's agents or its Antenna Facilities.
(h) Licensee shall have the right to amend Exhibits A, C and D,
from time to time, with the express written consent of Licensor for the purpose
of serving additional occupants of the building. Such consent shall not be
unreasonably withheld, conditioned or delayed by Licensor; however, the parties
recognize that, in the event of changes that will materially increase the value
of the Antenna Facilities, such consent may be withheld pending agreement upon
the terms of modifications to the Base License Fee, as contemplated in Section
2(b) above. Following Licensor's consent to amendment of Exhibits A, C and D,
all terms and conditions of this Construction Section (Section 6) shall apply.
7. Licensee's Covenants
(a) Licensee agrees to maintain Licensee's Antenna Facilities in
proper operating condition and to maintain the same in satisfactory condition as
to safety. Cost of maintenance and repair to Licensor's Equipment Room, and
other portions of the Building shall be borne by Licensor unless damage thereto
is caused by Licensee, in which case Licensor shall repair such damage and
Licensee shall reimburse Licensor of all reasonable costs and expenses incurred
in such repair.
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(b) Licensee agrees to comply with all applicable Rules and
Regulations of the Federal Communications Commission and applicable codes and
regulations of the city, county and state pertaining to the installation and
operation of Licensee's Antenna Facilities. Licensee further agrees to comply
with and all applicable health and safety rules specified for radio frequency
radiation by any of the above mentioned authorities, and shall placard for
safety warnings wherever so applicable.
(c) Licensee understands and agrees that the structural integrity
of the load bearing capability of the roof of the Building, the moisture
resistance of the Building membrane, and the ability of Licensor to use all
parts of the roof of the building are of critical importance to Licensor.
Licensee therefore agrees that the specifications and plans that it will provide
shall be of sufficient specificity to ensure that these concerns are protected,
and Licensee further agrees and commits that the actual installation of
Licensee's Antenna Facilities shall be in accordance with those specifications.
Licensee agrees there shall be no rooftop penetrations, as specified by the
attached plans as approved by Licensor. Installation is subject to approval by
Licensor's structural engineer regarding load bearing capacities and other
structural parameters of the weight and wind load of Licensee's equipment and
facilities.
(d) Licensee, through its designated and approved employees and
contractors, shall be solely responsible for the maintenance and care of the
Antenna Facilities and shall maintain the Antenna Facilities in a clean,
sanitary and safe condition and in good repair and free of any defects at all
times during this Lease. Licensee, at its sole expense and risk, shall ensure
that a physical inspection of the rooftop portion of the Antenna Facilities
occurs at intervals of no more than 12 months and that this inspection includes
a survey of structural integrity and a review and correction of any loose bolts,
fittings or other appurtenances. Licensee shall provide a written certification
of such inspections to Licensor not more than 10 days following each such
inspection. In the absence of such a certification, Licensor shall have the
right (but not the obligation) to conduct or arrange for such an inspection and
corrective action and to charge Licensee for such costs.
(e) Licensee further understands and agrees that the aesthetic
characteristics of the Building are of significant commercial importance to
Licensor and, therefore, commits to ensuring that the installed appearance of
the Antenna Facilities will be consistent with the specifications set forth in
Exhibits A and B. Licensee further agrees that, at no time during the period of
this License, will it use or permit the use of its Antenna Facilities in ways
that are inconsistent with those plans (as they may from time to time be amended
with the consent of Licensor) or for the display of advertising or other visual
displays with significant aesthetic impacts.
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8. Access
(a) Licensor agrees that Licensee's authorized representatives
shall have access to the Antenna Facilities at all times (with prior
notifications as per (b) below), for the purposes of installing, maintaining,
operating and repairing Licensee's Equipment, and Licensor further agrees to
give Licensee ingress and egress to the Building Spaces during the term of this
Agreement, including use of an elevator. It is agreed, however, that only
authorized engineers, employees or properly authorized contractor,
subcontractor, and agents of Licensee, other authorized regulatory inspectors,
or persons under their direct supervision and control will be permitted to enter
the Building Spaces, and only upon conditions set forth herein.
(b) Prior to any entry upon the Building Spaces, Licensee shall
submit a written request to Licensor, substantially in the form attached hereto
as Exhibit C, stating the name and company of the person(s) who will enter the
Building Spaces, the reason for entry, and the expected duration of the visit.
(c) Permission for all entries upon the Building Spaces
(including entries for maintenance and/or installation) must be received from
Licensor in advance, unless such entry is of an emergency nature and permission
cannot be obtained in a timely fashion. Licensor shall not be obligated to
provide elevator service during emergency situations and under emergency
conditions, which emergency situations and conditions shall be reasonably
determined by Licensor.
(d) Licensee agrees to be responsible for any damage caused to
the Building Spaces, Equipment Rooms, Pathways and/or any other property owned
by Licensor or any lessee or licensee of Licensor which may be caused by
Licensee or any of its agents or representatives. Licensee further agrees to
keep to a minimum the number of personnel visiting the Building and the
frequency of the visits.
(e) Licensee agrees to comply with all Building rules (Exhibit
F), as adopted and altered by Licensor from time to time, and will cause its
agents, employees, contractors, invitees and visitors to do so.
(f) Licensor shall have the right to enter Licensee's Rooftop and
Equipment Room during any emergency which requires entry to Licensee's space.
Licensor shall have the right to enter Licensee's Rooftop and Equipment Room at
other such times as Licensor may require, provided however, Licensor will try,
but not be obligated, to provide prior notice upon such non-emergency entrance
into Licensee's Rooftop and Equipment Room.
8
<PAGE> 9
9. Insurance: As agreed to in main lease.
(a) Licensee shall maintain in force all required workers'
compensation or other similar insurance pursuant to all applicable state and
local statutes.
10. Indemnification: As agreed to in main lease.
Licensee shall exercise due care to avoid any action that may cause damage to
any part of the Building or Licensor's other tenants.
11. Release and Waiver of Subrogation Rights
To the extent allowable under the laws and regulations governing
the writing of insurance within the state in which the Building is located,
Licensor and Licensee each release the other and their respective agents and
employees from all liability to each other, or anyone claiming through or under
them, by way of subrogation or otherwise, for any loss or damage to property
caused by or resulting from risks insured against under this Agreement, pursuant
to insurance policies carried by the parties which are in force at the time of
the loss or damage. Licensor and Licensee will each request its insurance
carrier to include in policies provided pursuant to this Agreement an
endorsement recognizing this waiver of subrogation. The waiver of subrogation
endorsement need not be obtained if it incurs an additional cost for the
affected policy, unless following written notice, the other party elects to pay
that additional cost to obtain the waiver of subrogation endorsement. The
provision of this Section 11 shall survive termination of this Agreement.
12. Liens
Licensee shall be responsible for the satisfaction or payment of
any liens for any provider of work, labor, material or services claiming by,
through or under Licensee. Licensee shall also indemnify, hold harmless and
defend Licensor against any such liens, including the reasonable fees of
Licensor's attorneys. Such liens shall be discharged by Licensee within thirty
(30) days after notice of filing thereof by bonding, payment or otherwise,
provided that Licensee may contest, in good faith and by appropriate proceedings
any such liens. The provision of this Section 12 shall survive termination of
this Agreement.
13. Renewal Options
Intentionally deleted.
14. Assignment and Subletting: As agreed to in main lease.
9
<PAGE> 10
15. Events of Default
The following events shall be deemed to be events of default
under this Agreement:
(a) Licensee shall fail to pay any Fees or other sum or money
due hereunder and such failure shall continue for a period of ten (10) days
after receipt of written notification of such failure to pay.
(b) Licensee shall fail to comply with any other provision of
this Agreement, after proper written notification of such failure and such
failure shall continue for a period of thirty (30) days, in which event,
Licensor may, at its option, terminate this Agreement without affecting its
right to sue for any other damages to which Licensor may be entitled at law or
in equity. In any suit or legal proceeding arising out of this Agreement or the
underlying transaction the prevailing party shall be indemnified by the
unsuccessful party for all reasonable expenses and costs incurred in such
proceedings, including attorneys' fees.
(c) Interference caused by Licensee to pre-existing
telecommunications equipment by the installation, operation, maintenance, repair
or removal of Licensee's Antenna Facilities, to the extent that such
interference is not insured in accordance with Section 6(b) above.
(d) Revocation of Licensee's permission to operate any element of
the Antenna Facilities by any governing authority that is authorized by law to
regulate Licensee's operation of such facilities.
(e) The filing or execution or occurrence of a petition in
bankruptcy or other insolvency proceeding by or against Licensee; or an
assignment for the benefit of creditors; or a petition or other proceeding by or
against the Licensee for the appointment of a trustee, receiver or liquidator of
Licensee or of any of the Licensee's property or a proceeding by any
governmental authority for the dissolution or liquidation of Licensee.
(f) Licensor or Licensee shall be in default hereunder in the
event Licensor or Licensee has not begun and pursued with reasonable diligence
the cure of any failure of Licensor or Licensee to meet its obligations
hereunder within thirty (30) days of receipt of written notice from the other
party of the alleged failure to perform, except where other cure periods have
been specifically described.
(g) The non-defaulting party shall have all rights available in
equity or at law.
10
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16. Termination/Remedies
Upon occurrence of an Event of Default the non-defaulting party
shall give written notice to the defaulting party, setting forth the nature of
the Default. With respect to the payment of Fees due hereunder, Licensee shall
have ten (10) days after receipt of written notice to cure the default. With
respect to all other defaults, the defaulting party shall have thirty (30) days
to cure such Default. If the defaulting party shall have failed to commence to
cure the Default within the applicable cure period, the non-defaulting party may
elect to terminate this Agreement, unless the defaulting party is actively and
satisfactorily pursuing such remedy and more time is required, which additional
time shall be granted to the curing party, whereupon the expiration of such time
period Licensee shall forthwith remove its Antenna Facilities from the Building
in a neat and orderly manner; and as of the date of such removal neither party
shall have any claim against the other, except for claims that may have arisen
prior to such termination and except for those provisions which expressly set
forth that they shall survive the termination of this Agreement, this Agreement
shall be deemed terminated and of no force and effect.
17. Notices
Any or all notices or demands by or from Licensor to Licensee, or
Licensee to Licensor, shall be in writing and shall be deemed given upon (a)
personal delivery to the addressee, (b) five (5) days after deposit into United
States mail, postage prepaid, certified mail return receipt requested, or (c)
one day after delivery to United States Postal Service Express Mail or similar
overnight delivery service. Until notified of a different address, as provided
herein, all notices shall be addressed to the parties as follows:
Licensor: Licensee:
Wright Runstad & Company Progressive Networks
1111 Third Avenue 1111 Third Avenue
Suite 2730 Suite 2900
Seattle, Washington 98101 Seattle, Washington 98101
18. No Implied Waiver
The waiver by Licensor of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such terms,
covenant, or condition for any subsequent breach of the same or any other term,
covenant or condition herein contained.
11
<PAGE> 12
19. Subordination
Licensee accepts this License subject and subordinate to any
mortgage, deed of trust or other lien presently existing or hereafter arising
upon the land or the Building and to any renewals, modifications, consolidation,
refinancing, and extensions thereof, but Licensee agrees that any such mortgagee
shall have the right at any time to subordinate such mortgage, deed of trust or
other lien to this license on such terms and subject to such conditions as such
mortgagee may deem appropriate in its discretion. This provision is hereby
declared to be self-operative and no further instrument shall be required to
effect such subordination of this Agreement.
20. Attorney's Fees
In the event of any action filed in relation to this Agreement,
the prevailing party shall be entitled to recover from the other reasonable
attorney's fees and other reasonable court costs.
21. Casualty Damage
As agreed to in main lease.
22. Hazardous Materials
(a) Licensee shall not install any hazardous substance or
material into the Building. In the event that Licensee shall discover, uncover,
disturb or otherwise reveal any existing hazardous materials within the
Building, Licensee shall immediately stop any work in progress and report such
findings to Licensor within twenty-four (24) hours. Licensee shall not conduct
any further work in the reported area without Licensor's written approval.
(b) Licensee shall have three options upon discovery of hazardous
material and cessation of work as described above; (1) Abate or remove, at its
sole cost and expense, and in compliance with any applicable Federal, State, or
Local rules and regulations, the hazardous material within the route or area
needed by Licensee to complete its work, and only with the approval of Licensor;
(2) Reroute its planned installation and Pathway designs to avoid such hazardous
material areas; (3) Terminate this agreement according to the procedure set
forth in Section 17 (Termination/Remedies).
(c) Licensee is hereby released and indemnified from any
responsibility for hazardous materials preexisting within the Building and
undisturbed by Licensee, or brought on the Premises, into the Building, on, in
or under the land upon which the Building is located by any other tenant or by
Licensor.
12
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23. Equipment to Remain Personalty
The Antenna Facilities shall remain personalty ("Personalty") of
the Licensee notwithstanding the fact that it may be affixed or attached to the
Building, and shall, during the term of this agreement, or any extension or
renewal thereof, and upon termination thereof, belong to and be removable by
Licensee.
24. Severability
If any part of any provision of this License or any other
agreement, document or writing given pursuant to or in connection with this
License shall be invalid or unenforceable under applicable law, said part shall
be ineffective to the extent of such invalidity only, and the remaining terms
and conditions shall be interpreted so as to give the greatest effect possible
thereto.
25. Governing Law
The construction, interpretation and performance of this
Agreement shall be in accordance with the laws of the state in which the
Building resides, and exclusive jurisdiction shall lie with the courts of that
state.
26. Survival of Provisions
Any obligation of the parties relating to monies owed, as well as
those provisions relating to limitations on liability and actions, shall survive
termination or expiration of this Agreement.
27. Force Majeure
Whenever a period of time is herein prescribed for the taking of
any action by Licensor or Licensee, Licensor or Licensee shall not be liable or
responsible for, and there shall be excluded from the computation of such period
of time, any delays due to strikes, riots, acts of God, shortages of labor or
materials, war, governmental laws, regulations or restrictions, or any other
cause whatsoever beyond the control of Licensor or Licensee.
28. Recordation
Licensee agrees not to record this License or any memorandum
thereof unless required to do so by law (in which event Licensee agrees to
execute, upon termination of this License, a recordable instrument evidencing
such termination in form reasonably satisfactory to Licensor).
13
<PAGE> 14
29. Entire Agreement
The terms and conditions contained herein supersede all prior
oral or written understandings between the parties and constitute the entire
agreement between them concerning the subject matter of this Agreement. This
Agreement shall not be modified or amended except by writing signed by
authorized representatives of the parties.
30. Headings
The descriptive heading of the several paragraphs of this
Agreement are inserted for convenience and ease of reference only and do not
constitute part of this Agreement.
14
<PAGE> 15
IN WITNESS WHEREOF, Licensor and Licensee have executed this License in multiple
original counterparts as of the day and year first above written.
LICENSOR: Wright Runstad Properties
Limited Partnership, Owner
By: Wright Runstad & Co.
By: PATRICIA DALEO
--------------------------
Patricia Daleo
Title: Property Manager
Date: 9-16-97
LICENSEE: Progressive Networks
By: MARK KLEBANOFF
--------------------------
Name: Mark Klebanoff
Title: Chief Financial Officer
Date: September 16, 1997
15
<PAGE> 1
Exhibit 10.10
AGREEMENT BETWEEN MICROSOFT AND PROGRESSIVE NETWORKS ON MEDIA STREAMING
TECHNOLOGY
This "Agreement" is entered into and effective as of June 17, 1997 (the
"Effective Date") by and between MICROSOFT CORPORATION, a Washington
corporation located at One Microsoft Way, Redmond, WA 98052 ("Microsoft") and
PROGRESSIVE NETWORKS, INC., a Washington corporation located at 1111 Third
Avenue, Suite 2900, Seattle, WA 98101 ("PN").
1. DEFINITIONS
1.1 "Standard Code" means all of the PN and third party code (subject to
Section 2.2) used in PN's current version 4.0 streaming audio and video
client and server products, including, but not limited to, PN Internal
Tools, tools currently provided to third parties at no charge by PN [*]
and including bug-fixes developed by PN during the one year following
delivery by PN, for all operating system platforms, including but not
limited to all versions of Microsoft Windows, all versions of UNIX, the
Macintosh operating system, and the WebTV operating system. Standard
Code shall not include code PN's "Splitter" products or its Player Plus
software, nor shall it include future-developed technology for
advertisement insertion, datatypes other than audio or video (which are
not included in PN Clients or RA/RV Server), distributed networking
(such as Splitter finding), tools which are value-add technology on top
of base level encoders, billing and other value added technology
(technology which is not required for Compatibility purposes). It is
expressly understood that base level encoding and compression
technology is part of the Standard Code; further, thinning and
bandwidth negotiation are part of the Standard Code to the extent such
technologies are used in PN's current version 4.0 streaming audio and
video client and server products. Standard Code does not include added
PN or third party hardware or software technology bundled with Standard
Code as part of short term sales promotions.
1.2 "Internal Tools" means associated documentation, specifications, and
tools developed by either party, necessary to build and create
derivative works of the code.
1.3 [*]
1.4 "Term" means the three (3) year period commencing upon the Effective
Date.
1.5 "Confidential Information" means: (i) any trade secrets relating to
either party's product or service plans, designs, costs, prices and
names, finances, marketing plans, business opportunities, personnel,
research, development or know-how; and (ii) the specific terms and
conditions of this Agreement. "Confidential Information" shall not
include information that: (i) is or becomes generally known or
available, whether by publication, commercial use or otherwise,
without restriction on disclosure and through no fault of the
receiving party; (ii) is known and has been reduced to tangible form
by the receiving party at the time of disclosure and is not subject to
restriction; (iii) is independently developed or learned by the
receiving party without reference to any Confidential Information of
the disclosing party; and (iv) is lawfully obtained from a third party
that has the right to make such disclosure.
1.6 "PN Clients" means PN's RealAudio and RealVideo standard player,
versions 4.0.
1.7 "RA/RV Server" means PN's Easy Start RealAudio/RealVideo server
software version 4.0, with 60 user stream capability.
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<PAGE> 2
1.9 "Compatible" means audio/video client or server streaming software
which interoperates with the PN Clients or the RA/RV Server (including
current versions of the PN Clients and the RA/RV Server as of the date
of a subsequent delivery of Standard Code), respectively, or as the
parties may otherwise mutually agree. For purposes of this Agreement
"interoperates" means the clients and servers of both parties will
operate substantially as well with PN Clients and RA/RV Server
(including current versions of the PN Clients and the RA/RV Server as
of the date of a subsequent delivery of Standard Code) as with its own
products.
2. LICENSE GRANTS
2.1 Non-Exclusive License to Standard Code. PN hereby grants to Microsoft
a non-exclusive, perpetual, [*] worldwide, fully paid-up right and
license to: (i) [*] (ii) reproduce, license, rent, lease, broadcast
publicly display, transmit or otherwise distribute in any medium now
known or hereafter devised (collectively, "Distribute") and have
Distributed, to and by third parties, binary versions of the Standard
Code [*]
The foregoing license grants include a license under any current and
future patents owned or licensable by PN to the extent necessary: (i)
to exercise any license right granted herein; and (ii) to combine the
Standard Code and/or derivative works thereof with any hardware and
software.
2.2 [*]
2.3 Non-Exclusive License to PN Trademarks. PN hereby grants to Microsoft
a non-exclusive, perpetual, irrevocable, worldwide, fully paid- up
right and license to use and sublicense the use of any "PN Marks" for
identification of, or in conjunction with, or as part of Microsoft
products which are
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<PAGE> 3
Compatible. For purposes of this Section 2.3, "PN Marks" means PN
trademarks and related logos for "Real Audio" and "Real Video." If
Microsoft exercises its rights under Section 3.3, the PN Marks will
also include those marks and associated logos which are used in
connection with the applicable versions of the Compatible PN Clients
and RA/RV Server.
PN agrees that it will license use of the PN Marks to third parties
only for use with products that are Compatible. Microsoft may only
sublicense the PN Marks for use in connection with third party
products which are Compatible, and which comply with the PN quality
control guidelines imposed on Microsoft under this Agreement.
Microsoft will use good faith efforts to ensure that its sublicensees
abide by PN's quality control guidelines, and will cooperate with PN
to remedy any violation thereof by its sublicensees.
Microsoft agrees that it will comply with PN's trademark usage
guidelines regarding the style and design of the PN Marks, which PN
will deliver to Microsoft within two (2) weeks of the Effective Date.
Microsoft agrees to cooperate with PN in facilitating PN's reasonable
monitoring and review of the nature and quality of products and
services bearing the PN Marks, and to supply PN with specimens of
Microsoft's use of the PN Marks upon reasonable request Microsoft
understands and agrees that the use of any PN Mark in connection with
this Agreement shall not create any right, title or interest in or to
the use of the PN Marks and that all such use and goodwill associated
with the PN Marks will inure to the benefit of PN. [*]
2.4 [*]
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<PAGE> 4
[*]
2.5 Distribution of RA/RV Server. Until Microsoft distributes a
Compatible server product, Microsoft shall distribute the RA/RV Server
[*] Microsoft's website shall provide cross-links to PN's website for
additional information and support of the RA/RV Server. PN shall be
solely responsible for RA/RV Server end user support and shall have
the discretion to create appropriate support policies for end user
support.
2.6 [*]
2.7 Support. During the Term, each party shall use commercially practical
efforts to:
(a) [*]
(b) Provide consistent points of contact at the program manager
and executive level; and
(c) Provide each other reasonable level of technical support.
PN will receive such information at such quarterly meetings and to the
same extent provided to Microsoft's own internal streaming media
operations.
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<PAGE> 5
3. LICENSE FEE; DELIVERY; CONSULTING
3.1 Initial Delivery. On a date within thirty (30) days of signing this
agreement, such date to be set by Microsoft at its sole discretion, PN
shall make delivery to Microsoft of the Standard Code. At that time,
PN shall deliver to Microsoft PN's latest version of the Standard
Code, including any and all works in progress whether or not such
works have been released by PN. PN shall also provide Microsoft with
six (6) man-months of free consulting help by knowledgeable PN
employee's to train Microsoft with respect to the Standard Code,
including but not limited to how to build and create derivative works
of the Standard Code.
3.2 License Fee. In consideration for the rights and licenses granted
under this Agreement, Microsoft shall pay PN the sum of thirty millon
dollars ($30,000,000). Of this amount, twenty million dollars
($20,000,000) shall be paid [*] and ten million dollars ($10,000,000)
shall be paid [*]
3.3 [*]
3.4 Bug Fixes. PN shall deliver any bug fixes to the Standard Code on a
quarterly basis in the twelve (12) months following the initial [*]
3.5 UNIX Port. Regardless of whether Microsoft exercises its rights to
subsequent deliveries of Standard Code, PN shall deliver to Microsoft
any UNIX port of Microsoft Code which PN makes which PN does not
distribute or ceases to distribute. Such UNIX port shall be
considered licensed royalty-free to Microsoft under the terms of
Section 2.1.
4. PATENT ISSUES
4.1 Patent Covenant. PN covenants not to (a) sue or (b) bring, prosecute,
assist or participate in any judicial, administrative or other
proceedings of any kind against Microsoft or its licensees (including
but not limited to OEMs and other distributors) for infringement of PN
Patents which occurs during the Immunity Period on account of the
manufacture, use, sale, importation, promotion or distribution of any
Microsoft audio and video client and server streaming functionality
included in any Microsoft products and technology (except Foundry
products and technology), regardless of whether such products and
technology is marketed under a Microsoft trademark regardless of
whether such products include Standard Code. "PN Patents" as used in
this Section 4.1 means (i) any and all patents (other than design
patents or the equivalent), or the inventions, ideas or applications
thereof, worldwide, whether currently existing, or later developed,
applied for, issued prior to the Term, or issuing during
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<PAGE> 6
the Term, and under which patents (or the inventions, ideas or
applications therefor) PN, or any of its Affiliates, now has or
obtains during the Term, the ability or right to license or grant
immunity from suit; and (ii) all extensions, divisionals,
continuations, continuations-in-art, re-examinations and reissue
patents of such patents, as well as patent applications thereof, to
the extent rights attach to such applications. The "Immunity Period"
shall commence upon the first to issue and shall terminate upon the
last to expire, of any of the PN Patents (in any jurisdiction).
For purposes of this Section 4, "Foundry" means a product or
technology manufactured, reproduced, sold, leased, licensed or
otherwise transferred ("Transferred") by one party to this Agreement
(the "Acting Party") to a third party, wherein the product or
technology is (i) designed by or for a third Party without substantial
input from the Acting Party and Transferred from the Acting Party to
such third party or such third party's customers on an exclusive or
substantially exclusive basis; or (ii) otherwise Transferred through
or by the Acting Party for the purpose of circumventing any patent
rights of the other Party to this Agreement.
4.2 Patent Covenant. Microsoft covenants not to (a) sue or (b) bring,
prosecute, assist or participate in any judicial administrative or
other proceedings of any kind against PN or its licensees (including
but not limited to OEMs and other distributors) for infringement of
Microsoft Patents which occurs during the Immunity Period on account
of the manufacture, use, sale, importation, promotion or distribution
of any PN audio and video client and server streaming functionality
included in any PN products and technology (except Foundry products
and technology), regardless of whether such products and technology is
marketed under a PN trademark regardless of whether such products
include Microsoft Code. "Microsoft Patents" as used in this Section
4.2 means (i) any and all patents (other than design patents or the
equivalent), or the inventions, ideas or applications thereof,
worldwide, whether currently existing, or later developed, applied
for, issued prior to the Term, or issuing during the Term and under
which patents (or the inventions, ideas or applications therefor)
Microsoft, or any of its Affiliates, now has or obtains during the
Term, the ability or right to license or grant immunity from suit; and
(ii) all extensions, divisionals, continuations, continuations-in-art
re-examinations and reissue patents of such patents, as well as patent
applications thereof, to the extent rights attach to such
applications. The "Immunity Period" shall commence upon the first to
issue and shall terminate upon the last to expire, of any of the
Microsoft Patents (in any jurisdiction).
4.3 [*]
4.4 Covenants Personal and Non-Assignable. Each party agrees that the
respective covenant granted to it in Section 4.1 or Section 4.2 is
personal to it and may not be assigned, licensed or otherwise
transferred by it in whole or in part, to any third party, whether
under action of law or otherwise and including in connection with the
insolvency or bankruptcy of such party.
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<PAGE> 7
5. MEDIA FILE FORMAT AGREEMENT
Microsoft and PN shall work in good faith and use best efforts to conclude,
within ten (10) business days, the agreement currently being negotiated to
align media file formats and client technology.
6. [*]
6.1 [*]
6.2 [*]
6.3 [*]
7. INVESTMENT
7.1 Non-Voting Preferred Stock. PN agrees to sell to Microsoft, and
Microsoft agrees to purchase from PN, three million, three hundred
thirty-eight thousand, three hundred seventy-four (3,338,374) shares
of non-voting preferred stock of PN at a per share price of eight
dollars and ninety-nine cents ($8.99). These shares are convertible
into voting or non-voting common stock (at Microsoft's option) of PN.
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<PAGE> 8
These preferred shares will have terms and rights and preferences
comparable to existing preferred shares of PN.
7.2 Warrant. Simultaneously with the purchase of the preferred shares set
forth in Section 7.1, PN will grant to Microsoft a warrant to purchase
three million, seven hundred nine thousand, three hundred and five
(3,709,305) shares of non-voting preferred stock of PN, convertible
into voting or non-voting common stock (at Microsoft's option) of PN.
The purchase price of each share under the warrant shall equal
thirteen dollars and forty-eight cents ($13.48), subject to standard
adjustments for stock splits, stock dividends, reclassifications or
reorganizations. The warrant shall have a term of two and one-half
(2.5) years. In the event of an initial public offering ("IPO") of
PN, the warrant shall either be exercised by Microsoft on or before
the date of the IPO or shall expire.
7.3 Board of Directors. So long as Microsoft holds no less than (i)
3,338,374 shares of preferred stock (or common stock issued upon the
conversion of the preferred shares), or (ii) five percent (5%) of the
fully-diluted shares of PN, Microsoft shall have the right in its sole
discretion to have either (a) a Microsoft representative appointed to
the PN Board of Directors, or (b) a Microsoft representative appointed
as an observer to the PN Board of Directors. PN shall have the right
to approve such board member or observer, provided such approval shall
not be unreasonably withheld or delayed.
7.4 Approvals. Microsoft acknowledges that (i) PN's obligations under
this Section 7 are conditioned upon receiving certain shareholder
approvals and (ii) the warrant in Section 7.2 and all shares to be
purchased by Microsoft pursuant to this Section 7 will not have been
registered under the Securities Act of 1933, as amended, and therefore
may be issued and sold only upon Microsoft making such representations
and warranties as are customary in connection with the purchase of
restricted stock. Microsoft agrees to make such customary
representations and warranties. PN will use its reasonable best
efforts to obtain any necessary shareholder approvals identified by
this Section 7.4. In the event PN is unable to obtain such
shareholder approval(s) by 5 p.m., June 23, 1997, PN shall propose to
Microsoft alternative terms which do not require shareholder approval.
If Microsoft does not agree to such alternative terms, this Agreement
shall terminate. If Microsoft does agree to such alternative terms,
then notwithstanding such agreement by Microsoft and if PN convinces
its shareholders within twenty-five (25) days to accept the original
transaction, then the original terms shall apply. Absent such
shareholder approval of the original terms, the alternative terms
proposed by PN and agreed to by Microsoft shall be the basis of the
Agreement. Upon such termination, then notwithstanding anything to
the contrary herein (including but not limited to Section 11.5), this
Agreement shall terminate as though the parties never executed the
Agreement.
7.5 Definitive Agreements. Each party will use all reasonable efforts to
negotiate and close on any and all necessary agreements and approvals
required to perfect the investment set forth in this Section 7 within
thirty (30) days of the Effective Date.
7.6 Due Diligence. Microsoft's obligation to purchase preferred shares of
PN is subject to the satisfactory completion of due diligence by
Microsoft. PN will make available to Microsoft documents and
information as reasonably requested, so that Microsoft can perform a
full investigation of PN's business and legal conditions. Microsoft
will complete its due diligence within seven (7) days of notification
by PN that PN has collected and made available to Microsoft all the
due diligence materials requested by Microsoft.
7.7 Regulatory Approval. The parties acknowledge that a material
consideration of this Agreement is the ability to implement and
conclude the Agreement expeditiously. If, by 5 p.m., June 23, 1997,
either party, in its sole discretion, determines that any required
government or regulatory approvals (solely with respect to this
Agreement and not in combination with any other proposed or actual
transaction) could cause unacceptable delay in successfully
implementing and concluding the Agreement expeditiously, either party
may terminate this Agreement. Upon such termination, then
notwithstanding anything to the contrary herein (including but not
limited to Section 11.5), this Agreement shall terminate as though the
parties never executed the Agreement.
Page 8 of 14
<PAGE> 9
8. CONFIDENTIALITY; ANNOUNCEMENTS
8.1 Announcement. The parties will announce their relationship under this
Agreement within thirty (30) days of the Effective Date. The precise
timing and content of any announcement of this Agreement must be
jointly agreed upon, but both parties will acknowledge the nature of
Microsoft's distribution of PN's technology, the fact of Microsoft's
investment in PN, and other matters of strategic importance agreed to
by the parties. [*] Upon such termination, then notwithstanding
anything to the contrary herein (including but not limited to Section
11.5), this Agreement shall terminate as though the parties never
executed the Agreement.
8.2 Restrictions on Use and Disclosure. Each party shall protect the
other's Confidential Information from unauthorized dissemination and
use with the same degree of care that such party uses to protect its
own like information. Neither party will use the other's Confidential
Information for purposes other than those necessary to directly
further the purposes of this Agreement. Each party will use its best
efforts not to disclose to third parties the other's Confidential
Information without the prior written consent (except with respect to
source code as set forth in Section 2.1) of the other party. Except
as expressly provided in this Agreement, no ownership or license
rights are granted in any Confidential Information.
9. [*]
Page 9 of 14
[*] denotes confidential treatment requested
<PAGE> 10
9.1 [*]
9.2 [*]
Page 10 of 14
[*] denotes confidential treatment requested
<PAGE> 11
10. [*]
10.1 [*]
10.2 [*]
11. TERMINATION
11.1 Term. Unless earlier terminated in accordance with Section 11.2, this
Agreement shall commence upon the Effective Date and continue in full
force and effect through the Term.
11.2 Termination By Either Party For Cause. Either party may suspend
performance and/or terminate this Agreement immediately upon written
notice at any time if the other party is in material breach of Section
8.2 and fails to cure that breach within five (5) days after written
notice thereof.
11.3 Dispute Resolution. If the a party is in material breach of any
material warranty, term, condition or covenant of this Agreement other
than those contained in Section 8.2, such party shall cure that breach
within forty-five (45) after written notice thereof. If a party
contests or disputes that material breach has so occurred, the parties
shall submit any dispute to structured negotiation as follows:
(a) Coverage. Other than actual or imminent material breaches of
Section 8.2, any dispute between the parties with respect to
this Agreement shall be submitted for structured negotiation.
The commencement, and any resolution reached as a result, of
any dispute resolution under Section 11.3 shall be considered
Confidential Information and protected under Section 8.
(b) Structured Negotiation. Either party may invoke this
procedure by giving written notice to the other party
designating a corporate officer with appropriate authority to
be its representative in negotiations relating to the dispute.
Upon receipt of such notice, the other party shall, within
five (5) business days, designate a corporate officer with
similar authority to be its
Page 11 of 14
[*] denotes confidential treatment requested
<PAGE> 12
representative. The designated officers shall, following
whatever investigation each deems appropriate, but no event
later than twenty (20) business days after the original
notice, enter into discussions concerning the dispute. If
within an additional twenty (20) business days of their
initial meeting, the representatives do not resolve the
dispute, either party may submit the matter to binding
arbitration under Section 11.3(c).
(c) Binding Arbitration. Any dispute not settled by the parties
by structured negotiation (other than actions for injunctive
relief including specific performance) shall be submitted only
to binding arbitration. The arbitration will be conducted in
accordance with the procedures in this document and the
Arbitration Rides for Commercial Arbitration Rules of the AAA
("AAA Rules"). In the event of a conflict with such rules,
the provisions of this Agreement will control.
The arbitration shall take place in Seattle, Washington,
before a panel of three arbitrators appointed as follows:
each party shall select a single arbitrator, and the two (2)
selected arbitrators shall mutually agree upon a third. The
arbitrators selected shall have knowledge and experience in
the computer software business. The arbitrators shall rule on
the dispute by issuing a written opinion setting forth
findings of fact and the rationale for their decision within
thirty (30) days after the close of hearings. The decision
rendered by the arbitrators shall be final and binding and may
be entered as a judgment in any court of competent
jurisdiction. The arbitrator(s) shall control the scheduling
so as to process the matter expeditiously. The times
specified in this section may be extended upon mutual
agreement of the parties by the arbitrators upon a showing of
good cause.
Any issue concerning the extent to which any dispute is
subject to arbitration, or concerning the applicability,
interpretation or enforceability of these procedures,
including any contention that all or part of these procedures
are invalid or unenforceable, shall be governed by the Federal
Arbitration Act and resolved by the arbitrators. No potential
arbitrator may serve on the panel unless he or she has agreed
in writing to abide and be bound by these procedures.
All aspects of the arbitration shall be treated as
Confidential Information.
Unless provided otherwise in the Agreement, the arbitrators
may not award non-monetary or equitable relief of any sort.
They will have no power to award damages inconsistent with the
Agreement. In no event, even if any other portion of these
provisions is held to be invalid or unenforceable, shall the
arbitrators have power to make an award or impose a remedy
that could not be made or imposed by a court deciding the
matter in the same jurisdiction.
The parties may submit written briefs. Discovery shall be
controlled by the arbitrators and shall be permitted as
follows: each party may submit in writing to a party, and that
party shall so respond, to a maximum of any combination of
thirty-five (35) (none of which may have subparts) of
interrogatories, demands to produce documents, and requests
for admission.
Each party shall bear its own costs of the arbitration. A
party seeking discovery shall reimburse the responding party
the costs of production of documents (to include search time
and reproduction costs). The parties shall equally split the
fees of the arbitration and the arbitrators.
11.4 Effect of Termination.
(a) Neither party shall be liable to the other for damages of any
sort resulting solely from terminating this Agreement in
accordance with its terms.
(b) Any end user licenses already validly granted by PN as the
effective date of termination shall not be affected and shall
survive termination.
Page 12 of 14
<PAGE> 13
11.5 Survival. In the event of termination or expiration of this Agreement
for any reason, Sections 2.1 (provided that Microsoft has paid the
applicable license fees set forth in Section 3), 2.2, 2.4(c), 3.2 (to
the extent fees are due and owing), 4, 8.2, 9, 10, 11, 12 and 13 shall
survive termination.
12. LIMITATION OF LIABILITIES
NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL,
PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
13. GENERAL
13.1 Notices. All notices and requests in connection with this Agreement
shall be deemed given as of the day they are received either by
messenger, delivery service, or in the United States of America mails,
postage prepaid, certified or registered, return receipt requested,
and addressed as follows:
To PN: To Microsoft:
Progressive Networks, Inc. Microsoft Corporation
1111 Third Avenue, Suite 2900 One Microsoft Way
Seattle, WA 98101 Redmond, WA 98052-6399
Attention: General Counsel Attention:
Phone: (206) 674-2213 Phone: (425) 882-8080
Fax: (206) 674-2695 Fax: (425) 936-7329
Copy to:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attention: Law & Corporate Affairs
Fax: (206) 936-7409
or to such other address as a party may designate pursuant to this
notice provision.
13.2 Independent Contractors. PN is an independent contractor for
Microsoft and nothing in this Agreement shall be construed as creating
an employer-employee relationship, a partnership, or a joint venture
between the parties.
13.3 Taxes. In the event taxes are required to be withheld on payments
made under this Agreement by any U.S. (state or federal) or foreign
government, Microsoft may deduct such taxes from the amount owed PN
and pay them to the appropriate taxing authority. Microsoft shall in
turn promptly secure and deliver to PN an official receipt for any
taxes withheld. Microsoft will use reasonable efforts to minimize
such taxes to the extent permissible under applicable law.
13.4 Governing Law. This Agreement shall be governed by the laws of the
State of Washington as though entered into between Washington
residents and to be performed entirely within the State of Washington,
and PN consents to jurisdiction and venue in the state and federal
courts sitting in the State of Washington. In any action or suit to
enforce any right or remedy under this Agreement or to interpret any
provision of this Agreement, the prevailing party shall be entitled to
recover its costs, including reasonable attorneys' fees.
Page 13 of 14
<PAGE> 14
13.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of each party's respective successors and lawful assigns;
provided, however, that PN may not assign this Agreement, in whole or
in part, without the prior written approval of Microsoft. For purposes
of this Agreement, a merger, consolidation, or other corporate
reorganization, or a transfer or sale of any or all of a party's stock,
or of all or substantially all of its assets shall be deemed to be an
assignment; provided, however, that an IPO of PN stock shall not be
considered an assignment.
13.6 Construction. If for any reason a court of competent jurisdiction
finds any provision of this Agreement, or portion thereof, to be
unenforceable, that provision of the Agreement will be enforced to the
maximum extent permissible so as to effect the intent of the parties,
and the remainder of this Agreement will continue in full force and
effect. Failure by either party to enforce any provision of this
Agreement will not be deemed a waiver of future enforcement of that or
any other provision. This Agreement has been negotiated by the
parties and their respective counsel and will be interpreted fairly in
accordance with its terms and without any strict construction in favor
of or against either party.
13.7 Entire Agreement. This Agreement does not constitute an offer by
Microsoft and it shall not be effective until signed by both parties.
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and merges all prior and
contemporaneous communications. It shall not be modified except by a
written agreement dated subsequent to the date of this Agreement and
signed on behalf of PN and Microsoft by their respective duly
authorized representatives.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective Date written above.
- --------------------------------------------------------------------------------
MICROSOFT CORPORATION PROGRESSIVE NETWORKS
- --------------------------------------------------------------------------------
By: [s] Paul Martiz By: [s] Rob Glaser
- --------------------------------------------------------------------------------
Name (Print): Paul Martiz Name (print): Rob Glaser
- --------------------------------------------------------------------------------
Title: Group VP, Applications & Platforms Title: CEO
- --------------------------------------------------------------------------------
Date: 6/17/97 Date: 6-17-97
- --------------------------------------------------------------------------------
Page 14 of 14
[*] denotes confidential treatment requested
<PAGE> 1
Exhibit 10.11
Bruce Jacobsen
15309 Earlham St.
Pacific Palisades, CA 90272
February 16, 1996
Dear Bruce:
I am extremely pleased to confirm in writing the terms of your employment at
Progressive Networks that we agreed to on January 16th, 1996.
Your title will be President and Chief Operating Officer. This is a full-time,
exempt, regular position with Progressive Networks, carrying the standard
Progressive Networks benefits. Your salary will be $135,000 per year. Your
benefits include, together with those required by law, coverage by a medical,
prescription and long term disability insurance plan, and participation in a
401(k) plan, selected by Progressive Networks (PN).
You will also earn equity in PN under the terms of PN's staff stock option
plan. Today PN has a total of 23,527,446 shares outstanding, counting all
shares available in our option plan. You will receive two grants of options on
shares, Grant A and Grant B:
- Grant A is options on 705,823 shares, and is subject to PN's standard
vesting schedule and all other provisions contained in the Plan with one
exception related to the treatment of these shares in the event of an
Approved Transaction or Control Purchase (as defined in the PN Stock
Option Plan) of PN. This exception is described below.
- Grant B is options on 470,544 shares and is subject to the provisions
contained in the Plan, the exception described below, and the following
additional exceptions: Grant B vests fully two years from your start
date with PN. 50% of Grant B vests one year from your start date with
PN. In the event your employment is terminated by PN (and not
voluntarily by you) Grant B immediately vests fully.
- In the event of an Approved Transaction or Control Purchase (as defined
in the PN Stock Option Plan) of PN, you have the right to have the
vesting of your Grant A options be accelerated by one year, and to have
your Grant B options vest immediately, both upon the closing of such a
Transaction or Purchase. This right does not prevent you from instead
choosing to participate in any acceleration of vesting which the Board
may provide under terms of the Plan.
<PAGE> 2
The above grants are subject to the approval of the Board of Directors of PN;
since I have received verbal agreement from the board on this matter, I believe
this agreement to be merely a formality.
You will also receive the standard holidays each year (e.g. The Fourth of July,
New Years Day, etc...), on a schedule to be determined by PN. You will also
receive fifteen days paid vacation per year. These vacation days are earned at
the rate of 1.25 days for each month worked. You will also earn one paid sick
day for each month worked. After January 1st of each year, you are eligible to
take the full annual vacation benefit to be earned in that year, subject to
reasonable advance planning. You are also eligible, as of January 1st, should
your ill health require it, to take the full sick day benefit to be earned in
that year. Vacation earned but not taken in excess of fifteen days cannot be
carried over into a new calendar year. Sick days earned but not taken cannot be
carried over into a new calendar year. Should your employment with Progressive
Networks end, your final paycheck will be adjusted to account for any positive
or negative vacation day balance and for any sick days taken but not earned.
One month after the start of your employment with PN, PN will reimburse you for
the actual costs of finding a new home, temporary accommodations, and relocating
to Seattle, up to a maximum of $8500.
All inventions, discoveries, improvements to existing technology, and computer
software which you conceive, develop, or first actually reduce to practice,
either alone or with others, during your employment at PN (collectively, the
"Inventions"), is work for hire, and ownership of any intellectual property
arising from or related to the Inventions shall be the sole and exclusive
property of PN. If for any reason the Inventions or any portion thereof is
deemed not to be a work made for hire, then you hereby irrevocably, absolutely
and unconditionally assign to PN (a) all of your right, title and interest in
and to the Inventions or portion thereof (whether arising under patent law,
copyright law, trade secret law, or otherwise), including to the extent
applicable, but not limited to, the exclusive rights enumerated in 17 U.S.C.
Section 106, and all extensions and renewals thereof, and (b) all moral rights
with respect to the Inventions, including but not limited to any and all rights
of identification of authorship and any and all rights of approval, restriction
or limitation on use or subsequent modifications relating to the Inventions. All
duties performed by you for PN and all communications between you and PN are
subject to the Agreement Restricting Use and Disclosure of Proprietary and
Confidential Information (the "Non-Disclosure Agreement") previously executed by
you and PN.
NOTICE: THIS AGREEMENT DOES NOT APPLY TO AN INVENTION FOR WHICH NO EQUIPMENT,
SUPPLIES, FACILITIES OR TRADE SECRET INFORMATION OF PN WAS USED AND WHICH WAS
DEVELOPED ENTIRELY ON YOUR OWN TIME, UNLESS (A) THE INVENTION RELATED (1)
DIRECTLY TO THE BUSINESS OF PN, OR (2) TO PN'S ACTUAL OR DEMONSTRABLY
ANTICIPATED RESEARCH OR DEVELOPMENT, OR (B) THE INVENTION RESULTS FROM ANY WORK
PERFORMED BY YOU FOR PN.
<PAGE> 3
This offer is contingent on you providing evidence of employability as required
by federal law. This offer is valid until February 29, 1996.
On both a personal and a professional level I'm very excited about the prospect
of you joining Progressive Networks. I look forward to a long and mutually
rewarding work relationship.
Sincerely,
/s/ ROB GLASER
- --------------------------------
Rob Glaser
Chairman & CEO
Progressive Networks
I have read and agree to the above terms of employment, which represent a full,
complete and fair statement of the offer of employment made to me by Progressive
Networks.
Bruce Jacobsen
/s/ BRUCE JACOBSEN
- --------------------------------
Date: 2/16/96
---------------------------
<PAGE> 1
Exhibit 10.12
[PROGRESSIVE NETWORKS LETTERHEAD]
James Wells
8405 Southeast 47th Place
Mercer Island, Washington 98040
May 2, 1995
Dear James:
As you know, I am extremely pleased to offer you employment at Progressive
Networks as Vice President, Sales and Service.
This offer is for a full-time, exempt, regular position with Progressive
Networks, carrying the standard Progressive Networks benefits. Your salary will
be $90,000 per year. Your benefits include, together with those required by law,
coverage by a medical, prescription and long term disability insurance plan
selected by Progressive Networks (PN).
You will also earn equity in PN under the terms of PN's staff stock option plan.
Your grant is options on 275,000 shares, and is subject to the vesting and all
other provisions contained in the plan.
You will also have the opportunity to earn a performance-based bonus. You will
first become eligible for this bonus, which will be in the range of 25-33% of
salary, after PN has begun to earn sales revenues. The bonus will be payable
every six months, and will hinge on your performance against both revenue and
management goals in the two quarters (with equal weighting given to each set of
goals). After PN has become profitable, we will consider whether changes in the
bonus plan are desirable.
You will also receive the standard holidays each year (e.g. The Fourth of July,
New Years Day, etc...), on a schedule to be determined by PN. You will also
receive ten days paid vacation per year. In your first year, these vacation days
are earned at the rate of one day per month worked after your first two months
of employment. In subsequent years, these vacation days are earned at the rate
of .83 days for each month worked. You will also earn one paid sick day for each
month worked. After January 1st of each year, you are eligible to take the full
annual vacation benefit to be earned in that year, provided it is scheduled in
advance with me. You are also eligible, as of January 1st, should your ill
health require it, to take the full sick day benefit to be earned in that year.
Vacation earned but not taken in excess of ten days a year cannot be carried
over into a new calendar year. Sick days earned but not taken cannot be carried
over into a new calendar year. Should your employment with Progressive Networks
end, your final paycheck will be adjusted to account for any positive or
negative vacation day balance and for any sick days taken but not earned.
All inventions, discoveries, improvements to existing technology, and computer
software which you conceive, develop, or first actually reduce to practice,
either alone or with others, during your employment at PN and for three (3)
months thereafter (collectively, the "Inventions"), is work for hire, and
ownership of any intellectual property arising from or related to the Inventions
shall be the sole and exclusive property of PN. If for any reason the Inventions
or any portion thereof is
<PAGE> 2
deemed not to be a work made for hire, then you hereby irrevocably, absolutely
and unconditionally assign to PN (a) all of your right, title and interest in
and to the Inventions or portion thereof (whether arising under patent law,
copyright law, trade secret law, or otherwise), including to the extent
applicable, but not limited to, the exclusive rights enumerated in 17 U.S.C.
Section 106, and all extensions and renewals thereof, and (b) all moral rights
with respect to the Inventions, including but not limited to any and all rights
of identification of authorship and any and all rights of approval, restriction
or limitation on use or subsequent modifications relating to the Inventions. All
duties performed by you for PN and all communications between you and PN are
subject to the Agreement Restricting Use and Disclosure of Proprietary and
Confidential Information (the "Non-Disclosure Agreement") previously executed by
you and PN.
NOTICE: THIS AGREEMENT DOES NOT APPLY TO AN INVENTION FOR WHICH NO EQUIPMENT,
SUPPLIES, FACILITIES OR TRADE SECRET INFORMATION OF PN WAS USED AND WHICH WAS
DEVELOPED ENTIRELY ON YOUR OWN TIME, UNLESS (A) THE INVENTION RELATED (1)
DIRECTLY TO THE BUSINESS OF PN, OR (2) TO PN'S ACTUAL OR DEMONSTRABLY
ANTICIPATED RESEARCH OR DEVELOPMENT, OR (B) THE INVENTION RESULTS FROM ANY WORK
PERFORMED BY YOU FOR PN.
This offer is contingent on you providing evidence of employability as required
by federal law.
We are excited about the prospect of you joining Progressive Networks and look
forward to a long and mutually rewarding term of employment.
This offer is valid until May 8, 1995.
Sincerely,
/s/ ROBERT GLASER
- ---------------------------------------------
Rob Glaser
President & CEO
Progressive Networks
I have read and agree to the above terms of employment, which represent a full,
complete and fair statement of the offer of employment made to me by Progressive
Networks.
James Wells
/s/ JAMES H. WELLS
- ---------------------------------------------
Date: 5/3/95
----------------------------------------
<PAGE> 1
Exhibit 10.13
[PN PROGRESSIVE NETWORKS LETTERHEAD]
May 24, 1994
Andy Sharpless
20 Harvard Lane
Hastings, NY 10706
Via Facsimile
Dear Andy:
The following letter constitutes our offer for you to join Progressive
Networks, Inc. (PN) as a principal member of PN's management team. As you and I
discussed on the phone last night, David and I are both extremely enthusiastic
about the prospect of you joining us, and it was great to hear that you are
equally excited.
Your responsibilities with PN will vary, depending on where we are in
the development process and the final form of our plan. We envision two phases:
- Phase I is the period starting with your initial employment, continuing
through the completion of PN's business plan and concluding with the
successful acquisition of funding sufficient to carry out that plan.
During Phase I you will be responsible for working with me and David to
research, write, and review the plan, and also to work with us to put
together strategic alliances that we deem necessary to either complete
the plan and/or to maximize its chance of success.
- Phase II is the operating phase. During this phase you would lead
implementation of the plan in one or more specific areas related to the
on-line service aspect pf PN, and you would provide significant input
into overall PN direction and strategy. The area or areas for you to
focus on are to be determined depending on the final shape of our plan;
based on our current thinking these may include handling all
transaction-related aspects of PN On-Line and/or managing our plans for
signing up and maintaining relations with advertisers.
As we discussed, your salary will be $100,000 per year. Once PN
establishes procedures for bonuses and salary review, you would of course be
eligible for these programs. PN will also provide health care coverage for you
and your family, and other benefits consistent with PN's yet-to-be-determined
benefits package. You will also be granted equity in PN once we complete our
business plan and acquire a first round of outside capital in accordance with
that plan. Until we have completed the first round of outside financing, it is
not possible to definitively quantify this equity, but we have agreed on the
following parameters:
- Your equity will accrue (vest) at 3/4th of the rate that equity accrues
to David Halperin, and the start date of your accrual will be the start
date of your employment with PN, even though this will likely precede
the arrival of outside capital. As per written agreement between Rob
Glaser and David Halperin, our intent is that Halperin will receive a
1% equity stake (post first round dilution) in PN for each of the first
5 years he is employed by PN. The Glaser/Halperin agreement is subject
to review in light of considerations at the time of outside
capitalization, such as the actual valuation of PN, or the size of the
pool of equity available for partners and senior management.
------------------------------------------------------
<PAGE> 2
- Your equity will accrue at this rate for the first 5 years of your
employment with PN. Then, if after 5 years the amount of equity you
have been granted is less than the amount that Halperin has vested by
October 1, 1998 (which is 5 years from his initial start date with PN),
and your are still employed by PN in a position of substantial
responsibility, we will come up with an arrangement for your subsequent
years of employment with PN that enables you to attain, over time,
equity equivalent to the total amount vested by Halperin through
10/1/98. The form that this subsequent option will take is to be
determined, and may well not be determined until at or near the 5th
anniversary of your joining PN.
- Your ability to continue vesting equity in PN will be contingent on
your abiding by the terms of PN's to-be-determined employee stock plan.
Terms to be included in this plan include your continuous employment in
good standing by PN.
The long-term location of PN's main office is still to be determined,
but will either be in Seattle or in the San Francisco Bay area. As part of the
terms of your employment, you will agree to relocate to whichever of these
locations is selected. PN in turn will apprise you of and involve you in the
selection process. It is our intent to make a final decision regarding location
by the end of July 1994.
During Phase I, PN will pay your commuting costs between New York and
Seattle (or San Francisco if this becomes the operating main office) and will
provide temporary housing for you. It is planned that you will commute weekly
back to New York, and that one week per month you will be able to work out of
New York (perhaps including short trips on the East Coast).
Upon successful completion of Phase I, you will set in motion steps to
permanently relocate yourself (and your family) to the location of PN's main
office (either Seattle or S.F.). At this time PN will provide you with a
one-time relocation bonus of $10,000. PN will also cover reasonable moving
expenses (consistent with PN's yet-to-be-determined relocation policy) and will
pay for 2 house-hunting trips for your wife to be taken when you deem necessary.
PN will continue to cover your commuting costs until you move, up through 2 1/2
months after the completion of Phase I.
In the event that PN terminates your employment within 24 months of
your start date, or you choose to leave PN because PN's plan has not been
successfully funded by May 1, 1995, PN will continue to pay you at the rate of
your starting salary for the least of: (a) 6 months; (b) 24 months minus the
number of months you have actually worked at PN; or (c) until you find full-time
employment. During this severance period PN will continue to provide health care
coverage for you and your family. During this severance period, you will, at
PN's option, continue to work for PN, with allowances made for time you need to
successfully pursue subsequent employment, and you will be obligated to make a
reasonable effort to obtain suitable full-time employment. During this severance
period you will not vest any additional equity in PN, but will have the
opportunity to exercise any equity you have already vested, and can keep any
equity you have already purchased.
In the event that you voluntarily choose to leave PN within 24 months
of your start date for reasons other than PN's plan not being funded by 5/1/95,
or you decide not to relocate permanently to PN's main office after completion
of Phase I, PN will continue to pay you at the rate of your starting salary for
the least of: (a) 3 months; (b) 24 months minus the number of months you have
actually worked at PN; or (c) until you find full-time employment. During this
severance period PN will continue to provide health care coverage for you and
your family. During this severance period, you will, at PN's option, continue to
work for PN, with allowances made for time you need to successfully pursue
subsequent employment, and you will be obligated to make a reasonable effort to
obtain suitable full-time employment. You will not vest any additional equity in
PN, will not be allowed to exercise any equity you have vested but not
purchased, and will be required to offer back to PN any equity you have already
purchased at the price you paid for it.
<PAGE> 3
In order to ensure the availability of the severance funds, the full
amount of potential severance money ($50,000) will be placed in escrow, using an
escrow agent of our mutual choosing, until passage of the 24 month period.
I believe the above fully and accurately memorializes the terms we
discussed and agreed to verbally. Please sign below to indicate your agreement
and acceptance of these terms. Again I want to restate how excited I am about
the prospects of you coming aboard, and how confident I am that together you,
David, and I will succeed in making Progressive Networks a financial and
political success!
Warmest Regards,
/s/ ROBERT GLASER
-------------------------------
Rob Glaser
I agree to the above terms and formally accept Progressive Networks'
offer of employment.
/s/ ANDREW SHARPLESS 5/24/94
-------------------------------
Andy Sharpless
<PAGE> 1
EXHIBIT 10.14
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into
effective as of ___________, 1997, between PROGRESSIVE NETWORKS, INC., a
Washington corporation (the "Company"), and ____________, a director and/or
officer of the Company ("Indemnitee").
R E C I T A L S
A. Indemnitee is a director and/or officer of the Company and in such
capacity is performing valuable services for the Company.
B. The Articles of Incorporation of the Company ("Articles") and the
Company's Bylaws ("Bylaws") provide for the indemnification of the directors and
officers of the Company to the fullest extent permitted by the Washington
Business Corporation Act (the "Statute").
C. The Articles, Bylaws and the Statute are not exclusive, and thereby
contracts may be entered into between the Company and the members of its Board
of Directors (the "Board") and its officers with respect to indemnification of
such directors and officers.
D. The Articles and Bylaws provide that the Company may purchase and
maintain a policy or policies of insurance on behalf of an individual who is a
director or an officer ("D&O Insurance"), covering certain liabilities which may
be incurred by its officers or directors in the performance of their obligations
to the Company;
E. As a result of recent developments affecting the terms, scope and
availability of D&O Insurance there exists general uncertainty as to the extent
of protection afforded Company officers and directors by such D&O Insurance and
said uncertainty also exists under statutory and bylaw indemnification
provisions; and
F. In order to induce Indemnitee to serve or to continue to serve as a
director and/or officer of the Company, the Company has agreed to enter into
this Agreement with Indemnitee.
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NOW, THEREFORE, In consideration of the recitals above, the mutual
covenants and agreements set forth in this Agreement, and Indemnitee's service
as a director and/or officer after the date hereof, the Company and Indemnitee
agree as follows:
1. INDEMNIFICATION
1.1 SCOPE. The Company agrees to and shall hold harmless and
indemnify Indemnitee to the full extent permitted by law against any Damages (as
defined in Section 1.5) incurred by Indemnitee with respect to any Proceeding
(as defined in Section 1.6) to which Indemnitee is or is threatened to be made a
party or witness, notwithstanding that such indemnification is not specifically
authorized by this Agreement, the Company's Articles or Bylaws, the Statute or
otherwise. Such right to indemnification shall be without regard to any
limitations found in RCW 23B.08.510 through 23B.08.550; PROVIDED, HOWEVER, that
Indemnitee shall have no right to indemnification on account of (a) acts or
omissions of Indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law; (b) conduct of Indemnitee finally adjudged in a final
judgment, not subject to appeal, by a court of proper jurisdiction to be in
violation of RCW 23B.08.310; or (c) any transaction with respect to which it is
finally adjudged in a final judgment, not subject to appeal, by a court of
proper jurisdiction that Indemnitee personally received a benefit in money,
property or services to which Indemnitee was not legally entitled. In the event
of any change, after the date of this Agreement, in any applicable law, statute
or rule issued pursuant to such law or statute regarding the right of a
Washington corporation to indemnify a member of its board of directors or an
officer, such changes, to the extent that they would expand Indemnitee's rights
hereunder, shall be within the scope of Indemnitee's rights and the Company's
obligations hereunder, and, to the extent that they would narrow Indemnitee's
rights hereunder, shall be excluded from this Agreement; PROVIDED, HOWEVER, that
any change that is found in a final judgment, not subject to appeal, by a court
of proper jurisdiction to be required by applicable laws, statutes or rules
issued pursuant to such law or statute to be applied to this Agreement shall be
so applied regardless of whether the effect of such change is to narrow
Indemnitee's rights hereunder.
1.2 PROCEEDINGS RELATING TO OFFICER'S FAILURE TO DISCHARGE
DUTIES. If Indemnitee is an officer of the Company, the indemnification and
other rights and benefits provided to Indemnitee by this Agreement shall apply
fully with respect to any Proceeding in which it is claimed or adjudicated that
Indemnitee is liable to the Company by reason of having failed to discharge the
duties of Indemnitee's office, which claims and liabilities are hereby released;
PROVIDED, HOWEVER, that the foregoing indemnification and release obligations of
the Company shall have no application with respect to claims and liabilities by
or to the Company to the extent
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that they are based upon or arise out of Indemnitee's actions or omissions
described in clauses (a), (b) or (c) of Section 1.1.
1.3 NONEXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled (and any failure to qualify for indemnification under this Agreement
shall not be determinative of any rights) under the Company's Articles or the
Company's Bylaws, any vote of shareholders or disinterested directors, the
Statute or otherwise, whether as to actions or omissions by Indemnitee in
Indemnitee's official capacity or otherwise.
1.4 ADVERSE AMENDMENTS. Subject to applicable law, the Company
agrees that the Articles or Bylaws shall not be amended in a manner that
adversely affects the indemnification rights provided thereunder to the
Indemnitee.
1.5 INCLUDED COVERAGE. If Indemnitee is made a party (or is
threatened to be made a party) to, or is otherwise involved (including, but not
limited to, as a witness) in any Proceeding, the Company shall hold harmless and
indemnify Indemnitee from and against any and all losses, claims, damages and
liabilities incurred in connection with such Proceeding, including but not
limited to attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid in settlement and other expenses (collectively, "Damages").
1.6 DEFINITION OF PROCEEDING. For purposes of this Agreement,
"Proceeding" shall mean any actual, pending, threatened or completed action,
suit, claim or proceeding (whether civil, criminal, administrative or
investigative and whether formal or informal) in which Indemnitee is, has been
or becomes involved by reason of the fact that Indemnitee is or has been a
director, officer, employee or agent of the Company or that, being or having
been such a director, officer, employee or agent, Indemnitee is or was serving
at the request of the Company as a director, officer, employee, trustee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise (collectively, a "Related Company"), including but not limited to
service with respect to any employee benefit plan, whether the basis of such
action, suit, claim or proceeding is alleged action or omission by Indemnitee in
an official capacity as a director, officer, employee, trustee or agent or in
any other capacity while serving as a director, officer, employee, trustee or
agent; PROVIDED, HOWEVER, that, except with respect to an action to enforce this
Agreement, "Proceeding" shall not include any action, suit, claim or proceeding
instituted by or at the direction of Indemnitee unless such action, suit, claim
or proceeding is or was authorized by the Board.
1.7 NOTIFICATION. As promptly as reasonably practicable after
receipt by Indemnitee of notice of the commencement of any Proceeding,
Indemnitee will,
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if a claim in respect thereof is to be made against the Company under this
Agreement, notify the Company of the commencement thereof; PROVIDED, HOWEVER,
that failure to so notify the Company will relieve the Company from any
liability that it may otherwise have to Indemnitee under this Agreement only if,
and then solely to the extent that, such failure can be shown to have materially
prejudiced the Company's ability to defend the Proceeding.
1.8 DETERMINATION OF ENTITLEMENT. If a determination of
Indemnitee's entitlement to indemnification is required pursuant to RCW
23B.08.550 or a successor statute or pursuant to other applicable law, the
appropriate decision maker shall make such determination; PROVIDED, HOWEVER,
that (a) Indemnitee shall initially be presumed in all cases to be entitled to
indemnification, and (b) unless the Company shall deliver to Indemnitee written
notice of a determination that Indemnitee may not be entitled to indemnification
within thirty (30) days after the Company's receipt of Indemnitee's notice
pursuant to Section 1.7, Indemnitee shall conclusively be deemed to be entitled
to such indemnification and the Company hereby agrees not to assert otherwise.
Indemnitee may establish a conclusive presumption of any fact necessary to such
a determination by delivering to the Company a declaration made under penalty of
perjury that such fact is true.
1.9 PRESUMPTION AND EFFECT OF CERTAIN PROCEEDINGS.
a. If a Change of Control shall have occurred, in
making a determination with respect to entitlement to indemnification hereunder,
the person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee has
submitted a request for indemnification in accordance with this Agreement, and
the Company shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any determination
contrary to that presumption.
b. If the person, persons or entity empowered or
selected under this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within 30 days after receipt
by the Company of Indemnitee's request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statements not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such 30-day period may be extended for a
reasonable time, not to exceed an additional 30 days, if the person, persons or
entity making the determination with respect to entitlement to indemnification
in good faith
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requires such additional time for the obtaining or evaluating of documentation
and/or information relating thereto and gives notice to Indemnitee thereof; and
provided, further, that the foregoing provisions of this Section 1.9 shall not
apply if (i) the determination of entitlement to indemnification is to be made
by the stockholders pursuant to this Agreement and (A) within 15 days after
receipt by the Company of the request for such determination the Board has
resolved to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within 75 days after such
receipt and such determination is made thereat, or (B) a special meeting of
stockholders is called within 15 days after such receipt for the purpose of
making such determination, such meeting is held for such purpose within 30 days
after having been so called and such determination is made thereat, or (ii) the
determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to this Agreement.
c. The settlement or termination of any Proceeding or
of any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that Indemnitee's conduct was lawful.
d. "Change in Control" means a change in control of
the Company occurring after the Effective Date of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or
not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to
have occurred if after the Effective Date (i) any "person" (as such term is used
in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities without the prior approval of at least
two-thirds of the members of the Board in office immediately prior to such
person attaining such percentage interest, (ii) the Company is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board in office immediately
prior to such transaction or event constitute less than a majority of the Board
thereafter, or (iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the
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Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board.
1.10 SURVIVAL. The indemnification and release provided under
this Agreement shall apply to any and all Proceedings, notwithstanding that
Indemnitee has ceased to be a director, officer, employee, trustee or agent of
the Company or a Related Company.
2. EXPENSE ADVANCES
2.1 GENERALLY. The right to indemnification conferred by
Section 1 shall include the right to have the Company pay Indemnitee's
attorneys' fees and other expenses in any Proceeding as such expenses are
incurred and in advance of such Proceeding's final disposition (such right is
referred to hereinafter as an "Expense Advance").
2.2 CONDITIONS TO EXPENSE ADVANCE. The Company's obligation
to provide an Expense Advance is subject to the following conditions:
A. UNDERTAKING. Indemnitee or his representative
shall have executed and delivered to the Company an undertaking, which need not
be secured and shall be accepted without reference to Indemnitee's financial
ability to make repayment, by or on behalf of Indemnitee, to repay all Expense
Advances if and to the extent that it shall ultimately be determined, by a final
decision not subject to appeal rendered by a court having proper jurisdiction,
that Indemnitee is not entitled to be indemnified for such Expense Advance under
this Agreement or otherwise.
C. AFFIRMATION. If required under applicable law,
Indemnitee shall furnish a written affirmation of Indemnitee's good faith belief
that Indemnitee has met all applicable standards of conduct.
3. PROCEDURES FOR ENFORCEMENT
3.1 ENFORCEMENT. If a claim for indemnification made by
Indemnitee hereunder is not paid in full within thirty (30) days, or a claim for
an Expense Advance made by Indemnitee hereunder is not paid in full within
thirty (30) days, after written notice of such claim is delivered to the
Company, Indemnitee may, but need not, at any time thereafter bring suit against
the Company to recover the unpaid amount of the claim (an "Enforcement Action").
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3.2 PRESUMPTIONS IN ENFORCEMENT ACTION. In any Enforcement
Action the following presumptions (and limitations on presumptions) shall apply:
A. The Company shall conclusively be presumed to have
entered into this Agreement and assumed the obligations imposed hereunder in
order to induce Indemnitee to serve or to continue to serve as an director
and/or officer of the Company;
B. The failure of the Company (including but not
limited to the Board, independent or special legal counsel or the Company's
shareholders) to make a determination prior to the commencement of the
Enforcement Action that indemnification of Indemnitee is proper in the
circumstances shall not be a defense to the Enforcement Action or create a
presumption that Indemnitee is not entitled to indemnification hereunder; and
C. If Indemnitee is or was serving as a director,
officer, employee, trustee or agent of a corporation of which a majority of the
shares entitled to vote in the election of its directors is held or controlled
by the Company or in which the Company has otherwise made an investment or in an
executive or management capacity in a partnership, joint venture, trust or other
enterprise of which the Company or a wholly-owned subsidiary of the Company is a
general partner or has a majority ownership or control position or in which the
Company has otherwise made an investment, then such corporation, partnership,
joint venture, trust or enterprise shall conclusively be deemed a Related
Company and Indemnitee shall conclusively be deemed to be serving such Related
Company at the request of the Company.
3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION. If
Indemnitee is required to bring an Enforcement Action, the Company shall hold
harmless and indemnify Indemnitee against all of Indemnitee's attorneys' fees
and expenses in bringing and pursuing the Enforcement Action (including but not
limited to attorneys' fees at any stage, and on appeal).
4. DEFENSE OF CLAIM. With respect to any Proceeding as to which
Indemnitee has provided notice to the Company pursuant to Section 1.7:
4.1 The Company may participate therein at its own expense.
4.2 If the Company agrees, in writing, to hold the Indemnitee
harmless with respect to the proceeding and is able to demonstrate, in
Indemnitee's reasonable judgment, that it is financially capable of holding the
Indemnitee harmless, then the Company, jointly with any other indemnifying party
similarly notified, may assume the defense thereof, with counsel reasonably
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satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to so assume the defense thereof, the Company shall not be liable to
Indemnitee under this Agreement for any legal fees or other expenses (other than
reasonable costs of investigation) subsequently incurred by Indemnitee in
connection with the defense thereof unless (a) the employment of counsel by
Indemnitee or the incurring of such expenses has been authorized by the Company,
(b) Indemnitee shall have reasonably concluded that there is or may be a
conflict of interest between the Company and Indemnitee in the conduct of the
defense of such Proceeding, or (c) the Company shall not in fact have employed
counsel to assume the defense of such Proceeding, in each of which cases the
legal fees and other expenses of Indemnitee shall be at the expense of the
Company. The Company shall not be entitled to assume the defense of a Proceeding
brought by or on behalf of the Company or as to which Indemnitee shall have
reached the conclusion described in clause (b) above.
4.3 The Company shall not be liable for any amounts paid in
settlement of any Proceeding effected without its written consent, which consent
shall not be unreasonably withheld.
4.4 The Company shall not settle any Proceeding in any manner
which would impose any penalty, costs or Damages on Indemnitee without
Indemnitee's written consent.
5. D&O INSURANCE
5.1 To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
5.2 In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
5.3 The Company shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent
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that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
6. LIMITATIONS ON INDEMNIFICATION; MUTUAL ACKNOWLEDGMENT
6.1 LIMITATION ON INDEMNITY. No indemnification pursuant to
this Agreement shall be provided by the Company:
A. On account of any suit in which a final,
unappealable judgment for which there is no further right of appeal is rendered
by a court having proper jurisdiction against Indemnitee for an accounting of
profits made from the purchase or sale by Indemnitee of securities of the
Company in violation of the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto; or
B. For Damages or Expense Advances that have been
paid directly to Indemnitee by an insurance carrier under a policy of D&O
Insurance or other insurance maintained by the Company.
6.2 MUTUAL ACKNOWLEDGMENT. The Company and Indemnitee
acknowledge that, in certain instances, federal law or public policy may
override applicable state law and prohibit the Company from indemnifying
Indemnitee under this Agreement or otherwise if found by a final, unappealable
judgment rendered by a court having proper jurisdiction.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to take or fail to take any action
in violation of applicable law. The Company's inability to perform its
obligations under this Agreement pursuant to court order shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable,
as provided in this Section 7. If a court of competent jurisdiction should
decline to enforce any of the provisions of this Agreement, the Company and
Indemnitee agree that such provisions shall be deemed to be reformed to provide
Indemnitee indemnification by the Company to the maximum extent permitted by the
other portions of this Agreement that are not unenforceable, and the remainder
of this Agreement shall not be affected, and this Agreement shall continue in
force.
8. GOVERNING LAW; BINDING EFFECT; ASSUMPTION BY SUCCESSORS;
AMENDMENT AND TERMINATION
8.1 This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Washington.
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8.2 This Agreement shall be binding upon Indemnitee and upon
the Company, its successors and assigns, and shall inure to the benefit of
Indemnitee, his or her spouse and marital community Indemnitee's heirs, personal
representatives and assigns and to the benefit of the Company, its successors
and assigns.
8.3 In the event the Company or any successor (i) consolidates
with or merges into any other person or entity and shall not be the continuing
or surviving corporation or entity of such consolidation or merger or (ii)
liquidates, dissolves or transfers all or substantially all of its assets to any
person or entity, then, and in each case, proper provisions shall be made so
that the successors of the Company assume the obligations set forth in this
Agreement to the maximum extent permitted under the law of such person's or
entity's jurisdiction of incorporation, if such entity is a corporation, or
under other applicable law.
8.4 No amendment, modification, termination or cancellation of
this Agreement shall be effective unless in writing signed by both parties
hereto.
8.5 No amendment, modification, repeal, termination or
replacement of any part or all of the Company's By-laws or Articles shall
operate in any way to limit Indemnitee's rights under this Agreement.
8.6 Nothing in this Agreement shall confer upon Indemnitee the
right to continue to serve as a director and\or officer of the Company. If
Indemnitee is an officer of the Company, then, unless otherwise expressly
provided in a written employment agreement between the Company and Indemnitee,
the employment of Indemnitee with the Company shall be terminable at will by
either party.
8.7 This Agreement shall remain in full force and effect so
long as Indemnitee is a director or officer of the Company, or is serving at the
request of the Company in any of the capacities specified in Section 1.6. Rights
arising pursuant to that Agreement with respect to any such office or position
held prior to the termination hereof shall survive the termination of such
office or position.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement effective as of the day and year first set forth above.
"Company" PROGRESSIVE NETWORKS, INC.
By______________________________________
"Indemnitee"
________________________________________
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Exhibit 10.15
LIMITED PROXY AND VOTING AGREEMENT
This Limited Proxy and Voting Agreement (the "Agreement") is made as of
the 21st day of July, 1997 (the "Effective Date"), by and between Microsoft
Corporation ("Microsoft") and Progressive Networks, Inc. (the "Company").
RECITALS
A. The Company and Microsoft are entering into a Series E Preferred
Stock Purchase Agreement dated as of the Effective Date (the "Purchase
Agreement") pursuant to which the Company is selling to Microsoft shares of the
Company's Series E Convertible Preferred Stock (the "Series E Preferred") and a
warrant to purchase additional shares of Series E Preferred (the "Series E
Warrant").
B. The obligation of the Company to issue and sell the Series E
Preferred and the Series E Warrant under the Purchase Agreement is conditioned
upon, among other things, the execution and delivery by Microsoft of this
Agreement.
C. In connection with the consummation of the Purchase Agreement,
Microsoft has agreed to make the provisions set forth below with respect to the
future voting of any and all shares of the Company's nonvoting capital stock
which Microsoft is acquiring pursuant to the Purchase Agreement, including upon
exercise, if ever, of the Series E Warrant, or will acquire in the future,
including but not limited to through conversion of the Series E Preferred into a
series of nonvoting common stock (the "Series E Common Stock") or the receipt of
additional shares of nonvoting stock issued in connection with a stock dividend,
stock split or other recapitalization (all of such nonvoting shares shall be
referred to, collectively, as the "Shares").
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the adequacy and receipt of which is hereby acknowledged,
Microsoft agrees as follows:
1. Voting Agreement. During the term of this Agreement, Microsoft
hereby agrees to vote all Shares as follows:
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(a) With the exception of voting on the following matters, which
are expressly excluded from the scope of this Agreement:
(i) any amendment or repeal of any provision of, or the
addition of any provision to, the Company's Articles of Incorporation to the
extent such action would adversely alter or change the preferences, rights, or
privileges of the Series E Preferred in a way that does not alter or change in a
substantially similar manner the preferences, rights, or privileges of all of
the other outstanding classes or series of Preferred Stock or otherwise
disadvantage disproportionately the holders of Series E Preferred;
(ii) any amendment or repeal of any provision of, or the
addition of any provision to, the Company's Articles of Incorporation to the
extent such action would adversely alter or change the preferences, rights, or
privileges of the Series E Common Stock in a way that does not alter or change
in a substantially similar manner the preferences, rights, or privileges of all
of the other outstanding classes or series of Common Stock or otherwise
disadvantage disproportionately the holders of Series E Common Stock;
(iii) any increase or decrease in the authorized number
of shares of Series E Preferred or Series E Common Stock;
(iv) the authorization, creation or issuance of any
shares of (A) Preferred Stock or securities convertible into Common Stock prior
or superior to the Series E Preferred as to dividends, distributions, conversion
rights, redemption rights or liquidation preference, or (B) Common Stock prior
or superior to the Series E Preferred or Series E Common Stock as to dividends,
distributions, redemption rights or liquidation preference;
(v) any increase in the rights, preferences, or number of
authorized shares of any existing class or series of (A) Preferred Stock that,
after giving effect to the amendment, has rights or preferences with respect to
dividends, distributions, conversion rights, redemption rights or liquidation
preference that are prior or superior to the Series E Preferred; or (B) Common
Stock that, after giving effect to amendment, has rights or preferences with
respect to dividends, distributions, conversion rights, redemption rights or
liquidation preference that are prior or superior to the Series E Common Stock;
(vi) any merger, consolidation or statutory share
exchange where (A) the conversion ratio or exchange rate, as applicable, is not
equal in value on an as-if-converted-to-common stock basis for all shareholders
or (B) any holder of Series E Preferred or Series E Common Stock is required to
make any representation or warranty, other than representations and warranties
required by
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all shareholders, under the definitive agreement with respect to such merger,
consolidation or share exchange;
(vii) any amendment that would cancel or otherwise affect
rights to distributions or dividends on all or part of the Series E Preferred in
a way that does not alter or change in a substantially similar manner the
preferences, rights, or privileges of all of the other outstanding classes or
series of Preferred Stock or otherwise disadvantage disproportionately the
holders of Series E Preferred;
(viii) any amendment that would cancel or otherwise
affect rights to distributions or dividends on all or part of the Series E
Common Stock in a way that does not alter or change in a substantially similar
manner the preferences, rights, or privileges of all of the other outstanding
classes or series of Common Stock or otherwise disadvantage disproportionately
the holders of Series E Common Stock;
(ix) in those situations where holders of Series E
Preferred do not vote as a separate series, any transaction in which such
holders intend to abstain or not vote in favor of a proposed transaction in
order to exercise their dissenters' rights, except in a transaction where the
exercise by the holders of Series E Preferred of their dissenters' rights would
cause the transaction not to qualify for pooling-of-interests accounting
treatment and such qualification is a requirement of the transaction; provided,
however, that, in the event that a holder of Series E Preferred would otherwise
have elected to exercise dissenters' rights with respect to such a
pooling-of-interests transaction, the Company shall cause all parties to such
transaction to agree to register under the Securities Act of 1933, as amended,
all outstanding shares of Series E Preferred as soon as such registration is
permissible legally and in accordance with the accounting principles with
respect to pooling-of-interests (e.g., immediately following one 30-day combined
reporting period following the transaction); or
(x) in those situations where holders of Series E Common
Stock, if any, do not vote as a separate series, any transaction in which such
holders intend to abstain or not vote in favor of a proposed transaction in
order to exercise their dissenters' rights, except in a transaction where the
exercise by the holders of Series E Common Stock of their dissenters' rights
would cause the transaction not to qualify for pooling-of-interests accounting
treatment and such qualification is a requirement of the transaction; provided,
however, that in the event that a holder of Series E Common Stock would
otherwise have elected to exercise dissenters' rights with respect to such a
pooling-of-interests transaction, the Company shall cause all parties to such
transaction to agree to register under the Securities Act of 1933, as amended,
all outstanding shares of Series E Common Stock as soon as such registration is
permissible legally and in
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accordance with the accounting principles with respect to pooling-of-interests
(e.g., immediately following one 30-day combined reporting period following the
transaction);
Microsoft hereby agrees, with respect to each matter submitted to the
shareholders for a vote in which the holders of nonvoting shares have voting
rights under the Washington Business Corporation Act or other applicable law, to
vote the Shares as recommended by the Company's Board of Directors.
(b) Microsoft hereby agrees to vote the Shares in favor of
adoption of the Amended and Restated Articles in the form attached as Exhibit J
to the Purchase Agreement.
2. Irrevocable Proxy. Microsoft hereby irrevocably appoints Rob Glaser,
but if he is unable to act, Bruce Jacobsen, as its proxy, with full power of
substitution, to execute written consents and vote all Shares with respect to,
the matters as provided in Section 1. Microsoft acknowledges that this proxy is
coupled with an interest pursuant to RCW 23B.07.220(4)(e) and is therefore
irrevocable during the term of this Agreement.
3. Termination. This Agreement shall terminate upon the earlier of:
(a)the date upon which Microsoft no longer holds any Shares;
(b) upon conversion of the Series E Preferred into voting common
stock; and
(c) ten (10) years after the Effective Date.
4. Rights and Obligations Upon Transfer. All transferees of Microsoft
will be bound by the terms of this Agreement. Microsoft shall not sell, assign,
transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, any
Shares unless the person or entity so acquiring such Shares shall first agree in
writing, delivered to the Company, to be bound by all the terms of this
Agreement with respect to such Shares to the same extent as is Microsoft. A
transferee shall be bound by this Agreement only with respect to Shares received
from Microsoft. It is expressly agreed by the parties that any sale or transfer
made contrary to the provisions of this Section 4 shall be null and void.
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<PAGE> 5
5. Legend.
(a) Each certificate representing any Shares held by Microsoft
or any transferee, or as to which it has voting power, shall bear the following
legend (the "Legend") until such time as the shares represented thereby are no
longer subject to the provisions of this Agreement:
THESE SHARES ARE SUBJECT TO CERTAIN VOTING RESTRICTIONS BY
VIRTUE OF A PROXY AND VOTING AGREEMENT, AS AT ANY TIME AMENDED
IN ACCORDANCE WITH THAT CERTAIN PROXY AND VOTING AGREEMENT, A
COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY.
(b) The Company agrees that, during the term of this Agreement,
it will not remove, and will not permit to be removed (upon registration of
transfer, reissuance or otherwise), the Legend from any such certificate and
will place or cause to be placed the Legend on any new certificate issued to
represent Shares theretofore represented by a certificate carrying the Legend.
6. Specific Enforcement. The Company and Microsoft acknowledge and agree
that the Company and Microsoft will each be irreparably damaged if this
Agreement is not specifically enforced. Upon a breach or threatened breach of
the terms, covenants and/or conditions of this Agreement by either the Company
or Microsoft, Microsoft or the Company, as applicable, shall, in addition to all
other remedies, be entitled to a temporary or permanent injunction, without
showing any actual damage, and/or a decree for specific performance, in
accordance with the provisions of this Agreement.
7. Miscellaneous. The provisions of Section 7 of the Purchase Agreement
are incorporated in this Agreement by this reference as of they were set forth
in this Agreement; provided, that this Agreement may be amended only by a
written instrument executed by both the Company and Microsoft.
IN WITNESS WHEREOF, the undersigned have executed this Limited Proxy and
Voting Agreement as of the date set forth above.
MICROSOFT CORPORATION
By /s/ Greg Maffei
-------------------------------
Its Vice President, Corporate
Development; Treasurer
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<PAGE> 6
PROGRESSIVE NETWORKS, INC.
By /s/ Rob Glaser
-------------------------------
Its CEO
------------------------
6
<PAGE> 1
EXHIBIT 10.16
PROGRESSIVE NETWORKS, INC.
SHAREHOLDERS' BUY-SELL AGREEMENT
dated
March 31, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Restriction on Transfer . . . . . . . . . . . . . . . . . . . . . . 1
2. Exempt Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Transfers to Company . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Transfers to Family . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Offer Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Offer to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.3 Share Purchase Procedures . . . . . . . . . . . . . . . . . . . . . 2
4. Terms of Sale and Closing . . . . . . . . . . . . . . . . . . . . . . . . . 4
5. Other Events Constituting an Offer to Transfer Shares . . . . . . . . . . . 4
5.1 Repurchase Events . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . 5
5.3 Offer Notice; Offered Price . . . . . . . . . . . . . . . . . . . . 5
5.4 Payment for the Shares . . . . . . . . . . . . . . . . . . . . . . 5
6. Determined Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. Effect of Non-complying Transfer . . . . . . . . . . . . . . . . . . . . . . 7
8. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9. Spouses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.1 Spousal Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.2 Future Spouses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.3 Agreement Drafted by Counsel to the Company . . . . . . . . . . . . . . 8
10. Independent Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11. Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 8
11.2 Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.3 Construction and Venue . . . . . . . . . . . . . . . . . . . . . . 8
11.4 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.5 Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.6 Legend on Shares . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.7 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.8 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 9
11.9 Testamentary Provisions . . . . . . . . . . . . . . . . . . . . . . 9
11.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.11 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.12 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.13 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11.15 Confirmation of Definition of Shares . . . . . . . . . . . . . . . 10
</TABLE>
i
<PAGE> 3
SHAREHOLDERS' BUY-SELL AGREEMENT
THIS SHAREHOLDERS' BUY-SELL AGREEMENT (this "Agreement") is entered
into effective as of the 31st day of March, 1995, by and among Progressive
Networks, Inc., a Washington corporation (the "Company"), Robert Glaser (the
"Founder"), and the holders of shares of common stock in the Company acquired
(i) by exercising options under the Company's 1995 Stock Option Plan, as
hereafter amended, or under any other stock option plan or similar compensation
plan adopted after the date hereof by the Company, or (ii) pursuant to a stock
bonus, warrant or other form of security issued or granted for services
rendered to the Company (together, the "Shares"), who sign a "Consent to Be
Bound" by this Agreement in the form of attached Exhibit A and who shall be
listed on attached Exhibit B. The Founder and the persons listed on attached
Exhibit B shall be referred to, collectively, as the "Shareholders" and,
individually, as a "Shareholder."
RECITALS
The Shareholders and the Company believe it is in their and the
Company's best interests to restrict the free transferability of the Shares to
assure continuity in the control and management of the corporation.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. GENERAL RESTRICTION ON TRANSFER. No Share or any interest
therein shall be validly sold, assigned, awarded, pledged, encumbered,
confirmed, or otherwise transferred, for consideration or otherwise, whether
voluntarily, involuntarily, or by operation of law (collectively, a
"Transfer"), except in accordance with the provisions of this Agreement. A
purported transferee of a Transfer not made in accordance with the provisions
of this Agreement shall not be recognized as a shareholder of the Company for
any purpose whatsoever. A Transfer or attempt to effect a Transfer subject to
the provisions of this Agreement shall be deemed to occur whenever any interest
in any Share is transferred or is attempted to be transferred, voluntarily,
involuntarily, or by operation of law, irrespective of whether any change in
the record ownership of the Shares occurs.
2. EXEMPT TRANSFERS.
2.1 TRANSFERS TO COMPANY. Notwithstanding anything in
this Agreement to the contrary, a Shareholder may effect a Transfer of all or
any portion of his or her Shares to the Company.
2.2 TRANSFERS TO FAMILY. Notwithstanding anything in
this Agreement to the contrary, a Shareholder may, during his life, effect a
Transfer of all or any portion of his
1
<PAGE> 4
or her Shares to his or her spouse, or his or her lineal ancestors or
descendants, or a trustee of a trust for the exclusive benefit of such spouse
or ancestors or descendants (the "Permitted Transferees," who would then become
"Shareholders"), provided that the transferee shall execute a "Consent to be
Bound" by this Agreement in the form of attached Exhibit A.
3. TRANSFERS.
3.1 OFFER NOTICE. If any Shareholder (the "Transferor")
desires to effect a Transfer of any or all of his or her Shares to any person
other than a Permitted Transferee or the Company pursuant to a bona fide
written offer, the Transferor shall (a) give notice to the Company (an "Offer
Notice") specifying the name, address and telephone number of the proposed
transferee, the number of Shares proposed to be transferred (the "Offered
Shares"), the price per Share proposed to be paid by the proposed transferee
for the Offered Shares (the "Offered Price"), and all other terms and
conditions of the proposed Transfer; (b) provide a legible photocopy of the
written offer, and (c) provide such additional information about the proposed
transferee as the Company or any Remaining Shareholder (defined below) may
reasonably request, which information shall be provided within ten (10) days of
receipt of the request.
3.2 OFFER TO SELL. Giving an Offer Notice to the Company
shall constitute an offer by the Transferor on the date the Offer Notice is
received by the Company (the "Offer Date") to sell the Offered Shares to the
Company and/or the other Shareholders (the "Remaining Shareholders") at a
purchase price per Share (the "Purchase Price") equal to the Offered Price and
in the manner provided in Section 3.3. If the Offered Shares are proposed to
be sold for consideration other than solely cash, the Offered Price shall be
deemed to be the sum of (a) the fair market value of the consideration other
than cash offered for the Offered Shares as determined in good faith by the
Board of Directors of the Company, and (b) any cash consideration so offered.
3.3 SHARE PURCHASE PROCEDURES. Each purchase of Shares
by the Company and/or the Remaining Shareholders pursuant to this Section 3
shall be made as follows:
3.3.1 The Company shall have the first right to purchase
any or all of the Offered Shares. It shall exercise this right by giving
written notice to the Transferor (the "Company Acceptance Notice") within
forty-five (45) days (the "Company Acceptance Period") after the Offer Date,
stating the number of Offered Shares that the Company agrees to purchase.
Delivery of the Company Acceptance Notice to the Transferor shall create a
binding contract between the Company and the Transferor for the purchase and
sale, at the Purchase Price and on the terms and conditions described in
Section 4, of the number of Shares specified in the Company Acceptance Notice.
3.3.2 No later than ten (10) days after the expiration of
the Company Acceptance Period, the Company shall provide each of the Remaining
Shareholders with a copy of the Offer Notice and inform them of the number of
Offered Shares the Company has
2
<PAGE> 5
agreed to purchase. If the Company does not exercise its right to purchase all
of the Offered Shares, each of the Remaining Shareholders shall then have the
right to purchase those Offered Shares that the Company has elected not to
purchase (the "Remaining Offered Shares") which are allocated to the
Shareholder pursuant to Section 3.3.4.
3.3.3 Within forty-five (45) days after the expiration of
the Company Acceptance Period (the "Shareholder Acceptance Period"), each
Remaining Shareholder desiring to purchase all or part of the Remaining Offered
Shares (an "Accepting Shareholder") shall deliver to the Company notice of his
or her acceptance of the offer (the "Shareholder Acceptance Notice"),
specifying the number of such Shares that he or she agrees to purchase.
Delivery of a Shareholder Acceptance Notice to the Company shall create a
binding contract between the Accepting Shareholder and the Transferor for the
purchase and sale, at the Purchase Price and on the terms and conditions
described in Section 4, of that portion of the Remaining Offered Shares
allocated to such Accepting Shareholder under Section 3.3.4.
3.3.4 Each Accepting Shareholder shall first have allocated
to him or her such portion of the Remaining Offered Shares as the number of
Shares of Capital Stock (as defined below) held by such Shareholder bears to
the total number of Shares of Capital Stock held by all of the Accepting
Shareholders (a Shareholder's "Pro Rata Portion"), but limited by the number of
Shares specified in his or her Shareholder Acceptance Notice. If any Accepting
Shareholder agrees to purchase less than his or her Pro Rata Portion of the
Remaining Offered Shares, each Accepting Shareholder who agrees to purchase
more than his or her Pro Rata Portion of the Remaining Offered Shares shall
have allocated to him or her such additional portion of the Remaining Offered
Shares not so allocated under the preceding sentence as the number of Shares of
Capital Stock held by such Accepting Shareholder bears to the total number of
Shares of Capital Stock held by all Accepting Shareholders who agree to
purchase more than their Pro Rata Portion of the Remaining Offered Shares, but
again limited by the number of Shares specified in his or her Shareholder
Acceptance Notice. This procedure shall continue until the Remaining Offered
Shares have been allocated among the Accepting Shareholders to the extent
specified in their respective Shareholder Acceptance Notices. "Shares of
Capital Stock" shall mean the number of shares of common stock held by one or
more Shareholders plus that number of shares of common stock into which any
shares of preferred stock then held by the Shareholder or Shareholders could be
converted at that time under the terms of the Company's Articles of
Incorporation, as amended from time to time.
3.3.5 If the Company and the Remaining Shareholders have
not agreed to purchase all of the Offered Shares, the Transferor may effect a
Transfer of any remaining Offered Shares to the proposed transferee at any time
within sixty (60) days after the expiration of the Shareholder Acceptance
Period at the Offered Price and on the terms and conditions stated in the Offer
Notice only, provided that the proposed transferee shall have first executed a
"Consent to Be Bound" by this Agreement in the form of attached Exhibit A.
3
<PAGE> 6
4. TERMS OF SALE AND CLOSING. The Transfer of Offered Shares to
the Company and/or to Accepting Shareholders (collectively, the "Purchasers")
shall be consummated on the terms and conditions set forth in the Offer Notice
on a date set by the Company (the "Closing Date"), which date shall be not less
than fifteen (15) nor more than thirty (30) days after expiration of (a) the
Company Acceptance Period if the Company is purchasing all of the Offered
Shares; or (b) the Shareholder Acceptance Period if the Company and/or the
Remaining Shareholders are purchasing all or a portion of the Offered Shares.
At least fourteen (14) days prior to the Closing Date, the Company shall give
notice to the Transferor and all the Remaining Shareholders, specifying the
number, if any, of the Offered Shares to be purchased by the Company and each
of the Remaining Shareholders and specifying the Closing Date.
5. OTHER EVENTS CONSTITUTING AN OFFER TO TRANSFER SHARES.
5.1 REPURCHASE EVENTS. Each of the following events or
conditions shall constitute a Repurchase Event:
(a) the filing of a petition in bankruptcy by or against
the Shareholder (unless the petition is dismissed within sixty (60) days);
(b) any general assignment by the Shareholder for the
benefit of his or her creditors;
(c) any decree of divorce, dissolution or separate
maintenance, or any property settlement or separation agreement wherein Shares
are awarded to a Shareholder's former or separated spouse or partner who is not
also a Shareholder (a "Former Spouse");
(d) the termination of employment for "cause" of any
Shareholder who is also an employee of the Company; provided, however, that the
Company's board of directors, in its sole discretion, may determine that the
termination of employment for "cause" of any Shareholder who is also an
employee of the Company shall not be considered a Repurchase Event
("employment" shall include full time employment, part time employment, or
service as a consultant, on an advisory board, or on the Company's board of
directors; termination of employment for "cause" shall have the meaning given
that term in any employment agreement or consulting agreement to which the
Shareholder is a party or, in the absence thereof, the conduct that shall
constitute "cause" for purposes of this Agreement shall be insubordination,
dishonesty, incompetence, moral turpitude or the refusal to perform the
individual's duties and responsibilities for any reason other than illness or
incapacity);
(e) any Non-complying Transfer (defined in Section 7); or
(f) any other event, other than a Transfer pursuant to
Section 2, which, were it not for the provisions of this Agreement, would cause
any such Shares, or any interest therein, to be sold, assigned, awarded,
confirmed or otherwise transferred, for
4
<PAGE> 7
consideration or otherwise, to any person, whether voluntarily, involuntarily
or by operation of law under circumstances that would not bring such event
within Section 3 of this Agreement.
5.2 PURCHASE OF SHARES. Upon the occurrence of a
Repurchase Event, as defined in Section 5.1 (except the Repurchase Event
described in Section 5.1(c)), the Company and secondarily the Remaining
Shareholders shall have the right to purchase such Shareholder's Shares on the
same terms and conditions as if such Shareholder had made an offer to sell such
Shares pursuant to Section 3 at a price per Share equal to the Determined Price
established pursuant to Section 6. Upon the occurrence of the Repurchase Event
specified in Section 5.1(c), first that Shareholder whose Former Spouse was
awarded Shares, and then the Company and, after the Company, the Remaining
Shareholders shall have the right to purchase any or all Shares owned, in whole
or in part, by that Shareholder's Former Spouse on the same terms and
conditions as if such Shareholder's Former Spouse made an offer to sell such
Shares pursuant to Section 3 at a price per Share equal to the price per share
at which the Shares were valued for purposes of the Former Spouse's property
settlement or, if no value was ascribed to the Shares for purposes of the
property settlement, the Determined Price established pursuant to Section 6.
5.3 OFFER NOTICE; OFFERED PRICE. Within thirty (30) days
after the occurrence of a Repurchase Event, the Shareholder or his or her
trustee in bankruptcy, personal representative, guardian, executor or
administrator, as appropriate (the "Transferor"), shall give written notice to
the Company and the other Shareholders (the "Remaining Shareholders") of such
event specifying the date of such event and describing in reasonable detail the
nature of the event and the number of Shares affected. The price per Share
shall be as specified in the last sentence of Section 5.2 or the Determined
Price established pursuant to Section 6, as appropriate. Such notice shall be
deemed to be the Offer Notice for purposes of Section 3, the number of Shares
affected shall be deemed to be the Offered Shares, and such Determined Price
shall be deemed to be the Offered Price. If the Company or any Remaining
Shareholder has not received this notice upon the expiration of the thirty-
(30-) day period, any Shareholder or director of the Company who has knowledge
of such event may give notice to the Company and the Remaining Shareholders at
any time after the end of such period, and the notice shall be deemed to be the
Offer Notice.
5.4 PAYMENT FOR THE SHARES. The Purchase Price for the
Offered Shares for purposes of this Section 5 shall be paid in five (5) equal
annual installments, together with interest on the unpaid balance compounded
semi-annually at a per annum rate equal to the minimum annual rate of interest
necessary to avoid the imputation of interest under federal income tax laws.
The first installment of principal and interest shall be paid on the last day
of the fiscal year in which the Repurchase Event occurred. Interest shall
accrue commencing on the Closing Date as defined in Section 4. The unpaid
balance of the Purchase Price for the Offered Shares may be prepaid in whole or
in part at any time without penalty, and may be accelerated in the event of
failure to pay any installment when due, in which case reasonable attorneys'
fees and costs may also be recovered if any legal action for
5
<PAGE> 8
collection is commenced. The other terms and conditions and procedures for
transferring Offered Shares shall be determined in accordance with Section 4.
6. DETERMINED PRICE.
The Determined Price for each Share shall be calculated as
follows:
6.1 Within sixty (60) days of the Repurchase Event, the
Company and the Transferor shall attempt to agree on the Determined Price.
6.2 If the Company and the Transferor are unable to agree
upon the Determined Price within such period, the Determined Price shall equal
the Fair Market Value of the Transferor's Shares (as defined below), as
established by an independent qualified appraiser, divided by the number of
Shares to be transferred. The "Fair Market Value of the Transferor's Shares"
means the cash or cash equivalent price at which those Shares would have
changed hands between a willing buyer and a willing seller on the date of the
Repurchase Event, both being adequately informed of the relevant facts and
neither being compelled to buy or sell (it is the intent of the parties that in
determining the Fair Market Value of the Transferor's Shares, all appropriate
factors will be considered, including, but not limited to, minority discounts
and discounts for lack of marketability).
The Company and the Transferor shall attempt to agree upon such an
appraiser, and, if an appraiser is agreed upon in writing by the parties, the
resulting calculation shall be final and binding. The costs of such appraiser
shall be divided evenly between the Company and the Transferor.
6.3 If the Company and the Transferor are unable to agree
upon a single appraiser within ninety (90) days of the Repurchase Event, then
either party shall be entitled to notify the other in writing of such party's
institution of the following appraisal procedure:
Within ten (10) days of one party's giving notice to the other that he
or she is instituting the appraisal process, each party shall notify the other
in writing of his or her appointed qualified independent appraiser (each, a
"Party Appraiser"), which appraiser must be experienced in the valuation of
closely held corporations and of the type of business engaged in by the
Company. The two appraisers shall select a third qualified independent
appraiser (the "Independent Appraiser") within thirty (30) days of the
appointment of the second Party Appraiser. If the two Party Appraisers cannot
agree on an Independent Appraiser within the thirty (30) day period, the
Independent Appraiser shall be selected pursuant to the American Arbitration
Association's Commercial Arbitration Rules, Sections 13 and 15, as such
sections may be amended or succeeded from time to time. Each Party Appraiser
shall complete and submit to the Independent Appraiser a calculation of the
Determined Price, pursuant to Section 6.1, within sixty (60) days of the
appointment of the first Party Appraiser. The Independent Appraiser shall
select as the Determined Price one of the two calculations of the Determined
Price submitted by the Party Appraisers. The calculation of the Determined
Price selected by the Independent Appraiser shall be final and
6
<PAGE> 9
binding and shall constitute the Determined Price. Each party shall bear the
costs associated with the appraiser he or she selects and shall share equally
the costs of the Independent Appraiser. If either party fails to appoint an
appraiser within the allotted time period, or if either appraiser fails to
complete the calculation within the allotted time period, the calculation of
the appraiser appointed by the other party shall be final and binding and shall
be deemed to constitute the Determined Price.
7. EFFECT OF NON-COMPLYING TRANSFER. If any Transfer in violation
of this Agreement shall be attempted, or if any involuntary or other purported
Transfer by law of any Shares occurs or is attempted (each, a "Non-complying
Transfer"), it shall be void and upon presentation for transfer the Company
shall not give effect to such purported Transfer. The failure of the Company
or its Shareholders to purchase, pursuant to Section 5, Shares which are the
subject matter of a Non-complying Transfer shall not be construed as permission
to proceed with such Transfer. In addition, any Shareholder or the Company may
institute and maintain a proceeding to compel specific performance of this
Agreement by the Shareholder attempting such Transfer, it being agreed that the
other Shareholders not in default and the Company do not have an adequate
remedy at law.
8. CONFIDENTIALITY.
Each Shareholder agrees to hold in strict confidence all information
concerning or related to the Company ("Confidential Information") and shall not
disclose any Confidential Information to third parties unless such Confidential
Information is already generally publicly known through no fault of the
Shareholder.
9. SPOUSES.
9.1 SPOUSAL CONSENT. The execution of this Agreement by a
Shareholder's spouse who is not also a Shareholder (a "Spouse") signifies that
he or she authorizes, ratifies, confirms and approves the execution of this
Agreement by the Shareholder, and acknowledges that any interest he or she now
owns or hereafter acquires in the Shares, pursuant to community property laws
or otherwise, shall be subject to the terms of this Agreement as if such
interests constituted Shares and as if such Spouse were a Shareholder. He or
she further authorizes and appoints his or her spouse as his or her
attorney-in-fact to exercise all rights he or she may have with respect to the
ownership of any Shares, including the encumbrance and disposition of such
Shares. Except to the extent specifically provided in this Section 9, the
Spouse of a Shareholder shall not be considered a Shareholder.
9.2 FUTURE SPOUSES. If a Shareholder marries or remarries
after executing this Agreement, the Shareholder shall have his or her Spouse
execute a "Consent to Be Bound" by this Agreement in the form of attached
Exhibit A within a reasonable time, not to exceed thirty (30) days, following
the marriage.
9.3 AGREEMENT DRAFTED BY COUNSEL TO THE COMPANY. Each Spouse,
by signing this Agreement or a "Consent to Be Bound" by this Agreement,
acknowledges that he
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<PAGE> 10
or she (a) has read and understood this Agreement, and understands the effect
of this Section 9, (b) has had the opportunity to obtain separate and
independent counsel of his or her own choosing prior to signing this Agreement
or a "Consent to Be Bound" by this Agreement and has either exercised or waived
such right, and (c) understands that this Agreement has been drafted by
attorneys for the Company.
10. INDEPENDENT COUNSEL. Each Shareholder understands that this
Agreement has been drafted by attorneys for the Company and acknowledges that
he or she has had the opportunity to obtain separate and independent counsel of
his or her own choosing prior to signing this Agreement or a "Consent to Be
Bound" by this Agreement and has either exercised or waived such right.
11. MISCELLANEOUS PROVISIONS.
11.1 FURTHER ASSURANCES. Each party agrees to perform any
further acts and to execute and deliver any further documents that may be
reasonably necessary to carry out the provisions of this Agreement. The
obligation imposed by this Section 11.1 shall be specifically enforceable.
11.2 ATTORNEY'S FEES. In the event it is necessary for
any party to engage an attorney to enforce the terms of this Agreement,
regardless of whether a lawsuit or arbitration is commenced, the prevailing
party shall, in addition to any other relief, be entitled to recover from the
party in default reasonable attorney's fees and costs, including any on appeal.
11.3 CONSTRUCTION AND VENUE. It is agreed and understood
that this Agreement is made in accordance with and shall be interpreted under
the laws of the State of Washington. If any action or other proceeding be
brought on or in connection with this Agreement, the venue of said action or
other proceeding shall be in King County, Washington.
11.4 NUMBER AND GENDER. Unless some other meaning or
intent is apparent from the context, the plural shall include the singular and
vice versa, and masculine, feminine and neuter words shall be used
interchangeably.
11.5 SECTION HEADINGS. Section headings have been
included solely for convenience and shall not be considered a part of this
Agreement for any purpose relating to the interpretation or construction of its
terms.
11.6 LEGEND ON SHARES. Upon execution of this Agreement,
Shareholders shall deliver all certificates representing Shares to the Company
to have placed upon them a legend in substantially the following form:
The Shares represented by this certificate are subject to the
terms of a Shareholders' Buy-Sell Agreement, as such agreement
may
8
<PAGE> 11
be amended from time to time as provided in the agreement, a
copy of which may be examined at the principal office of the
corporation. All terms and provisions of the Shareholders'
Buy-Sell Agreement are hereby incorporated by reference and made
a part of this certificate.
11.7 AMENDMENTS. The provisions of this Agreement may be
altered, amended or repealed, in whole or in part, only upon the written
consent of the Company and the Shareholders holding two-thirds (2/3) of the
outstanding Shares of Capital Stock (as defined in Section 3.3.4).
11.8 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding on, and shall inure to the benefit of, the parties to it and their
respective heirs, personal representatives, successors and assigns.
11.9 TESTAMENTARY PROVISIONS. Each Shareholder agrees to
insert in his or her will a direction and authorization to the executor to
fulfill and comply with the provisions of this Agreement.
11.10 SEVERABILITY. Should any provision or portion of
this Agreement be held unenforceable or invalid for any reason, the remaining
provisions and portions shall be unaffected by such holding.
11.11 ENTIRE AGREEMENT. This instrument constitutes the
sole and entire agreement of the parties with respect to its subject matter and
correctly sets forth the rights, duties and obligations of each as to the other
with respect to the subject matter as of its date. Any prior agreements,
promises, negotiations or representations concerning its subject matter not
expressly set forth in this Agreement are of no force or effect.
11.12 TERMINATION. This Agreement shall terminate on the
written agreement of the Company and the Shareholders holding two-thirds (2/3)
of the outstanding Shares of Capital Stock (as defined in Section 3.3.4); upon
the dissolution, bankruptcy or insolvency of the Company; or at such time as
only one Shareholder (other than the Founder) remains, after the Shares of all
other Shareholders have been transferred, redeemed or purchased.
11.13 NOTICES. Any notice or other communication required
or permitted to be given under this Agreement shall be in writing, and notice
shall be deemed given when delivered personally to, or deposited in the United
States mail, first-class, postage prepaid, addressed to the Company or the
Founder at 616 First Avenue, Suite 701, Seattle, WA 98104, or to the
Shareholder at the Shareholder's address as set forth on attached Exhibit B.
Any party may at any time give notice in writing to the other parties of a
change of his or her address for purposes of this Section 11.13.
9
<PAGE> 12
11.14 COUNTERPARTS. This Agreement may be executed by the
parties in one or more counterparts, all of which taken together shall
constitute one instrument.
11.15 CONFIRMATION OF DEFINITION OF SHARES. The parties
expressly acknowledge and confirm that, as noted above, this Agreement binds
only those Shares of Shareholders acquired (a) pursuant to the exercise of
options granted under the Company's 1995 Stock Option Plan, as hereafter
amended, or under any other stock option plan or similar compensation plan
adopted after the date hereof by the Company, or (b) pursuant to a stock bonus,
warrant or other form of security issued or granted for services rendered to
the Company.
IN WITNESS WHEREOF, the parties have executed this Shareholders'
Buy-Sell Agreement effective as of the date first written above.
"COMPANY"
PROGRESSIVE NETWORKS, INC.
By /s/ Robert Glaser
-------------------------------------
Robert Glaser, President
"FOUNDER"
/s/ Robert Glaser
-------------------------------------
Robert Glaser
10
<PAGE> 1
Exhibit 10.17
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is entered into effective as of
the 25th day of September, 1997, by and among Real Networks, Inc., a Washington
corporation (the "Company"), Robert Glaser ("Glaser"), Accel IV L.P., Mitchell
Kapor and Bruce Jacobsen. Accel IV L.P. and Messrs. Kapor and Jacobsen are
referred to collectively as the "Shareholders":
RECITAL
The Shareholders, the Company and Glaser desire to enter into this
Voting Agreement to provide that upon the closing of the Company's planned
initial public offering the Shareholders will vote all of the shares of stock of
the Company now owned or hereafter acquired by the Shareholders for Glaser as a
director of the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein, and for good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Election of Directors.
(a) Each of the Shareholders agree to vote all shares of
preferred stock of the Company ("Preferred Stock") and common stock of the
Company ("Common Stock") now owned or hereafter acquired by such Shareholder in
each and every election of Glaser to the Board of Directors of the Company,
provided, however; that this provision shall only become effective upon the
closing of an initial public offering by the Company of its stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended.
The Shareholders shall not vote for the removal of Glaser as a director of the
Company.
(b) The Company agrees to take all actions required to ensure
that the rights given to the parties hereunder are effective and that they enjoy
the benefits thereof. The Company will at all times in good faith assist in the
carrying out of the provisions of this Agreement and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
parties hereunder against impairment.
2. Termination. This Agreement, and the respective rights and
obligations of the parties hereto, shall terminate only in the event of the
death of Glaser.
3. Notices. All notices, requests, consents, and demands shall be in
writing and shall be deemed to have been sufficiently given if sent, postage
prepaid, by registered or certified mail, return receipt requested, or by
personal delivery to the Company at Real Networks, Inc., 1111 Third Avenue,
Suite 500, Seattle, Washington 98101, Attention: President; to Glaser at 1111
Third Avenue, Suite 500, Seattle, Washington 98101; and to the
1
<PAGE> 2
Shareholders at the addresses listed in on the signature page hereto; or to such
other address as may from time to time be furnished in writing to the other
parties hereto.
4. Specific Performance. The parties agree that their rights under this
Agreement are unique and cannot be satisfied by the award of monetary damages.
Accordingly, the parties shall, in addition to any other remedies available to
them at law or in equity, have the right to enforce their rights hereunder by
actions for specific performance to the extent permitted by law.
5. Entire Agreement: Amendments and Waivers. This Agreement constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects herein. This Agreement may only be amended if agreed to in
writing by the Company, Glaser, and the Shareholders.
6. Transferees and Assignment. This Agreement and the rights and
obligations of the parties shall inure to the benefit of, and be binding upon,
successors and assigns of the Company. The obligations of the Shareholders
hereunder are personal obligations and any transferee of shares of Common Stock
or Preferred Stock from the Shareholders are not bound by, or subject to the
terms of, this Agreement.
7. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Washington without giving effect to its conflict
of laws provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
REALNETWORKS, INC.
By: /s/ MARK KLEBANOFF
-----------------------------
Its: CFO
---------------------
/s/ ROBERT GLASER
--------------------------------
Rob Glaser
2
<PAGE> 3
/s/ MITCHELL KAPOR
--------------------------------
Mitchell Kapor
c/o Kapor Enterprises
238 Main Street
Cambridge, MA 02142
/s/ BRUCE JACOBSEN
--------------------------------
Bruce Jacobsen
c/o Real Networks, Inc.
1111 Third Avenue, Suite 500
Seattle, WA 98101
ACCEL IV L.P.
Accel IV Associates L.P.
Its: General Partner
/s/ JAMES BREYER
By: ----------------------------
General Partner
[Signature Page To Voting Agreement]
3
<PAGE> 1
EXHIBIT 10.18
This Agreement (this "Agreement") is entered into as of September 26,
1997 by and between Progressive Networks, Inc., a Washington corporation the
name of which is to be changed to RealNetworks, Inc. (the "Company") and Robert
Glaser, the founder, principal shareholder, Chairman of the Board, Chief
Executive Officer and a Director of the Company ("Mr. Glaser").
RECITALS
A. Mr. Glaser owns approximately 14,000,000 shares of preferred stock of
the Company, each of which shares is entitled to 15 votes.
B. Mr. Glaser, in consideration in part for the Company's covenants
under this Agreement, has agreed that the Company's Articles of Incorporation
may be amended to cause his shares of preferred stock to be converted (the
"Conversion") upon the closing of the Company's initial public offering, (as
defined in the Company's Amended and Restated Articles of Incorporation, the
"Qualified Public Offering") into shares of Common Stock, each share of which
would be entitled to one vote.
C. Mr. Glaser will, as a result of the Conversion and the Qualified
Public Offering, dilute his ability to direct the Company as a shareholder, and
give up a significant degree of influence as a shareholder over a change of
control of the Company. Mr. Glaser's investment in the Company has grown over
100 times in value from inception through September 24, 1997, and the dilution
to Mr. Glaser's ability to prevent a change of control could, in his judgment,
damage his continued return on investment.
NOW THEREFORE, in consideration of Mr. Glaser's significant economic
concessions described above, and the mutual covenants and agreements set forth
in this Agreement, and Mr. Glaser's consent to the Conversion, Mr. Glaser and
the Company agree as follows:
1. Acknowledgment of Concession in Value
The Company acknowledges and agrees that Mr. Glaser has given up
significant economic value in agreeing to the Conversion, and the diminution of
his voting rights.
2. Specific Enforcement
In addition to any and all rights as a shareholder of the Company, Mr.
Glaser shall have a direct contractual right to require the Company to abide by
and perform all terms of Article 7.1 (Strategic Transactions Committee) of the
Company's Articles of Incorporation (the "Strategic Transactions Article"). The
Company represents that its violation of or failure to abide by the Strategic
Transactions Article will violate this Agreement and will cause Mr. Glaser to
suffer direct irreparable harm for which there be no adequate legal remedy. The
parties hereto therefore acknowledge and agree that immediate injunctive relief,
including but not limited to specific enforcement of this Agreement, is an
appropriate and necessary remedy for violation of the Agreement, and that Mr.
Glaser shall have the right to obtain such judicial relief.
1
<PAGE> 2
3. Election of Directors
So long as Mr. Glaser shall own at least 3,500,000 shares of Common
Stock (such number of shares to be equitably adjusted to reflect stock splits,
stock dividends and recapitalizations), the Company shall use its best efforts,
as permitted under applicable law, to cause Mr. Glaser to be nominated to, not
removed from, and elected to the Company's board of directors.
4. Miscellaneous
Nothing in this Agreement is intended to require or shall be construed
as requiring the Company to take or fail to take any action in violation of
applicable law. The Company's inability to perform its obligations under this
Agreement pursuant to court order (other than any such order obtained at the
request of the Company) shall not constitute a breach of this Agreement. The
provisions of this Agreement shall be severable, as provided in this Section 4.
If a court of competent jurisdiction should decline to enforce any of the
provisions of this Agreement, the Company and Mr. Glaser agree that such
provisions shall be deemed to be reformed to provide Mr. Glaser with the
benefits intended by the partner to the maximum extent permitted by the other
portions of this Agreement that are not unenforceable, and the remainder of this
Agreement shall not be affected, and its Agreement shall continue in force. This
Agreement shall be interpreted and enforced in accordance with the laws of the
State of Washington. This Agreement shall be binding up Mr. Glaser and upon the
Company, its successors and assigns, and shall inure to the benefit of the
Company, its successors and assigns. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
each of the parties hereto.
IN WITNESS WHEROF, the parties have executed and delivered this
Agreement effective as of the day and year first set forth above.
PROGRESSIVE NETWORKS, INC.
/s/ Bruce Jacobsen
By___________________________________
ROBERT GLASER
/s/ Robert Glaser
______________________________________
<PAGE> 1
EXHIBIT 10.19
PROGRESSIVE NETWORKS, INC.
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
July 21, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. REGISTRATION RIGHTS................................................................ 1
1.1 Certain Definitions.................................................. 1
1.2 Registrable Securities............................................... 2
(a) Definition............................................. 2
(b) Transfer of Registration Rights........................ 2
(c) Conditions to Participation............................ 3
1.3 Demand Registration.................................................. 3
1.4 S-3 Registration..................................................... 4
(a) S-3 Registrations...................................... 4
(b) Priority S-3 Registrations............................. 5
(c) Restrictions on Purchasers and S-3
Registrations........................................................ 5
(d) Limited Number of S-3 Registrations.................... 6
(e) Selection of Underwriters.............................. 6
1.5 Piggyback Registrations.............................................. 6
(a) Right to Piggyback..................................... 6
(b) Priority on Primary Registrations...................... 6
(c) Priority on Secondary Registrations.................... 6
1.6 Lockup Agreements.................................................... 7
1.7 Registration Procedures.............................................. 7
1.8 Registration Expenses................................................ 9
1.9 Indemnification...................................................... 9
1.10 Termination.......................................................... 11
2. COVENANTS OF THE COMPANY........................................................... 11
2.1 Financial Statements, Budgets, etc................................... 12
2.2 Inspection........................................................... 13
2.3 Current Public Information........................................... 13
2.4 Reservation of Shares................................................ 14
2.5 Rights in Future Offerings........................................... 14
2.6 Insurance............................................................ 15
2.7 Use of any Investor Information...................................... 15
2.8 Conduct of Business.................................................. 15
2.9 Payment of Taxes..................................................... 16
2.10 Adverse Changes...................................................... 16
2.11 Life Insurance....................................................... 16
2.12 Affiliated Transactions.............................................. 16
2.13 Board of Directors................................................... 16
2.14 Distributions or Redemption of Capital Stock......................... 18
2.15 Conversion Shares.................................................... 18
3. MISCELLANEOUS.......................................................................... 18
3.1 Parties in Interest.................................................. 18
3.2 Entire Agreement: Amendments and Waivers............................. 18
3.3 Governing Law, Severability.......................................... 19
3.4 Notices.............................................................. 19
3.5 Counterparts......................................................... 19
3.6 Captions............................................................. 19
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
EXHIBITS:
- ---------
<S> <C>
Exhibit A: Holders of Series B Preferred Stock
Exhibit B: Holders of Series C Preferred Stock
Exhibit C: Holders of Series D Preferred Stock
</TABLE>
ii
<PAGE> 4
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
This Second Amended and Restated Investors' Rights Agreement (this
"Agreement") is entered into effective as of the 21st day of July, 1997, by and
among PROGRESSIVE NETWORKS, INC., a Washington corporation (the "Company"), the
holders of Series B Preferred Stock ("Series B Preferred") identified on
attached Exhibit A (the "Series B Holders"), the holders of Series C Preferred
Stock ("Series C Preferred") identified on attached Exhibit B (the "Series C
Holders"), and the holders of Series D Preferred Stock ("Series D Preferred")
identified on attached Exhibit C (the "Series D Holders"), and Microsoft
Corporation, a Washington corporation ("Microsoft").
RECITALS
A. Microsoft and the Company are parties to that certain Series E
Preferred Stock Purchase Agreement dated July 21, 1997 (the "Series E
Agreement"), under which certain of the obligations of the Company and Microsoft
are conditioned upon the execution and delivery by Microsoft and the Company of
this Agreement.
B. The Series D Holders, the Series C Holders, Series B Holders and the
Company are parties to that certain Investors Rights Agreement dated November
27, 1996 (the "D Rights Agreement"), and now wish to amend and restate the D
Rights Agreement to admit Microsoft as a party.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(b) "Exempt Registrations" shall mean registrations relating
solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that
may be promulgated in the future, or registrations relating solely to a
Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future.
(c) "Investors" shall mean investors who purchased shares
pursuant to the Series B Preferred Stock Purchase Agreement by and among the
Series B Holders and the Company dated April 8, 1995 (the "Series B Agreement"),
the Series C Preferred Stock Purchase Agreement by and among the Series C
Holders and the Company dated October 26, 1995 (the "Series C Agreement"), the
Series D Preferred Stock Purchase
<PAGE> 5
Agreement by and among the Series D Holders and the Company dated November 27,
1996 (the "Series D Agreement"), and/or the Series E Agreement and persons or
entities who received any of such shares from such Investors.
(d) "Rule 144" shall mean Rule 144 as promulgated by the
Securities and Exchange Commission (the "Commission") under the Securities Act,
as such Rule may be amended from time to time, or any similar successor rule
that may be promulgated by the Commission.
(e) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(f) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time, corresponding
to such act.
1.2 Registrable Securities.
(a) Definition. The term "Registrable Securities" means (i) any
common stock ("Common Stock") and other securities issued upon conversion of any
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
Stock (the "Series E Preferred") (including without limitation the Series C
Preferred issuable upon exercise of those certain Series C Warrants, as defined
in the Series C Agreement, the Series D Preferred issuable upon the exercise of
those certain Series D Warrants, as defined in the Series D Agreement and the
Series E Preferred issuable upon the exercise of that certain Series E Warrant,
as defined in the Series E Agreement), (ii) any Common Stock and other
securities issued upon exercise of those certain Series B Common Warrants, as
defined in the Series C Agreement, or (iii) any securities issued with respect
to the Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or the Common Stock and other securities referred to in clauses (i)
and (ii) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. For purposes of this Agreement, a person will be deemed to be a
holder of Registrable Securities whenever such person has the right to acquire
such Registrable Securities whether or not such acquisition has actually been
effected. Registrable Securities, if transferred in accordance with Section
1.2(b), will remain Registrable Securities; provided, however, that Registrable
Securities shall not include shares (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and disposed of
in accordance with the registration statement covering them or (b) that may be
publicly sold pursuant to Rule 144 under the Securities Act.
(b) Transfer of Registration Rights. The rights granted under
this Section may be assigned or otherwise conveyed by any holder of Registrable
Securities, in compliance with federal and applicable state
<PAGE> 6
securities laws, to any transferee or assignee who, after such assignment or
transfer, holds at least 50,000 shares of Registrable Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided that the Company is given written notice by such
transferee at the time of or within thirty (30) days after said transfer,
stating the name and address of said transferee and said transferee's agreement
to be bound by the provisions of this Agreement. For the purposes of determining
the number of shares of Registrable Securities held by a transferee or assignee,
the holdings of a transferee or assignee who is (A) a shareholder, partner,
retired partner, member, retired member or beneficiary of a Purchaser; (B) a
spouse or child of a shareholder, partner, retired partner, member, retired
member or beneficiary of a Purchaser; (C) a trust for the benefit of the persons
set forth in (A) or (B) or for the issue of the persons set forth in (A) or (B);
and (D) an entity (corporation, partnership, limited liability company or other
juridical entity) of which at least 75 percent in interest is owned or
controlled, directly or indirectly through other entities, or by one or more of
the persons set forth in (A), (B) or (C), shall be aggregated together with the
corporation, partnership or limited liability company as the case may be;
provided that all assignees and transferees who would not qualify individually
for assignment of registration rights shall have a single attorney-in-fact for
the purpose of exercising any rights, receiving notices or taking any action
under this Agreement.
(c) Conditions to Participation. No holder of Registrable
Securities may participate in any underwritten registration hereunder unless
such holder (i) agrees to sell such holder's securities on the basis provided in
any underwriting arrangements and (ii) completes and executes all
questionnaires, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, provided
that such documents shall not provide for indemnification or contribution
obligations to the Company, or obligations to the Company to provide
information, of holders of Registrable Securities greater than those obligations
to the Company provided for in Section 1.9.
1.3 Demand Registration.
(a) If at any time after the earlier of (i) two (2) years after
the date of this Agreement or (ii) six (6) months after the effective date of
the Initial Public Offering (as such term is defined in Section 2 of this
Agreement), the Company shall receive a written request from the holders of at
least 30% of the Registrable Securities then outstanding that the Company file a
registration statement (other than on Form S-3 pursuant to Section 1.4 of this
Agreement) under the Securities Act covering the registration of all or part of
the Registrable Securities, then the Company shall, within ten (10) days of the
receipt of such request, give written notice of such request to all holders of
Registrable Securities and shall, subject to the limitations of Section 1.3(b),
use its best efforts to effect as soon as practicable the registration under the
Securities Act of all Registrable Securities which the holders request to be
registered in a written request to be given within twenty (20) days of the
giving of such notice by the Company.
<PAGE> 7
(b) The holders initiating the registration request under this
Section 1.3 (the "Initiating Holders") must distribute the Registrable
Securities covered by their request by means of a public offering underwritten
by a recognized national or regional underwriter, which underwriter shall be
reasonably acceptable to the Company. The right of any holder to include its
Registrable Securities in such registration shall be conditioned upon such
holder's participation in such underwriting and the inclusion of such holder's
Registrable Securities in the underwriting to the extent provided herein. All
holders proposing to distribute their Registrable Securities through such
underwriting shall (together with the Company as provided in Section 1.7(h))
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by a majority in interest of the
Initiating Holders. Notwithstanding any other provision of this Section 1.3, if
the underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities of
the Company owned by each holder and requested to be registered in such
registration. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from the registration.
(c) The Company is obligated to effect only two registrations
pursuant to this Section 1.3. A request for registration under this Section 1.3
cannot be made within six (6) months of the effective date of a registration
statement for a public offering of the Company's securities (other than Exempt
Registrations).
(d) Notwithstanding the foregoing, if the Company shall furnish
to the holders requesting a registration statement pursuant to this Section 1.3
a certificate signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve (12) month period.
(e) The Company shall not be obligated to take any action to
effect any registration pursuant to this Section 1.3, if, within ten (10) days
of the receipt of a request from Initiating Holders the Company gives the
Initiating Holders written notice that it has begun substantive discussions with
an underwriter with respect to a public offering of securities that would give
rise to registration rights under Section 1.5. The Company must promptly notify
the holders of any abandonment of such offering.
<PAGE> 8
1.4 S-3 Registration.
(a) S-3 Registrations. Subject to the terms hereof, the holders
of Registrable Securities, including transferees that have acquired the
Registrable Securities in accordance with Section 1.2(b) (the "Holders"), may
request in writing registration under the Securities Act of all or part of their
Registrable Securities (an "S-3 Registration") on Form S-3 (or any other form of
offering permitted under applicable securities laws involving effort and expense
reasonably similar to that involved in effecting a registration on Form S-3 for
which the Company may then be eligible). Any such request shall state the number
of Registrable Securities to be disposed of and the intended disposition of such
shares by their Holders, provided that the aggregate offering price must be not
less than $250,000 for each such registration and on not more than three
occasions. S-3 Registrations will be effected on Form S-3 (or any similar
short-form registration for which the Company may then be eligible) whenever the
Company is permitted to use such a form. Following the initial public offering
of its securities, the Company will use its best efforts to qualify for
registration on Form S-3 (or any similar short-form registration for which the
Company may then be eligible) and maintain such registration in effect for not
less than one hundred twenty (120) days.
(b) Priority S-3 Registrations. If any S-3 Registration is an
underwritten offering, the Company may request that securities to be sold on its
behalf be included in such S-3 Registration, and if the managing underwriters
advise the Company in writing that in their opinion the number of securities
requested to be included exceeds the number that can be sold in such offering
without adversely affecting such underwriters' ability to effect an orderly
distribution of the securities, the Company will include in such registration:
first, the securities the Company proposes to sell; and second, the number of
Registrable Securities that the Holders propose to sell and that in the opinion
of such underwriters can be sold; provided that in the event that the number of
Registrable Securities that the Holders propose to sell is reduced by more than
ten percent (10%), such registration will not be counted as a S-3 Registration.
Anything in this subsection (b) to the contrary notwithstanding, for a period of
twelve months following the conclusion of any offering from which, pursuant to
this subsection (b), there were excluded any Registrable Securities requested to
be included (an "Exclusion Offering"), the Company shall not exercise its right
to priority so as to exclude such Registrable Securities from a subsequent S-3
Registration; provided, however, that a S-3 Registration may not be requested by
the Holders of Registrable Securities for a period of four (4) months following
the conclusion of any such Exclusion Offering. If any S-3 Registration in which
the Company does not have the right to priority is an underwritten offering, the
Company may have securities to be sold on its behalf included in such S-3
Registration, to the extent deemed practicable by the managing underwriters,
provided the number of Registrable Securities included therein is not reduced.
<PAGE> 9
(c) Restrictions on Purchasers and S-3 Registrations. The Company
may postpone for up to ninety (90) days the filing or the effectiveness of a
registration statement for a S-3 Registration if the Company's Chief Executive
Officer delivers a written certification to each Holder of the Registrable
Securities requested to be included therein stating that the Company's Board of
Directors has declared that such S-3 Registration would not be in the best
interests of the Company; provided that in any such event, the Holders of
Registrable Securities requesting such registration will be entitled to withdraw
such requests and, if the remaining requests that are not withdrawn are not
sufficient to initiate such registration, such registration need not be effected
by the Company and will not count as a S-3 Registration; provided further, that
if such event occurs during the twelve (12) month period during which the
Company may not conduct an Exclusion Offering (as described in Clause (b)
above), then such twelve (12) month period shall be extended by the length of
any such postponement. The Company may only make one election in any
twelve-month period to postpone a S-3 Registration pursuant hereto.
(d) Limited Number of S-3 Registrations. The Company is obligated
to effect only three (3) registrations pursuant to this Section 1.4.
(e) Selection of Underwriters. In a S-3 Registration, the holders
of Registrable Securities will have the right to determine the method of
distribution and, if the offering is underwritten, to select the investment
banker(s) and manager(s) to administer the offering.
1.5 Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register
any of its securities under the Securities Act (other than pursuant to a
registration primarily for sales of securities to employees of the Company or in
connection with a transaction to which Rule 145 or any similar rule of the SEC
under the Securities Act is applicable) and the registration form to be used
also may be used for the registration of Registrable Securities, the Company
will give prompt written notice to all holders of Registrable Securities of its
intention to effect such a registration (a "Piggyback Registration") and will
use its best efforts to include in such registration all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within thirty (30) days after the receipt of the Company's notice except
as set forth in paragraph (b) below. Such written request may specify all or
part of a holder's Registrable Securities to be included in the registration.
(b) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number that can be sold in such offering without adversely affecting
such underwriters' ability to effect an orderly distribution of such securities,
the Company will include in such
<PAGE> 10
registration: first, the securities the Company proposes to sell; second, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of shares of
Common Stock (or equivalents) represented by the Registrable Securities owned by
the holders thereof and requested to be registered, but in no event in an
offering following the Company's initial public offering shall the number of
Registrable Securities included in such registration be less than 30% of the
total of all securities included in such registration; and third, other
securities requested to be included in such registration.
(c) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities and there are no newly issued securities of the Company
being registered thereunder, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number that can be sold in such offering
without adversely affecting such underwriters' ability to effect an orderly
distribution of such securities, the Company will include in such registration:
first, any Registrable Securities requested to be included in such registration,
pro rata among the holders of such securities on the basis of the number of
shares of Common Stock (or equivalents) represented by the Registrable
Securities owned by the holders thereof and requested to be registered, and
second, other securities requested to be included in such registration. If any
holder of Registrable Securities who has requested inclusion in such
registration or offering disapproves of the terms of the underwriting, he may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the holders of Registrable Securities who initiated the offering.
1.6 Lockup Agreements. Each holder of the Registrable Securities agrees
not to effect any public sale or distribution of Registrable Securities, or any
securities convertible into or exchangeable or exercisable for Registrable
Securities, during the seven (7) days prior to and the period after (as
requested by the underwriters, but not to exceed 180 days) the effectiveness of
the first registration of the Company's securities to be sold in an underwritten
public offering for the account of the Company, provided that all officers and
directors of the Company and all other holders of more than one percent (1%) of
the Company's equity securities agree to be similarly bound with respect to
equity securities of the Company held by such officers, directors and one
percent (1%) holders, provided further that any discretionary waiver or
termination of the restrictions of such agreements by the representatives of the
underwriters shall apply to all persons subject to such agreements pro rata
based on the number of equity securities held by such persons and subject to
such agreements, provided further that such holders are given reasonable notice
of such Registration, and provided further, that the provisions of this Section
1.6 shall bind The Goldman Sachs Group, L.P. and any transferee of its
Registrable Securities only with respect to the Registrable Securities held by
such person and shall not otherwise in any manner bind or restrict Goldman,
Sachs & Co. (whether as a broker, dealer, underwriter or otherwise) or The
Goldman Sachs Group. L.P. or any
<PAGE> 11
of their affiliates or general or limited partners. Without limiting the
foregoing, it is expressly agreed that the provisions of this Section 1.6 shall
not (a) apply to any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock acquired by a Holder directly
from the underwriters in a registered public offering of the Company's
securities or in an established trading market from any party other than the
Company, or (b) prevent the exercise of the Series B Common Warrants, the Series
C Warrants, the Series D Warrants, or the Series E Warrant described in Section
1.2(a) during such lockup period.
1.7 Registration Procedures. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration of such Registrable Securities in accordance with the intended
method of disposition thereof, and pursuant thereto the Company will, without
limiting the generality of the foregoing, as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission
a registration statement with respect to such Registrable Securities, which
registration statement will state that the holders of Registrable Securities
covered thereby may sell such Registrable Securities either under such
registration statement or pursuant to Rule 144 (or any similar rule then in
effect), and use its best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or prospectus or
any amendments or supplements thereto, the Company will furnish to the counsel
selected by the holders of a majority of the voting interest of the Registrable
Securities covered by such registration statement copies of all such documents
proposed to be filed);
(b) prepare and file with the Commission, if applicable, such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than one hundred eighty (180) days
in the case of the Company's initial registration of Common Stock under the
Securities Act and one hundred twenty (120) days in the case of any subsequent
registration;
(c) furnish to each seller of Registrable Securities such number
of copies of such registration statement, each amendment and supplement thereto,
and the prospectus included in such registration statement (including each
preliminary prospectus) as such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions of
the United States as any seller reasonably requests and do any other related
acts that may be reasonably necessary to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company
<PAGE> 12
will not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section 1.7(d)
or (ii) consent to general service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any
time when a prospectus relating thereto is or would be required to be delivered
under the Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will prepare
a supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
any untrue statement of a material fact or omit any fact necessary to make the
statements therein not misleading;
(f) upon the request of the holders of 20% or more of the
Registrable Securities or such lesser number of Registrable Securities as are
actually registered pursuant to this Agreement, cause all such Registrable
Securities to be listed on each securities exchange or quotation system on which
similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including underwriting
agreements on customary terms) and take all such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Registrable
Securities (including, without limitation, effecting a stock split or a
combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, and any attorney, accountant or any other agent retained
by any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by any such seller, underwriter, attorney, accountant or agent in connection
with such registration statement;
(j) comply with all necessary filing and other requirements,
including without limitation listing shares on any national securities exchange
on which similar securities of the Company are then listed, so as to enable the
holders of Registrable Securities to sell Registrable Securities under Rule 144
(or any similar rule then in effect) after any initial public offering of the
Company's Common Stock; and
<PAGE> 13
(k) obtain a comfort letter from the Company's independent
accountants in customary form and covering such matters of the type customarily
covered by comfort letters and an opinion from the Company's counsel in
customary form covering such matters normally covered in a public issuance of
securities, in each case addressed to the holders of the Registrable Securities.
1.8 Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement with respect to any Demand Registration, S-3
Registration or Piggyback Registration, including, without limitation, all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding discounts and commissions, which in all
cases shall be borne by the party selling the securities with respect to which
the discounts or commissions are incurred or paid) and other persons retained by
the Company, will be borne by the Company.
(b) In connection with any Demand Registration, S-3 Registration
or Piggyback Registration, the Company will reimburse the holders of Registrable
Securities covered by such registration for the reasonable fees and
disbursements of one counsel chosen by the holders of a majority of the voting
interest of such Registrable Securities.
<PAGE> 14
1.9 Indemnification.
(a) Incident to any registration statement referred to in this
Section 1 and subject to applicable law, the Company will indemnify and hold
harmless each underwriter, each holder of Registrable Securities (including its
respective directors, officers, members, employees and agents) so registered,
and each person who controls any of them within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act and the rules and regulations
promulgated thereunder, from and against any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise out of
or are based on (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement (including any related
preliminary or definitive prospectus, or any amendment or supplement to such
registration statement or prospectus), (ii) any omission or alleged omission to
state in such document a material fact required to be stated in it or necessary
to make the statements in it not misleading, or (iii) any violation by the
Company of the Securities Act, any state securities or "blue sky" laws or any
rule or regulation thereunder in connection with such registration, provided
that the Company will not be liable to the extent that such loss, claim, damage,
expense or liability arises from and is based on an untrue statement or omission
or alleged untrue statement or omission made in reliance on and in conformity
with information furnished in writing to the Company by such underwriter, holder
or controlling person expressly for use in such registration statement. With
respect to such untrue statement or omission or alleged untrue statement or
omission in the information furnished in writing to the Company by such holder
expressly for use in such registration statement, such holder will indemnify and
hold harmless each underwriter, the Company (including its directors, officers,
members, employees and agents), each other holder of Registrable Securities
(including its respective directors, officers, employees and agents) so
registered, and each person who controls any of them within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, expenses and liabilities, joint or
several, to which they, or any of them, may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise to the same extent provided in the immediately preceding
sentence. In no event, however, shall the liability of a holder for
indemnification under this Section 1.9(a) exceed the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified against equal to the proportion of the total Registrable Securities
sold under such registration statement which is being sold by such holder of
Registrable Securities or (ii) the proceeds received by such holder from its
sale of Registrable Securities under such registration statement.
<PAGE> 15
(b) If the indemnification provided for in Section 1.9(a) above
for any reason is held by a court of competent jurisdiction to be unavailable to
an indemnified party in respect of any losses, claims, damages, expenses or
liabilities referred to therein, then each indemnifying party under this Section
1.9, in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the other
selling holders of Registrable Securities and the underwriters from the offering
of the Registrable Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, the other selling holders of Registrable
Securities and the underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company, the selling holders of Registrable Securities and the
underwriters shall be deemed to be in the same respective proportions as the net
proceeds from the offering (before deducting expenses) received by the Company
and the selling holders and the underwriting discount received by the
underwriters, in each case as set forth in the table on the cover page of the
applicable prospectus, bear to the aggregate public offering price of the
Registrable Securities. The relative fault of the Company, the selling holders
of Registrable Securities and the underwriters shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the selling holders or the
underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the holders of Registrable Securities, and the underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 1.9(b) were
determined by pro rata or per capita allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the first sentence of this Section 1.9(b). In no event, however, shall a
holder of Registrable Securities be required to contribute any amount under this
Section 1.9(b) in excess of the lesser of (i) that proportion of the total of
such losses, claims, damages or liabilities indemnified against equal to the
proportion of the total Registrable Securities sold under such registration
statement which is being sold by such holder or (ii) the proceeds received by
such holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(c) The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in this
Section 1.9 shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such
<PAGE> 16
action or claim. The indemnification and contribution provided for in this
Section 1.9 will remain in full force and effect regardless of any investigation
made by or on behalf of the indemnified parties or any officer, director,
employee, agent or controlling person of the indemnified parties.
1.10 Termination. The rights to registration of Registrable Securities
set forth in this Section shall terminate and have no further effect on the
seventh (7th) anniversary of the closing of the Company's Initial Public
Offering, as defined below.
2. COVENANTS OF THE COMPANY
During the term of this Agreement, the Company covenants and agrees that
it will comply with each of the following provisions under this Section 2,
provided that the Company's obligations under each such provision other than
those set forth in Section 2.3 shall terminate at the earliest of such time as:
(a) the Company completes a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act
covering the offer and sale of Common Stock for the account of the Company to
the public at a price of at least $13.554 per share (as adjusted to reflect
subsequent stock dividends, stock splits and recapitalizations) with aggregate
proceeds of not less than $20,000,000 (prior to the deduction of underwritten
commissions and offering expenses) ("Initial Public Offering"), (b) the
automatic conversion of the Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred pursuant to Section 5.4(b)(y) of the Company's
Articles of Incorporation; or (c) less than (10%) of each of the Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred
originally issued shall remain outstanding:
2.1 Financial Statements, Budgets, etc. The Company will maintain a
standard system of accounting administered in accordance with generally accepted
accounting principles consistently applied, will keep full and complete
financial records, and will furnish to each of the Investors or his/her/its
designees, so long as he/she/it holds at least 500,000 shares of Series B
Preferred, Series C Preferred, and/or Series E Preferred, or at least 132,000
shares of Series D Preferred for purposes of Section 2.1(b) through (g) or at
least 350,000 shares of Series D Preferred for purposes of Section 2.1(a):
(a) As soon as available, but in any event not later than fifteen
(15) days after the end of each month (other than the last month of any fiscal
quarter of the Company), the unaudited consolidated balance sheet of the Company
as at the end of each such month and the related unaudited consolidated
statements of income and cash flow of the Company for such month and for the
elapsed period in such fiscal year, all in reasonable detail and stating in
comparative form (i) the figures as of the end of and for the comparable periods
of the preceding fiscal year and (ii) the figures reflected in the operating
budget for such period as specified in the financial plan of the Company
delivered pursuant to paragraph (e) hereof. All such financial statements shall
be complete and
<PAGE> 17
correct in all material respects and shall be subject to normal year end audit
adjustments.
(b) As soon as available, but in any event no later than fifteen
(15) days after the end of each of the first three fiscal quarters, the
unaudited consolidated balance sheet of the Company as at the end of each such
period and the related unaudited consolidated statement of operations,
stockholders' equity and cash flows of the Company for such quarterly period and
for the elapsed period in such fiscal year, all in reasonable detail and stating
in comparative form (i) the figures at the end of and for the comparable periods
of the preceding fiscal year and (ii) the figures reflected in the operating
budget for such period as specified in the financial plan of the Company
delivered pursuant to paragraph (e) hereof. All such financial statements shall
be complete and correct in all material respects, shall be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods reflected therein except as stated therein, and
shall be subject to normal year end audit adjustments.
(c) As soon as available, but in any event within ninety (90)
days after the end of each fiscal year of the Company, a copy of the audited
consolidated balance sheet of the Company as at the end of such fiscal year and
the related audited consolidated statements of operations, stockholders' equity
and cash flows of the Company for such fiscal year, all in reasonable detail and
stating in comparative form the figures as at the end of and for the previous
fiscal year, accompanied by an opinion of an accounting firm of recognized
national standing selected by the Company, which opinion shall state that such
accounting firm's audit was conducted in accordance with generally accepted
auditing standards. All such financial statements, together with the notes
thereto, shall be complete and correct in all material respects and prepared in
reasonable detail and in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods reflected
therein except as stated therein.
(d) Promptly upon receipt or transmission thereof, (i) any
additional reports, management letters or other detailed written information
concerning significant aspects of the Company's operations and financial affairs
given to the Company by its independent certified public accountants and any
written response thereto by the Company; and (ii) copies of all such financial
statements, proxy statements and reports as the Company sends to its
stockholders, and copies of all registration statements and all regular, special
or periodic reports which it files, or any of its officers or directors file
with respect to the Company or its securities of which the Company is aware,
with the Securities and Exchange Commission or with any securities exchange on
which any of the Company's securities are then listed, and copies of all press
releases and other statements made available by the Company to the public.
<PAGE> 18
(e) At least forty-five (45) days prior to the end of each fiscal
year, a detailed operating budget prepared on a monthly basis for the
immediately succeeding fiscal year, and, promptly upon approval thereof by the
Board of Directors, any other budgets and any revisions of such operating or
other budgets.
(f) Within sixty (60) days after the end of each fiscal year,
copies of all stock option plans, and a list detailing all options granted,
issued or lapsed; all warrants granted or issued (whether to directors, in
connection with financings or otherwise) or lapsed; and all stock issued or sold
(including in each case, without limitation, all option and warrant exercise
prices, stock issuance prices, and other terms).
(g) Such other information and financial data concerning the
Company as the Investors may reasonably request.
2.2 Inspection. The Company will permit any representative designated by
each of the Investors, so long as he/she/it holds at least 500,000 shares of
Series B Preferred and/or Series C Preferred and/or Series E Preferred or
132,000 shares of Series D Preferred, to visit and inspect any of the properties
of the Company including their respective books of account (and to make copies
thereof and to take extracts therefrom), and/or to discuss the affairs, finances
and accounts of the Company with its officers, all at such reasonable times and
as often as may reasonably be requested.
2.3 Current Public Information. For so long as any (a) Series B
Preferred, Series C Preferred, Series D Preferred, or Series E Preferred, (b)
Common Stock issued upon conversion of the Series B Preferred, Series C
Preferred, Series D Preferred, or Series E Preferred (including without
limitation the Series C Preferred issuable upon exercise of the Series C
Warrants, Series D Preferred issuable upon exercise of the Series D Warrants,
and Series E Preferred issuable upon exercise of the Series E Warrant), or (c)
securities issued with respect to the securities referred to in clauses (a) and
(b) above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization (hereinafter collectively referred to as "Restricted
Securities"), remain outstanding (the Series C Preferred issuable upon exercise
of the Series C Warrants, the Series D Preferred issuable upon exercise of the
Series D Warrants, and the Series E Preferred issuable upon exercise of the
Series E Warrant being deemed outstanding for purposes of this Section 2.3), at
all times after the Company has filed a registration statement pursuant to the
requirements of the Securities Act, or the Exchange Act, the Company will file
all reports required to be filed by it under the Securities Act or the Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission (the "Commission") thereunder, and will take such further action as
any holder or holders of Restricted Securities may reasonably request, all to
the extent required to enable each such holder to sell Restricted Securities
pursuant to (i) Rule 144 under the Securities Act, or (ii) any similar rule or
regulation hereafter adopted by the Commission. Upon request, the Company will
deliver to each such holder a written
<PAGE> 19
statement as to whether the Company has complied with such requirements.
2.4 Reservation of Shares. The Company will have reserved, at all times,
at least enough shares of Common Stock for issuance upon conversion of the then
outstanding Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred (including without limitation the Series C Preferred issuable
upon exercise of the Series C Warrants, Series D Preferred issuable upon
exercise of the Series D Warrants, and Series E Preferred issuable upon exercise
of the Series E Warrants), which amount of reserved shares shall include the
additional shares of Common Stock that would be necessary in the event of such
conversion after reductions in any "conversion price" pursuant to the Company's
Restated Articles of Incorporation.
2.5 Rights in Future Offerings. The Company agrees that if hereafter the
Company at any time or from time to time makes any nonpublic offering of its
capital stock or of any security that is convertible into or carries the right
to purchase shares of its capital stock (other than issuances of Common Stock or
securities convertible into or carrying the right to purchase shares of Common
Stock (a) through the exercise of options or warrants granted under an employee
stock plan or employee stock bonus program or grant approved by a majority of
the Company's Board of Directors, (b) upon the conversion of convertible
preferred stock, (c) in connection with the acquisition of any assets, stock or
other interest in any partnership, corporation or other entity approved by a
majority of the company's Board of Directors, (d) in connection with the
formation of any research and development partnerships, licensing or
collaborative agreements or other similar venture approved by a majority of the
Company's Board of Directors, (e) upon the conversion of Series B Common Stock
to Series C Common Stock under Section 4.3.5 of the Company's Articles of
Incorporation, and (f) upon the exercise of the Series B Common Stock Warrants
which were issued under the Series C Agreement, and other than issuances of
Preferred Stock or securities convertible into or carrying the right to purchase
shares of Preferred Stock (i) upon the exercise of the Series C Preferred Stock
Warrants which were issued under the Series C Agreement, (ii) upon the exercise
of the Series D Preferred Stock Warrants which were issued under the Series D
Agreement, (iii) upon the exercise of the Series E Preferred Stock Warrant which
was issued under the Series E Agreement, (iv) in connection with the acquisition
of any assets, stock or other interest in any partnership, corporation or other
entity approved by a majority of the Company's Board of Directors, and (v) in
connection with the formation of any research and development partnerships,
licensing or collaborative agreements or other similar venture approved by a
majority of the Company's Board of Directors), each holder of Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred, or any
shares of Common Stock issued upon conversion of Series B Preferred, Series C
Preferred, Series D Preferred, or Series E Preferred (the "Offeree") shall be
offered the opportunity to acquire from the Company, on the same terms as such
securities are offered to others, the same percentage (or a lesser amount at the
Offeree's option) of the total securities offered in such subsequent offering
(the "Offering") as the Offeree's shares of Underlying Common
<PAGE> 20
Stock (as hereinafter defined) bear to the aggregate number of shares of
Underlying Common Stock. The Offerees shall be given at least fifteen (15) days'
written notice by the Company of the purchase right set forth in this Section
2.5. For purposes of this Section 2.5, the term "Offeree's shares of Underlying
Common Stock" shall mean, in the case of a particular Offeree, the total number
of shares of Common Stock of the Company as of the time of determination issued
or issuable to each such Offeree upon conversion of the outstanding shares of
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred and the phrase "the aggregate number of shares of Underlying Common
Stock" shall mean the total number of shares of Common Stock of the Company
outstanding at the time of determination and including, as of the time of
determination, all shares issued or issuable upon conversion of the outstanding
shares of Series A Preferred, Series B Preferred, Series C Preferred and Series
D Preferred, and Series E Preferred. For purposes of this Section 2.5, the term
Offering shall not include shares issued pursuant to this Section 2.5.
2.6 Insurance. The Company hereafter will maintain in effect with
reputable insurers insurance against such risks and liability to persons and
property to the extent and in the manner customary for companies in similar
businesses, similarly situated.
2.7 Use of any Investor Information. Should the Company desire to use
any Investor's name (or the name of any subsidiary or affiliate of any of the
Investors) except to identify the Investor as an investor in the Company, it
will do so only with the express written consent of the Investor; provided, that
the Company will not use The Goldman Sachs Group, L.P.'s name for any purpose
without its prior written consent. Anything to the contrary in the preceding
sentence or in any other agreement between an Investor and the Company
notwithstanding, if, in connection with the proposed sale of the Company's
securities in a future offering or to consummate the proposed sale of the
Company's business, the Company is required by law to disclose information
concerning such Investor's ownership in, dealings with or other relationships
with the Company (the "Required Information"), each Investor hereby consents to
the disclosure of the Required Information.
2.8 Conduct of Business. The Company will keep in full force and effect
its corporate existence and all patents and proprietary rights useful in its
business and will comply with all laws, government regulations, rules and
ordinances and judicial orders, judgments and decrees applicable to the Company,
its business and its properties. The Company will use its best efforts to cause
each officer and employee to execute a confidentiality and inventions agreement
presently used by the Company, with such reasonable changes as may be deemed
appropriate; provided, however, that any material change therein shall be
approved by the Board of Directors.
2.9 Payment of Taxes. The Company will pay and discharge all lawful
taxes, assessments and governmental charges or levies imposed upon it or upon
its income or property before the same shall become in
<PAGE> 21
default, as well as all lawful claims for labor, materials and supplies which,
if not paid when due, might become a lien or charge upon its property or any
part thereof; provided, however, that the Company shall not be required to pay
and discharge any such tax, assessment, charge, levy, or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books.
2.10 Adverse Changes. The Company will promptly advise the Investors of
any event which represents a material adverse change in the condition or
business, financial or otherwise, of the Company, and of each suit or proceeding
commenced or threatened against the Company which, if adversely determined,
would result in such a material adverse change. The Company will also promptly
advise the Investors of any facts which are inconsistent with the
representations and warranties contained herein.
2.11 Life Insurance. The Company will (i) obtain as soon as practicable
and (ii) maintain key-man life insurance on the life of Rob Glaser to the extent
and in the manner determined appropriate by the Board of Directors in their best
business judgment, which shall at a minimum provide for a payment of at least
$2,000,000 to the Company.
2.12 Affiliated Transactions. All transactions by and between the
Company and any officer, key employee or stockholder of the Company, or persons
controlled by or affiliated with such officer, key employee or stockholder,
shall be conducted on an arm's-length basis, and will be on terms and conditions
no less favorable to the Company than could be obtained from nonrelated persons.
Any such transaction which is not in the ordinary course of business and is in
an amount in excess of $50,000 per transaction or group of related transactions
will be approved in advance by the Board of Directors after full disclosure of
the terms thereof.
2.13 Board of Directors.
(a) The Company will use its best efforts to cause one nominee of
the Series B Holders, who shall be nominated by the holders of the majority of
the outstanding shares of Series B Preferred, and who shall be reasonably
acceptable to the Company, to be recommended to the stockholders (or, for
purposes of filling a vacancy on the Board of Directors, the directors) for
election as a director at all meetings of stockholders, or consents in lieu
thereof, for such purpose. The Company will use its best efforts to cause one
nominee of the Series C Holders, who shall be nominated by the holders of the
majority of the outstanding shares of Series C Preferred, and who shall be
reasonably acceptable to the Company (the Company acknowledging that James W.
Breyer is acceptable), to be recommended to the stockholders (or, for purposes
of filling a vacancy on the Board of Directors, the directors) for election as a
director at all meetings thereof, or consents in lieu thereof, for such purpose.
In addition, the Company will, if requested to in writing by the Series E Holder
(for so long as the Series E Holder holds (i) no fewer than 3,338,374 shares of
Series E Preferred Stock (or the equivalent in
<PAGE> 22
Common Stock issued upon the conversion of Series E Preferred Stock), or (ii) no
less than five percent (5%) of the issued and outstanding shares of Common
Stock, on an as-if converted basis), use its best efforts to cause one nominee
of the Series E Holder, who shall be reasonably acceptable to the Company, to be
recommended to the Stockholders (or, for purposes of filling a vacancy on the
Board of Directors, the directors) for election as a director at all meetings
thereof, or consents in lieu thereof, for such purpose. Before the closing of an
Initial Public Offering, as defined in Section 2, the Company agrees not to
grant stock options, warrants or similar rights as compensation for
participation on the Board of Directors to Rob Glaser, to the director nominated
by the Series B Holders, to the director nominated by the Series C Holders, or
to the director, if any, nominated by the Series E Holder.
(b) The Company will ensure that it will have a Board of
Directors of at least three (3) members (or four (4) members, if the Series E
Holder elects to nominate a director) and that regular meetings of its Board of
Directors will be held at least four (4) times each year and at intervals of not
more than four (4) months, upon at least such notice as is required to be given
to the directors in the Bylaws of the Company. The Articles of Incorporation or
Bylaws of the Company will at all times during which the director nominees of
the Series B Holders, Series C Holders, and Series E Holder serve as directors
of the Company provide for indemnification of the directors to the fullest
extent permitted under Washington state law. The Company shall promptly
reimburse in full the nominees of the Series B Holders, Series C Holders, and
Series E Holder for all of their reasonable out-of-pocket expenses incurred in
attending each meeting of the Board of Directors of the Company or any committee
thereof.
(c) In the event that no director is serving as a nominee of the
Series B Holders, Series C Holders, or Series E Holder, the Company shall (a)
provide each Investor holding at least 500,000 shares of Series B Preferred,
Series C Preferred, and/or Series E Preferred in the aggregate (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
recapitalizations) with notice of all meetings of the Board of Directors; (b)
allow each Investor holding at least 500,000 shares of Series B Preferred,
Series C Preferred, and/or Series E Preferred in the aggregate (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
recapitalizations) to attend such meetings in a nonvoting observer capacity; and
(c) provide such Investor with all materials delivered to the directors as and
when such materials are delivered to the directors; provided, however, that such
Investor shall agree to hold in confidence and trust and to act in a fiduciary
manner with respect to all information so provided; and, provided further, that
the Company reserves the right to withhold any information and to exclude such
Investors from any meeting or portion thereof if access to such information or
attendance at such meeting or portion thereof could adversely affect the
attorney client privilege between the Company and its counsel. In the event any
other Investor is invited to attend a meeting(s) of the Company's Board of
Directors in a nonvoting observer capacity and/or receives copies of any
materials provided to directors,
<PAGE> 23
such Investor shall agree to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so provided.
2.14 Distributions or Redemption of Capital Stock. Except as otherwise
expressly provided herein, the Company will not, without the consent or waiver
of the holders of 51% of the outstanding shares of the Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred (provided, for
purposes of calculating the requisite 51% pursuant to this Section 2.14, the
shares of Series E Preferred to be issued upon exercise, if ever, of the Series
E Warrant shall not be deemed to be outstanding, regardless of whether the
Series E Warrant has been exercised) directly or indirectly, redeem, purchase or
otherwise acquire for value (or pay into or set aside for a sinking fund for
such purpose), any share or shares of capital stock of the Company beneficially
owned, directly or indirectly, by Rob Glaser or any person that is a member of
Rob Glaser's family or is related in any way to him, or any entity affiliated
with any such person, except as set forth in Section 5.5 of Article V of the
Company's Restated Articles of Incorporation in effect as of the date hereof.
2.15 Conversion Shares. The Company will reserve and keep available from
its authorized shares of Common Stock, solely for the purpose of issuance upon
the conversion of the Series B Preferred, Series C Preferred, Series D
Preferred, and Series E Preferred (the "Conversion Shares"), such number of
shares of Common Stock as shall then be issuable upon the conversion of all of
the shares of Series B Preferred, Series C Preferred, Series D Preferred, and
Series E Preferred taking into account any antidilution rights of the holders
thereof (the "Conversion Shares"). The Company covenants that all Conversion
Shares issuable upon conversion of the convertible preferred stock shall be duly
and validly issued, fully paid and nonassessable, and free of all liens,
encumbrances and restrictions on transfer other than restrictions on transfer
arising under the federal and state securities laws.
3. MISCELLANEOUS
3.1 Parties in Interest. All covenants, agreements, representations,
warranties and undertakings in this Agreement made by and on behalf of any of
the parties hereto shall bind and inure to the benefit of their respective
successors and assigns.
3.2 Entire Agreement: Amendments and Waivers. This Agreement (including
the attachments hereto) and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof. This Agreement may be amended,
or compliance with any term, covenant, agreement, condition or provision set
forth herein may be omitted or waived (either generally or in a particular
instance and either retroactively or prospectively) if agreed to in writing by
the Company and either: (a) the holders of at least two-thirds (2/3) of the
outstanding Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, voting together as a voting group,
and, until the conclusion of the first public offering of the Company's Common
Stock
<PAGE> 24
registered under the Securities Act, the Common Stock theretofore issued upon
conversion of any of the Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, or (b) the holders of at least 51% of the
outstanding Series B Preferred Stock, the holders of at least 51% of the
outstanding Series C Preferred Stock, the holders of at least 51% of the
outstanding Series D Preferred Stock and the holders of at least 51% of the
Series E Preferred Stock; provided, however, that the holder(s) of the Series E
Preferred Stock hereby agree to: (i) any amendment that is limited to adding
holders of Common Stock or a new series of Common Stock or Preferred Stock or
securities convertible into or carrying the rights to purchase Common Stock or a
new series of Common Stock or Preferred Stock (the "New Securities") as parties
to this Agreement as long as the New Securities have rights under this Agreement
that are equivalent or subordinate to those of the Series E Preferred, and (ii)
any amendment that does not (A) adversely affect the holders of Series E
Preferred Stock but not the holders of the other series of Preferred Stock or
(B) otherwise disadvantage disproportionately the holders of Series E Preferred
Stock; and provided further, that if any amendment or omission or waiver of
compliance with any term, covenant, agreement or condition or provision affects
any Investor disproportionately, the written agreement of such Investor shall
also be required. The Series B Holders and the Company expressly agree that this
Agreement supersedes Sections 4 and 5 of the Series B Agreement in their
entirety and that such sections of the Series B Agreement are no longer in force
or effect, the Series B Holders, Series C Holders and the Company expressly
agree that this Agreement supersedes the C Rights Agreement in its entirety and
the C Rights Agreement is no longer in force and effect; and the Series B
Holders, Series C Holders, Series D Holders, and the Company expressly agree
that this Agreement supersedes the D Rights Agreement in its entirety and the D
Rights Agreement is no longer in force and effect.
3.3 Governing Law, Severability. This Agreement, together with the
rights and obligations of the parties hereunder, shall be governed by, construed
and enforced in accordance with the laws of the State of Washington without
regard to principles of conflicts of laws. In the event any provision of this
Agreement or the application of any such provision to any party shall be held by
a court of competent jurisdiction to be contrary to law, the remaining
provisions of this Agreement shall remain in full force and effect.
3.4 Notices. All notices, requests, consents, and demands shall be in
writing and shall be deemed to have been sufficiently given if sent, postage
prepaid, by registered or certified mail, return receipt requested, to the
Company at Progressive Networks, Inc., 1111 Third Avenue, Suite 500, Seattle, WA
98101, Attention: President, with a second copy addressed separately to the
General Counsel; to the Investors at the addresses listed in Exhibits A, B and C
and to Microsoft at Microsoft Corporation, One Microsoft Way, Redmond,
Washington 98052-6399, Attention: Robert A Eshelman, Assistant Secretary; or to
such other address as may from time to time be furnished in writing to the other
parties hereto.
<PAGE> 25
3.5 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
3.6 Captions. The captions and headings of this Agreement are for
convenience only and are not to be construed as defining or limiting the scope
or intent of any of the provisions hereof.
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
PROGRESSIVE NETWORKS, INC.
By:________________________________
Its:________________________
INVESTOR
-----------------------------------
Rob Glaser
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-A
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
ACCEL IV L.P.
Accel IV Associates L.P.
Its: General Partner
By_______________________________
General Partner
ACCEL KEIRETSU L.P.
By: Accel Partners & Co., Inc.
Its: General Partner
By_______________________________
ACCEL INVESTORS '95, L.P.
By______________________________________
General Partner
ELLMORE C. PATTERSON PARTNERS
By______________________________________
General Partner
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-B
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Phillip Barrett
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-C
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Jeanine Glaser
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-D
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
JULIUS & BARBARA C. GLASER
TRUST U/A 09/03/91
----------------------------------------
Julius Glaser, Trustee
----------------------------------------
Barbara Glaser, Trustee
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-E
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Martha E. Glaser
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-F
<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Norma Ann Crampton
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-G
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Dennis L. Heck
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-H
<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Mitchell Kapor
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-I
<PAGE> 35
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Michael B. Slade
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-J
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Howard P. Welt
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-K
<PAGE> 37
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
----------------------------------------
Elaine Yeomelakis
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-L
<PAGE> 38
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
Ziff Asset Management, L.P.
By: PBK Holdings, Inc.
General Partner
By:_______________________________________
Name: Philip B. Korsant
Title: President
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-M
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
Bayview Investors, Ltd.
By Robertson, Stephens &
Company Private Equity
Group LLC
Its General Partner
----------------------------------------
Authorized Signatory
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-N
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
IPG Network, Inc.
By_____________________________________
Its________________________________
Its General Partner
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-O
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
----------------------------------------
INVESTORS:
Technology Crossover Ventures, L.P.
By: Technology Crossover
Management, L.L.C.,
Its: General Partner
By:____________________________________
Name:
Title:
Technology Crossover Ventures, C.V.
By: Technology Crossover
Management, L.L.C.,
Its: Investment General
Partner
By:___________________________________
Name:
Title:
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-P
<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
Velocity Technology and
Communications Trust B
By:__________________________________
Its:____________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-Q
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
Merrill Lynch KECALP L.P. 1994
By:__________________________________
Its:____________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-R
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTORS:
CSK Venture Capital Co., Ltd.
By:_________________________________
Its:___________________________
CSK Corporation
By:_________________________________
Its:___________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-S
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTORS:
Encompass Group, Inc.
By:_________________________________
Its:___________________________
Trans Cosmos USA, Inc.
By:_________________________________
Its:___________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-T
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
The Goldman Sachs Group, L.P.
By:_________________________________
Its:___________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-U
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
INVESTOR:
PSP & Trust
PS Plan For The Benefit Of Peter
J. Rubin
By:_________________________________
Peter J. Rubin, Trustee
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-V
<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
MICROSOFT CORPORATION
By:_________________________________
Its:___________________________
[Signature Page to Second Amended and Restated Investors' Rights Agreement]
20-W
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
RealNetworks, SARL
RealNetworks, Limited
Progressive Networks Kabushiki Kaisha (to be renamed RealNetworks Kabushiki
Kaisha)
<PAGE> 1
EXHIBIT 23.2
REPORT AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
RealNetworks, Inc.:
The audits referred to in our report dated March 14, 1997 included the
related financial statement schedule for the period from February 9, 1994
(inception) to December 31, 1994 and the years ended December 31, 1995 and 1996,
included in the registration statement on Form S-1 of RealNetworks, Inc. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports and to the reference of our firm under
the headings "Summary Consolidated Financial Data", "Selected Consolidated
Financial Data" and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Seattle, Washington
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 14,737,806 4,971,916
<SECURITIES> 4,857,163 6,523,710
<RECEIVABLES> 3,275,518 4,352,334
<ALLOWANCES> 383,350 581,219
<INVENTORY> 60,543 80,270
<CURRENT-ASSETS> 23,528,266 16,535,286
<PP&E> 3,462,153 5,644,834
<DEPRECIATION> 783,355 1,625,579
<TOTAL-ASSETS> 26,468,158 22,147,854
<CURRENT-LIABILITIES> 6,634,922 7,656,583
<BONDS> 0 991,268
23,153,494 23,264,467
932,385 932,385
<COMMON> 46,450 88,617
<OTHER-SE> (4,299,093) (10,785,466)
<TOTAL-LIABILITY-AND-EQUITY> 26,468,158 22,147,854
<SALES> 0 0
<TOTAL-REVENUES> 14,012,388 13,366,177
<CGS> 0 0
<TOTAL-COSTS> 2,185,524 3,054,277
<OTHER-EXPENSES> 15,843,408 17,119,451
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,789,245) (6,371,786)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,789,245) (6,371,786)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,789,245) (6,371,786)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
