<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23137
REALNETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1628146
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
1111 THIRD AVENUE, SUITE 2900 98101
SEATTLE, WASHINGTON (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 674-2700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
October 31, 1998 was 30,113,942. In addition, there were 3,338,374 outstanding
shares of the registrant's Special Common Stock, par value $0.001 per share,
that automatically convert on a one-for-one basis into Common Stock on a bona
fide sale to a purchaser who is not an affiliate of the holder.
<PAGE> 2
REALNETWORKS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................19
Item 2. Changes in Securities and Use of Proceeds.............................................19
Item 6. Exhibits and Reports on Form 8-K......................................................20
</TABLE>
- 2 -
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments..................... $ 92,028 $ 98,577
Trade accounts receivable, net of allowance for doubtful
accounts and sales returns......................................... 5,073 4,806
Other receivables..................................................... 10,706 221
Prepaid expenses and other current assets............................. 2,052 3,506
--------- ---------
Total current assets............................................... 109,859 107,110
Property and equipment, net................................................ 5,143 5,457
Investment in joint venture................................................ 816 499
Other assets, net.......................................................... 886 1,910
--------- ---------
Total assets....................................................... $ 116,704 $ 114,976
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 2,136 $ 2,648
Accrued compensation.................................................. 974 1,555
Other accrued expenses................................................ 2,679 7,941
Deferred revenue...................................................... 16,550 21,651
--------- ---------
Total current liabilities.......................................... 22,339 33,795
Deferred revenue, net of current portion................................... 15,500 8,250
Notes payable.............................................................. 963 996
Shareholders' equity:
Preferred stock, $0.001 par value
Authorized 60,000 shares; no shares issued and outstanding......... -- --
Common stock, $0.001 par value
Authorized 292,952 shares; issued and outstanding 27,528 shares
at December 31, 1997 and 29,620 shares at September 30, 1998....... 28 30
Special common stock, $0.001 par value
Authorized 7,048 shares; issued and outstanding 3,338 shares
at December 31, 1997 and September 30, 1998........................ 3 3
Additional paid-in capital............................................ 95,557 113,225
Accumulated deficit................................................... (17,524) (41,075)
Accumulated other comprehensive loss.................................. (162) (248)
--------- ---------
Total shareholders' equity......................................... 77,902 71,935
--------- ---------
Total liabilities and shareholders' equity......................... $ 116,704 $ 114,976
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
- 3 -
<PAGE> 4
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months
September 30, Ended September 30,
----------------------- -----------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Software license fees................... $ 7,480 $ 12,413 $ 17,550 $ 32,627
Service revenues........................ 1,121 3,988 3,310 10,105
Advertising............................. 450 843 1,557 2,070
-------- -------- -------- --------
Total net revenues.................. 9,051 17,244 22,417 44,802
-------- -------- -------- --------
Cost of revenues:
Software license fees................... 946 2,140 2,080 5,526
Service revenues........................ 345 642 1,957 1,918
Advertising............................. 264 469 572 1,207
-------- -------- -------- --------
Total cost of revenues.............. 1,555 3,251 4,609 8,651
-------- -------- -------- --------
Gross profit........................ 7,496 13,993 17,808 36,151
-------- -------- -------- --------
Operating expenses:
Research and development................ 3,667 5,739 9,130 14,947
Sales and marketing..................... 4,863 8,203 14,024 23,168
General and administrative.............. 1,917 2,653 4,413 7,220
Acquisition related charges............. -- -- -- 17,879
-------- -------- -------- --------
Total operating expenses............ 10,447 16,595 27,567 63,214
-------- -------- -------- --------
Operating loss...................... (2,951) (2,602) (9,759) (27,063)
Other income, net........................... 748 1,243 1,184 3,512
-------- -------- -------- --------
Net loss.................................... $ (2,203) $ (1,359) $ (8,575) $(23,551)
======== ======== ======== ========
Basic and diluted net loss per share........ $ (2.15) $ (0.04) $ (11.10) $ (0.74)
======== ======== ======== ========
Shares used to compute basic and diluted
net loss per share..................... 1,122 32,686 804 31,971
</TABLE>
See accompanying notes to condensed consolidated financial statements
- 4 -
<PAGE> 5
REALNETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1998
--------- ---------
<S> <C> <C>
Net cash provided by operating activities.....................................$ 21,870 $ 7,722
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment...................................... (3,496) (2,665)
Purchases of short-term investments...................................... (189,419) (72,474)
Proceeds from sales and maturities of short-term investments............. 171,379 57,117
Investment in joint venture.............................................. (998) --
Increase in other assets................................................. (251) --
Cash obtained through acquisition........................................ -- 203
--------- ---------
Net cash used in investing activities................................. (22,785) (17,819)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of note payable................................... 991 --
Payments on notes payable................................................ -- (3)
Net proceeds from sales of preferred and common stock and
exercise of stock options and warrants................................. 29,989 1,348
--------- ---------
Net cash provided by financing activities............................. 30,980 1,345
--------- ---------
Effect of exchange rate changes on cash....................................... (52) (56)
--------- ---------
Net increase (decrease) in cash and cash equivalents.................. 30,013 (8,808)
Cash and cash equivalents at beginning of period.............................. 14,738 62,255
--------- ---------
Cash and cash equivalents at end of period.................................... 44,751 53,447
Short-term investments at end of period....................................... 22,897 45,130
--------- ---------
Total cash, cash equivalents and short-term investments at end of period......$ 67,648 $ 98,577
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
- 5 -
<PAGE> 6
REALNETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
RealNetworks, 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, video, and animation, over the Internet and intranets. The Company's
products and services include its RealSystem, a streaming media solution that
includes RealAudio and RealVideo technology, an electronic commerce World Wide
Web (Web) site designed to promote the proliferation of streaming media products
and a network of advertising-supported content aggregation Web sites.
(b) Basis of Presentation
The accompanying unaudited condensed 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.
These statements reflect all adjustments, consisting only of normal,
recurring adjustments that, in the opinion of the Company's management, are
necessary for a fair presentation of the results of operations for the periods
presented. Operating results for the quarter and nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for any
subsequent quarter or for the year ending December 31, 1998. Certain information
and footnote disclosures normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(c) Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments are comprised of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Cash and cash equivalents $62,255 $43,847
Short-term investments 29,773 45,130
Restricted cash equivalents -- 9,600
------- -------
$92,028 $98,577
======= =======
</TABLE>
Restricted cash equivalents represent a restricted escrow account
established in connection with a lease agreement for new corporate offices. The
Company expects to take occupancy of the new facilities during the quarter
ending June 30, 1999.
- 6 -
<PAGE> 7
(d) Revenue Recognition
On January 1, 1998, the Company adopted the provisions of Statement of
Position 97-2, Software Revenue Recognition (SOP 97-2), which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence that is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered. The adoption of SOP 97-2 did not have a material
effect on revenue recognition for the quarter and nine months ended September
30, 1998.
Prior to January 1, 1998, the Company recognized revenue from software
license fees upon delivery, net of an allowance for estimated returns, provided
that no significant obligations of the Company remain 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. 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
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), when the following conditions are met: the software
product has been delivered to the VAR, the fee to the Company is fixed or
determinable, and collectibility is probable.
Service revenues include payments under support and upgrade contracts,
and fees from consulting and content hosting. Support and upgrade revenues are
recognized ratably over the term of the contract, which typically is 12 months.
Other service revenues are recognized when the service is performed.
Revenues from advertising appearing on the Company's Web sites are
recognized ratably 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
minimum guaranteed page impression deliveries are not met, the Company defers
recognition of the corresponding revenues until guaranteed page impression
delivery levels are achieved.
(e) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income (Statement 130), which establishes standards for the
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 and requires reclassification of financial statements for earlier
periods to be provided for comparative purposes. The Company has not determined
the manner in which it will present the information required by Statement 130 in
its annual financial statements for the year ending December 31, 1998. The
Company's total comprehensive loss for the quarters ended September 30, 1997 and
1998 was $(2,283,000) and $(1,392,000), respectively. The Company's total
comprehensive loss for the nine months ended September 30, 1997 and 1998 was
$(8,636,000) and $(23,637,000), respectively. Total comprehensive loss for the
quarters and nine months ended September 30, 1997 and 1998 consisted of net loss
and foreign currency translation adjustments.
- 7 -
<PAGE> 8
(f) Net Loss Per Share
Basic net loss per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable preferred stock by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is computed by dividing the sum of net loss plus accretion of
redemption value of redeemable preferred stock by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
the Company had a net loss attributable to common shareholders in each of the
periods presented, basic and diluted net loss per share are the same.
The following table reconciles the Company's reported net loss to net
loss attributable to common shareholders used to compute basic and diluted net
loss per share:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net loss $ (2,203) $ (1,359) $ (8,575) $(23,551)
Accretion of redemption value of
redeemable preferred stock
prior to conversion into
common stock (212) -- (346) --
-------- -------- -------- --------
Net loss attributable to common
shareholders $ (2,415) $ (1,359) $ (8,921) $(23,551)
======== ======== ======== ========
</TABLE>
Excluded from the computation of diluted net loss per share for the quarter and
nine months ended September 30, 1998 are options to acquire 7,955,000 shares of
common stock with a weighted-average exercise price of $9.57 and warrants to
acquire 413,000 shares of common stock with a weighted-average exercise price of
$9.41 because their effects would be anti-dilutive. Excluded from the
computation of basic net loss per share are approximately 110,000 shares held in
escrow because all necessary conditions to release the shares from escrow were
not satisfied during the quarter and nine months ended September 30, 1998. The
escrow shares are excluded from the computation of diluted net loss per share as
their effect would be anti-dilutive.
(g) Recent Accounting Pronouncements
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 fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by Statement 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133). Statement 133 establishes a
new model for accounting for derivatives and hedging activities and supercedes
and amends existing accounting standards. Statement 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a component of other comprehensive income depending on the
type of hedge relationship that exists with respect to such derivative. The
Company does not expect the adoption of Statement 133 to have a material impact
on its consolidated financial statements.
- 8 -
<PAGE> 9
NOTE 2 - ACQUISITION
In March 1998, the Company completed the acquisition of Vivo Software,
Inc. (Vivo), a developer of streaming media creation tools. Under the terms of
the acquisition, the Company issued approximately 1,102,000 shares of its common
stock in exchange for all outstanding shares of Vivo common stock. In addition,
the Company issued options to purchase approximately 48,000 shares of the
Company's common stock in exchange for outstanding unvested options to purchase
Vivo common stock. The acquisition was accounted for using the purchase method
of accounting, and, accordingly, the results of Vivo's operations are included
in the Company's condensed consolidated financial statements from the date of
acquisition.
A summary of the purchase price for the acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Stock and stock options $16,526
Direct acquisition costs 445
Accrued expenses assumed 1,640
Other current liabilities assumed 1,021
Non-current liabilities assumed 36
-------
Total $19,668
=======
</TABLE>
A summary of the allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
In-process research and development $17,729
Cash acquired 203
Other current assets acquired 148
Property and equipment 100
Goodwill 1,488
=======
Total $19,668
=======
</TABLE>
In-process research and development represents the fair value of
technologies acquired for use in the Company's own development efforts. The
Company determined the amount of the purchase price to be allocated to
in-process research and development based on the time and cost to incorporate
the acquired technology into the Company's development projects, expected
incremental revenues and expenses associated with the development projects
utilizing the acquired technology, and risks and uncertainties associated with
the acquired technology. Such risks and uncertainties include inherent
difficulties and uncertainties in incorporating the acquired technology into the
Company's development projects and risks related to the viability of and
potential changes to target markets. The Company also concluded that the
acquired technology had no alternative future use.
Goodwill represents the excess of the purchase price over the fair value
of identifiable tangible and intangible assets acquired and is amortized using
the straight-line method over its estimated life of five years.
The acquisition of Vivo was a tax free reorganization under the Internal
Revenue Code (IRC). Therefore, the charge for in-process research and
development is not deductible for income tax purposes. The Company acquired a
net operating loss carryforward of approximately $16,000,000, which expires from
2008 to 2012. Under the provisions of the IRC, the amount of these net operating
loss carryforwards available annually to offset future taxable income is
significantly limited. No value has been attributed to these net operating
losses in the purchase price allocation due to these limitations.
In connection with the acquisition, approximately 220,000 shares of
common stock issued were placed in escrow to secure indemnification obligations
of former shareholders of Vivo. As of September 30, 1998, approximately 110,000
shares remain in escrow.
- 9 -
<PAGE> 10
The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of each of the periods presented. The
pro forma results of operations exclude $17,879,000 of acquisition related
charges as the charges are not expected to have a continuing impact on the
Company's results of operations. The pro forma information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place at the beginning of 1997 or at the beginning of 1998, nor is it
necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
Pro forma
Nine Months Ended
September 30,
--------------------------
1997 1998
-------- --------
(in thousands except per
share data)
<S> <C> <C>
Revenues $ 23,785 $ 45,455
Net loss (13,091) (6,802)
Basic and diluted net loss per
share (7.48) (0.21)
</TABLE>
- 10 -
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND
CERTAIN ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT. WORDS SUCH AS
"ANTICIPATES", "EXPECTS", "INTENDS", "PLANS", "BELIEVES", "SEEKS", "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THE COMPANY'S ACTUAL ACTIONS OR RESULTS MAY DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH HEREIN UNDER "OVERVIEW", "RESULTS OF OPERATIONS", AND
"LIQUIDITY AND CAPITAL RESOURCES", IN THE SECTION TITLED "CERTAIN RISK FACTORS
THAT MAY AFFECT THE COMPANY'S BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION" INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997, AND IN THE SECTIONS TITLED "RISK FACTORS" AND
"BUSINESS" INCLUDED IN THE COMPANY'S FINAL PROSPECTUS DATED NOVEMBER 21, 1997.
UNLESS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE INFORMATION
SET FORTH IN OTHER REPORTS OR DOCUMENTS THAT THE COMPANY FILES FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.
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 RealSystem, a
streaming media solution that includes RealAudio and RealVideo technology, an
electronic commerce Web site designed to promote the proliferation of streaming
media products and a network of advertising-supported content aggregation Web
sites.
In March 1998, the Company completed the acquisition of Vivo Software,
Inc. ("Vivo"), a developer of streaming media creation tools. Under the terms of
the acquisition, the Company exchanged approximately 1,102,000 shares of its
common stock in exchange for all outstanding shares of Vivo common stock. The
acquisition was accounted for using the purchase method of accounting. Of the
total purchase price, $17,729,000 was allocated to in-process research and
development and was charged to the Company's results of operations for the nine
months ended September 30, 1998. The remaining purchase price of $1,939,000 was
allocated to tangible assets acquired and goodwill. Goodwill is amortized over
its estimated life of five years. See Note 2 of Notes to Condensed Consolidated
Financial Statements. Although the Company believes that the acquisition of Vivo
is in the best interests of the Company and its shareholders, acquisitions
involve a number of special risks, including: the integration of acquired
products and technologies in a timely manner; the integration of businesses and
employees with the Company's business; adverse effects on the Company's reported
operating results from acquisition-related charges and amortization of goodwill;
potential increases in stock compensation expense and increased compensation
expense resulting from newly-hired employees; distraction of the Company's
management from the day-to-day business and operations of the Company; the
assumption of unknown liabilities; and the possible failure to retain key
acquired personnel. Because most software business acquisitions involve the
purchase of significant amounts of intangible assets, acquisitions of such
businesses typically result in goodwill and amortization charges and may also
involve charges for acquired research and development projects. If the Company
were to incur additional charges for acquired in-process research and
development and amortization of goodwill with respect to future acquisitions,
such charges could have a material adverse effect on the Company's business,
financial condition and results of operations.
- 11 -
<PAGE> 12
During the third quarter of 1998, the Company released RealSystem G2,
its next generation streaming media delivery system consisting of servers,
tools, and client software, in beta form to the public prior to finalizing
product features, functionality and operability. The beta release of RealSystem
G2 may cause certain customers to delay purchasing decisions until commercial
versions of the products are available, which could have a material adverse
effect on the Company's future revenues and quarterly results of operations. In
addition, software products as complex as those offered by the Company
frequently contain errors or failures, especially when new versions are
released. Although the Company conducts extensive product testing during product
development, there can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new versions of
its products after commencement of commercial shipments. Potential errors could
result in the loss of revenue or delay in market acceptance of the Company's
products, diversion of development resources, damage to the Company's reputation
or increased service and warranty costs, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company will not
experience delays in the development, introduction, marketing and distribution
of the final version of RealSystem G2, which delays, if they were to occur,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In June 1997, the Company entered into a strategic agreement
("Agreement") with Microsoft Corporation ("Microsoft") pursuant to which the
Company granted Microsoft a nonexclusive license to its Standard Code (as
defined in the Agreement), which is comprised of certain substantial elements of
the source code of the Company's RealAudio/RealVideo Version 4.0 technology
included in its basic RealPlayer and substantial elements of its EasyStart
Server (currently known as the Basic Server), and related Company trademarks. In
July 1997, the Company delivered the Standard Code in exchange for a license fee
of $30,000,000. The Company recognizes revenue related to this Agreement ratably
over the three-year term of its ongoing obligations. The portion of the license
fee that has not yet been recognized as revenue is included in deferred revenue.
Under the Agreement, Microsoft may sublicense its rights to the Standard
Code to third-parties under certain conditions without additional compensation
to the Company. In addition, Microsoft has an option to receive two additional
deliveries of updated versions of the Standard Code. Microsoft's right to
receive the first delivery expired unexercised in July, 1998. Microsoft may
elect to receive a delivery of the then current version of the Standard Code
once before July, 1999, upon payment of a license fee of $35 million. If the
Company elects in its sole discretion to grant an Event License (as defined in
the Agreement) to a third-party, the Agreement provides for a refund of a
portion of the license fee paid by Microsoft, based on a declining scale over
the term of the Agreement.
In connection with the Agreement, Microsoft purchased a minority
interest in the Company in the form of 3,338,374 shares of nonvoting Series E
Preferred Stock at approximately $8.99 per share, which shares were converted to
nonvoting Special Common Stock upon the completion of the Company's initial
public offering. All shares of Special Common Stock will automatically convert
into the same number of shares of Common Stock upon transfer by Microsoft to a
purchaser who is not affiliated with Microsoft. Microsoft has the right to
require the Company to register Microsoft's shares for sale under the Securities
Act of 1933. Commencing in July 1998, Microsoft also may be eligible to sell a
portion of its holdings pursuant to Rule 144 of the Securities Act. Rule 144 of
the Securities Act provides, in general, that any person who has beneficially
owned shares for at least one year may generally 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 or the reported average weekly trading volume
in the Company's Common Stock (computed over a four-week period). Sales of
substantial numbers of shares of Special Common Stock in the public market could
have a material adverse effect on the market price for the Company's Common
Stock.
Although Microsoft is a shareholder of the Company, it is also a
competitor and its interests may not always be aligned with those of the Company
and the Company's other shareholders. Microsoft has indicated to the Company
that it is re-evaluating its investment position in the Company and may sell a
portion, if not all, of its shares. There can be no assurance that any such
issues, the evolving nature of the relationship, or economic factors would not
result in Microsoft selling all or a portion of its holdings in the Company,
which could have a material adverse effect on the market price for the Company's
Common Stock.
- 12 -
<PAGE> 13
Microsoft recently introduced the Windows Media Player, which competes
with the Company's RealPlayer software, and is available for download from
Microsoft's Web site. Microsoft has stated publicly that future releases of its
new Windows 98 operating system will include the Windows Media Player. The
Windows Media Player is based in part on technology Microsoft licensed from the
Company under the Agreement, and can therefore play audio and video content
based on earlier versions of the Company's RealAudio and RealVideo technology.
Because Microsoft has not exercised its option to receive subsequent versions of
the Standard Code, the Windows Media Player cannot play audio and video content
based on the RealSystem 5.0 or G2 technology. Therefore, consumers who are using
the Windows Media Player to receive audio and video over the Internet will not
be able to access content available in the Company's newer formats. In addition,
while Microsoft currently distributes certain older versions of the RealPlayer
with Microsoft Internet Explorer, which is distributed with the Windows
operating system, Microsoft has indicated to the Company that it will not
distribute the RealPlayer with future versions of Windows 98.
On July 23, 1998, Robert Glaser, the Company's Chief Executive Officer,
testified before the Senate Judiciary Committee that if a consumer already had
the RealPlayer on a computer system, and thereafter downloaded the Windows Media
Player, in a number of circumstances the Windows Media Player disabled certain
important functions of the RealPlayer. As a result, certain of the Company's
customers who had downloaded the free RealPlayer, or paid for the RealPlayer
Plus, may have found that their product had ceased working. The Company raised
the issue right after the Windows Media Player was released and the Company
quickly incorporated a workaround solution into its RealPlayer and RealPlayer
Plus and also posted this workaround solution on its Web site. The Company
believes the workaround solution counteracted the situation, and, as a result,
the Company believes only a small number of consumers were impacted by the
situation. In light of these recent events, the Company's relationship with
Microsoft has become more competitive.
Microsoft has a longer operating history, greater name recognition, and
significantly greater financial, technical, marketing, and distribution
resources than the Company. The Company's inability to sustain or maintain its
leadership position in its market segment could have a material adverse effect
on the Company's business, financial condition and results of operations and on
the market price for the Company's Common Stock.
In August 1997, the 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. The Company continues to
supply documents and information in response to the subpoenas. 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.
Due to the foregoing factors, it is likely that the Company's operating
results in some future quarters will fall below the expectations of securities
analysts and investors, which would likely have a material adverse affect on the
trading price of the Company's Common Stock.
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<PAGE> 14
RESULTS OF OPERATIONS
REVENUES
Software License Fees. Software license fees were $12,413,000 for the
quarter ended September 30, 1998, an increase of 66% from $7,480,000 in the
comparable quarter of the prior year. Software license fees were $32,627,000 for
the nine months ended September 30, 1998, an increase of 86% from $17,550,000 in
the comparable period of the prior year. The increases were due primarily to a
greater volume of products sold as a result of growing market acceptance of the
Company's products, the introduction of new products, successful product
promotions and increased sales from electronic distribution. In addition, in
June 1997, the Company entered into a $30,000,000 license agreement with
Microsoft. The agreement requires the Company to provide Microsoft with
engineering consultation services, certain error corrections and certain
technical support over a defined term. The Company recognizes revenue from the
agreement over the three-year term of the Company's ongoing obligations.
Included in software license fees for each of the quarters ended September 30,
1998 and 1997 was $2,417,000 related to the Microsoft license agreement.
Included in software license fees for the nine months ended September 30, 1998
and 1997 was $7,251,000 and $2,417,000, respectively, related to the Microsoft
license agreement.
Service Revenues. Service revenues were $3,988,000 for the quarter ended
September 30, 1998, an increase of 256% from $1,121,000 in the comparable
quarter of the prior year. Service revenues were $10,105,000 for the nine months
ended September 30, 1998, an increase of 205% from $3,310,000 in the comparable
period of the prior year. The increases were primarily due to the introduction
of support and upgrade contracts for the Company's RealPlayer Plus during the
fourth quarter of 1997 and a larger installed base of the Company's products.
The larger installed base of the Company's products promotes increases in
revenues through the purchase of support and upgrade contracts and other
services performed by the Company. Service revenues for the nine months ended
September 30, 1997, also included $498,000 related to the Company's RealNetworks
Conference.
Advertising Revenues. Advertising revenues were $843,000 for the quarter
ended September 30, 1998, an increase of 87% from $450,000 in the comparable
quarter of the prior year. Advertising revenues were $2,070,000 for the nine
months ended September 30, 1998, an increase of 33% from $1,557,000 in the
comparable period of the prior year. The increases in advertising revenues were
due to a larger sales force and greater success in attracting advertisers.
COST OF REVENUES
Cost of Software License Fees. Cost of software license fees includes
costs of product media, duplication, manuals, packaging materials, royalties
paid for licensed technology, and order fulfillment costs. Cost of software
license fees was $2,140,000 for the quarter ended September 30, 1998, an
increase of 126% from $946,000 in the comparable quarter in the prior year, and
increased as a percentage of software license fees to 17% from 13%. Cost of
software license fees was $5,526,000 for the nine months ended September 30,
1998, an increase of 166% from $2,080,000 in the comparable period in the prior
year, and increased as a percentage of software license fees to 17% from 12%.
These increases were due primarily to higher sales volumes and royalties related
to new third-party technologies incorporated into the Company's products. The
increases in cost of software license fees as a percentage of software license
fees were due to changes in the mix of products sold.
Cost of Service Revenues. Cost of service revenues includes the cost of
in-house and contract personnel providing support and other services and
bandwidth expenses for hosting services. Cost of service revenues was $642,000
for the quarter ended September 30, 1998, an increase of 86% from $345,000 in
the comparable quarter in the prior year, but decreased as a percentage of
service revenues to 16% from 31%. Cost of service revenues was $1,918,000 for
the nine months ended September 30, 1998, a decrease of 2% from $1,957,000 in
the comparable period in the prior year, and decreased as a percentage of
service revenues to 19% from 59%. Cost of service revenues for the nine months
ended September 30, 1997, includes $1,000,000 of costs associated with the
Company's RealNetworks Conference. Excluding the impact of the RealNetworks
Conference, cost of service revenues was $957,000, or 34% of service revenues,
for the nine months ended September 30, 1997. The increases in cost of service
revenues excluding the RealNetworks Conference were primarily due to increased
staff and contract
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<PAGE> 15
personnel to provide services to a greater number of customers and increases in
bandwidth expenses. The decreases in percentage terms were primarily due to
economies of scale in providing support services to a larger customer base.
Cost of Advertising Revenues. Cost of advertising revenues includes
personnel associated with content creation, bandwidth expenses and fees paid to
third-parties for content included in the Company's Web sites. Cost of
advertising revenues was $469,000 for the quarter ended September 30, 1998, an
increase of 78% from $264,000 in the comparable quarter in the prior year, but
decreased as a percentage of advertising revenues to 56% from 59%. Cost of
advertising revenues was $1,207,000 for the nine months ended September 30,
1998, an increase of 111% from $572,000 in the comparable period in the prior
year, and increased as a percentage of advertising revenues to 58% from 37%.
These increases were primarily due to increases in the quality and quantity of
content available on the Company's Web pages and increased costs associated with
the maintenance of newly developed Web sites.
Gross margins may be affected by the mix of distribution channels used,
the mix of products sold, licensed third-party technology incorporated into the
Company's products, the mix of product versus services revenues and the mix of
international versus U.S. revenues. If sales through indirect channels increase
as a percentage of total net revenues, or sales of the Company's lower margin
products 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 to support product development and
costs of technology acquired from third parties to incorporate into products
under 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. Costs incurred between
completion of a working model and general release of products have been
insignificant. Research and development expenses were $5,739,000 for the quarter
ended September 30, 1998, an increase of 57% from $3,667,000 in the comparable
quarter in the prior year, but decreased as a percentage of total net revenues
to 33% from 41%. Research and development expenses were $14,947,000 for the nine
months ended September 30, 1998, an increase of 64% from $9,130,000 in the
comparable period in the prior year, but decreased as a percentage of total net
revenues to 33% from 41%. The increases in absolute dollars were primarily due
to increases in internal development personnel and consulting expenses. The
decreases in percentage terms were a result of revenues growing at a faster rate
than expenses. Research and development expenses were primarily related to the
development of new technology and products and enhancements made to existing
products. The Company believes that significant investments in research and
development is a critical factor in attaining its strategic objectives and, as a
result, expects to increase research and development expenditures in future
periods.
Sales and Marketing. Sales and marketing expenses consist principally of
salaries, commissions, consulting fees paid, trade show expenses, advertising,
promotional expenses and cost of marketing collateral. Sales and marketing
expenses were $8,203,000 for the quarter ended September 30, 1998, an increase
of 69% from $4,863,000 in the comparable quarter of the prior year, but
decreased as a percentage of total net revenues to 48% from 54%. Sales and
marketing expenses were $23,168,000 for the nine months ended September 30,
1998, an increase of 65% from $14,024,000 in the comparable period of the prior
year, but decreased as a percentage of total net revenues to 52% from 63%. The
increases in absolute dollars were due to the expansion of the Company's direct
sales organization, the creation of additional sales offices, promotions and
expenses related to the continued development of the "Real" brand. For the nine
months ended September 30, 1998, sales and marketing expenses included the net
costs of the 1998 RealNetworks Conference. The decreases in percentage terms
were a result of revenues growing at a faster rate than expenses. The Company
intends to continue its branding and marketing efforts and, therefore, expects
sales and marketing expenses to increase significantly in future periods.
General and Administrative. General and administrative expenses consist
primarily of personnel costs, fees for professional services and corporate
infrastructure costs. General and administrative expenses were $2,653,000 for
the quarter ended September 30, 1998, an increase of 38% from $1,917,000 in the
comparable quarter of the prior year, but decreased as a percentage of total net
revenues to 15% from 21%. General and administrative expenses were $7,220,000
for the nine months ended September 30, 1998, an increase of 64% from $4,413,000
in the comparable period of the prior year, but decreased as a percentage of
total net revenues to 16% from 20%. The
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<PAGE> 16
increases in absolute dollars were primarily a result of increased personnel and
facility expenses necessary to support the Company's growth and costs associated
with operating as a public company. The decreases in percentage terms were due
to revenues growing at a faster rate than expenses. The Company expects general
and administrative expenses to increase as the Company expands its staff, incurs
additional costs related to the growth of its business, and incurs additional
costs related to operating as a public company.
Acquisition Related Charges. Acquisition related charges include
acquired in-process research and development and other acquisition related
charges. In connection with the acquisition of Vivo in March 1998, the Company
allocated $17,729,000 of the total purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on projected cash flows related to the in-process research and development
projects. At the date of acquisition, this amount was expensed as part of
acquisition related charges as the in-process technology had not yet reached
technological feasibility and had no alternative future uses.
The value assigned to acquired in-process research and development was
determined by estimating the present value of the operating cash flows expected
to be generated by the in-process projects. The revenue projections were based
upon the revenues likely to be generated upon completion of the projects and
the beginning of commercial sales. Net cash flow estimates include cost of
goods sold, other operating expenses and taxes forecasted based upon historical
operating characteristics. In addition, net cash flow estimates were adjusted
to allow for a fair return on working capital and fixed assets and return on
other intangibles. Discount rates of 42% and 43%, which represent premiums to
the Company's cost of capital, were used to discount the net cash flows back to
their present value.
The nature of the efforts required to develop the acquired in-process
projects into commercially viable products principally relate to the completion
of planning, designing and testing activities necessary to establish that the
Vivo technology can be successfully combined with the Company's products and
that the resulting products can be produced to meet their design requirements
including functions, features and performance. Although the Company currently
expects that the in-process projects will be successfully developed, there can
be no assurance that commercial or technical viability of these products will be
achieved. Significant uncertainty exists as to the extent of compatibility of
the Vivo technology with the Company's technology. Furthermore, future
developments in streaming technology may impact the market for the in-process
projects. If the projects are not successfully developed, the Company may not
realize the value assigned to the in-process research and development projects.
In addition, the value of other acquired intangible assets may also become
impaired.
The Company may, in the future, acquire businesses or technologies that
are complimentary to those of the Company, the results of which could include
significant charges for acquired in-process research and development and the
amortization of acquired intangible assets.
OTHER INCOME, NET
Other income, net consists primarily of earnings on the Company's cash,
cash equivalents and short-term investments. Other income, net was $1,243,000
and $3,512,000 for the quarter and nine months ended September 30, 1998,
respectively, and $748,000 and $1,184,000 for the quarter and nine months ended
September 30, 1997, respectively. The increases were due primarily to interest
earned on proceeds from the sales of common and preferred stock in 1997,
including the Company's initial public offering in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7,722,000 for the nine
months ended September 30, 1998. Net cash provided by operating activities was
$21,870,000 for the nine months ended September 30, 1997. Cash provided by
operating activities for the nine months ended September 30, 1998 was due to a
decrease in other receivables, an increase in accrued expenses and non-cash
charges associated with depreciation and acquisition related charges, partially
offset by the reported net loss. Cash provided by operating activities for the
nine months ended September 30, 1997 was primarily due to an increase in
deferred revenue, partially offset by the reported net loss.
Net cash used in investing activities was $17,819,000 and $22,785,000
for the nine months ended September 30, 1998 and 1997, respectively. Cash used
in investing activities for the nine months ended September 30, 1998 was
primarily a result of net purchases of short-term investments and purchases of
equipment. Cash used in investing activities for the nine months ended September
30, 1997 was due to net purchases of short-term investments, purchases of
equipment, and investment in a joint venture.
Net cash provided by financing activities was $1,345,000 and $30,980,000
for the nine months ended September 30, 1998 and 1997, respectively. Cash
provided by financing activities for the nine months ended September 30, 1998
was a result of net proceeds from the sales of common stock and the exercise of
stock options and warrants. Cash provided by financing activities for the nine
months ended September 30, 1997 was a result of the exercise of stock options,
sales of preferred stock and proceeds from a note payable.
At September 30, 1998, the Company had $98,577,000 in cash, cash
equivalents and short-term investments. As of September 30, 1998, the Company's
principal commitments consisted of obligations under operating leases and
$996,000 in notes payable. Since its inception, the Company has experienced a
substantial increase in its capital expenditures to support expansion of the
Company's operations and information systems. In January 1998, the Company
entered into a lease agreement for a new location for its corporate offices. The
Company anticipates the new lease will require significant capital expenditures
associated with leasehold improvements. In the past, the Company has completed
acquisitions of businesses and technologies, and will continue to evaluate
acquisitions of, or investments in, businesses, products, joint-ventures, or
technologies that are complementary to the operations of the Company. Such
acquisitions or investments, which the Company believes have been, and will
continue to be, in the best interest of the Company, involve risks and may
require additional cash investments by the Company.
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<PAGE> 17
Since its 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 and that such expenses
will be a material use of the Company's cash resources. The Company believes
that 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. The Company may, in the future,
seek to raise additional funds through public or private equity financing, or
through other sources such as credit facilities. The sale of additional equity
securities could result in dilution to the Company's shareholders.
YEAR 2000
What is commonly referred to as the "Year 2000" problem arose because
many existing computer programs use only the last two digits to refer to a year.
As a result, such date-sensitive computer programs are unable to recognize
two-digit date fields designated as "00" as the year 2000. Such inability could
result in system failures or miscalculations causing disruptions to operations.
The Company believes that its current products are Year 2000 Compliant,
although the Company is continually identifying, evaluating, testing and
implementing changes to minimize or eliminate the effect of the Year 2000 risk
on the Company's recently developed products and newly acquired technologies. As
used herein, "Year 2000 Compliant" means that software products and systems are
able to function properly before, during and after the Year 2000 without loss of
functionality resulting from date changes. The Company believes that all of its
products will be ready for the Year 2000 by the end of 1999 and that no material
costs will remain at that time. However, there can be no assurance that the
Company's current products do not contain undetected errors related to Year 2000
that may result in material additional costs or liabilities that could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues in a variety of ways. The Company believes that it is not possible to
predict the overall impact of these decisions.
With regard to the Company's internal processing and operational
systems, the Company is in the process of identifying and testing its systems
for Year 2000 compliance. The Company will continue its Year 2000 assessment
during 1998 and 1999. Based on the preliminary analysis of these internal
systems, the Company does not believe the cost of addressing their Year 2000
readiness will be material. However, the Company believes that undetected errors
or the failure of such systems to be Year 2000 Compliant could create
significant record-keeping and operational deficiencies, the results of which
could have material adverse effects on the Company's business, financial
condition and results of operations.
The Company relies on third-parties for services such as
telecommunications, internet service, utilities and other key services and
supplies. Interruption of those services or supplies due to Year 2000 issues
could adversely affect the Company's operations. Furthermore, to the extent that
the Company is not able to test the technology provided to it by third-parties
for its own use or for redistribution, or to obtain assurance from such
third-parties that their products are Year 2000 Compliant, the Company may
experience additional costs or liabilities that could have a material adverse
effect on the Company's business, financial condition and results of
operations.
To date, the Company has not incurred significant expenditures
associated with the costs of Year 2000 remediation efforts. Although the Company
does not anticipate the costs to address the Company's Year 2000 issues to be
material, the costs of the Company's Year 2000 remediation work and the date on
which the Company plans to complete such work are based on management's best
estimates, which were derived from numerous assumptions about future events,
including the availability of certain resources, third-party remediation plans
and other factors. Accordingly, if Year 2000 modifications, evaluations,
assessments and conversions are not made, or are not completed in time, the Year
2000 problem could have a material adverse impact on the Company's business,
financial condition and results of operations.
At this stage in the Company's analysis and remediation process, it is
difficult to specifically identify the cause, and the magnitude of any adverse
economic impact, of the most reasonably likely worst case Year 2000 scenario.
Such reasonably likely worst case scenario would include the failure of the
Company's products to operate properly, causing customers' systems and/or
operations to fail or be disrupted. In the event of such
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<PAGE> 18
failures or disruptions customers may commence legal action against the Company
or otherwise seek compensation for their losses. In addition, the Company has on
occasion agreed to indemnify certain of its customers for claims and losses
arising out of the failure of the Company's products to be Year 2000 Compliant,
which indemnification, claims or losses could have a material adverse economic
impact on the Company's business, financial condition and results of operations.
Such reasonably likely worst case scenario also would include the failure of key
vendors and/or suppliers to correct their own Year 2000 issues, which failures
could cause failure or disruption of the Company's operations, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's contingency plans to address the most
reasonably likely worst case Year 2000 scenarios include developing or obtaining
upgrades for products that have been tested and found to be non-compliant and
seeking a second source of supply in the event the Company believes that any of
its key suppliers are unlikely to be able to resolve their Year 2000 issues.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 25, 1998, a lawsuit was filed against the Company and
co-defendant, Broadcast.com, Inc. in the United States District Court for the
Northern District of Texas - Dallas Division by Venson M. Shaw and Steven M.
Shaw. In this action, the plaintiffs allege that the Company, individually and
in combination with Broadcast.com, infringes on a certain patent by making,
using, selling, and/or offering to sell software products and services directed
to media delivery systems for the Internet and corporate intranets. Plaintiffs
seek to enjoin the Company from its alleged infringing activity and to recover
damages in an amount no less than a reasonable royalty. Although no assurance
can be given as to the outcome of this lawsuit, the Company believes that the
allegations in this action are without merit, and the Company intends to
vigorously defend against the complaint.
From time to time the Company has been, and continues 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Since July 1, 1998, the Company has issued and sold unregistered
securities as follows:
(1) An aggregate of 15,029 shares of Common Stock was issued to
one investor upon the cashless exercise of a warrant in July 1998. The aggregate
consideration received for such shares was the cancellation of a warrant to
acquire 19,920 shares of Common Stock at an exercise price of $9.41.
(2) An aggregate of 39,841 shares of Common Stock was issued to
one investor upon the exercise of a warrant in July 1998. The aggregate
consideration received for such shares was $375,003.
(3) During the third quarter, an aggregate of 60,000 shares of
Common Stock were issued to Film.com, Inc. in connection with the satisfaction
of certain performance criteria pursuant to that certain Asset Purchase
Agreement by and between the Company and Film.com, Inc. dated October 24, 1997.
A total of 30,000 of such shares were issued on July 28, 1998, and the remaining
30,000 shares were issued on September 1, 1998.
(4) Between July 1, 1998 and September 30, 1998, an aggregate of
253,818 shares of Common Stock were issued to employees upon the exercise of
options. The aggregate consideration received for such shares was $261,987.
Use of Proceeds
The Company's registration statement under the Securities Act of 1933,
as amended, for its initial public offering became effective on November 21,
1997. Offering proceeds, net of aggregate expenses of approximately $4.6
million, were approximately $38.5 million. The Company has used all of the net
offering proceeds for the purchase of temporary investments consisting of cash,
cash equivalents and short-term investments. The Company has not used any of the
net offering proceeds for construction of plant, building or facilities,
purchases of real estate, acquisition of other businesses, or repayment of
indebtedness. None of the net offering proceeds were paid directly or indirectly
to directors, officers, or general partners of the Company or their associates,
persons owning 10% or more of any class of the Company's securities, or
affiliates of the Company.
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<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<S> <C>
3.1 Restated Articles of Incorporation filed September 14, 1998
3.2 Amended and Restated Bylaws
10.1 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only
and not filed
</TABLE>
(b) Reports on Form 8-K:
None
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<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 1998.
REALNETWORKS, INC.
By /s/ ROBERT GLASER
------------------------------------
Robert Glaser
Chairman of the Board, Chief
Executive Officer and Treasurer
By /s/ PAUL BIALEK
------------------------------------
Paul Bialek
Senior Vice President, Finance and
Operations
and Chief Financial Officer
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<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1 Restated Articles of Incorporation filed September 14, 1998
3.2 Amended and Restated Bylaws
10.1 RealNetworks, Inc. Amended and Restated 1996 Stock Option Plan
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed
</TABLE>
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
REALNETWORKS, INC.
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles
of Incorporation of RealNetworks, Inc., a Washington corporation.
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").
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<PAGE> 2
4.2 SPECIAL COMMON STOCK.
4.2.1 DESIGNATION. Seven Million Forty-Seven Thousand Six Hundred
Seventy-Nine (7,047,679) shares of Common Stock shall be designated and known as
"Special Common Stock."
4.2.2 RECLASSIFICATION OF SPECIAL COMMON STOCK.
(a) If any shares of Special Common Stock are sold in
a Qualified Sale (as defined in Section 4.2.2(b)), then, effective immediately
upon such sale (A) the number of authorized but undesignated shares of Common
Stock of the Corporation shall be increased by the number of shares of Special
Common Stock so sold; (B) each share of Special Common Stock so sold 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; (C) the certificate or certificates representing the shares of
Special Common Stock that were outstanding immediately prior to such sale shall,
by virtue of the sale and without any action on the part of the holder,
thereafter represent (I) to the extent of the number of shares of Special Common
Stock so sold, the corresponding number of shares of Common Stock, and (II) the
shares of Special Common Stock represented by such certificate or certificates
immediately prior to such sale, if any, that have not been so sold; and (D) if
no shares of Special Common Stock remain outstanding following the Qualified
Sale, the designation of the Special Common Stock as a separate series of Common
Stock having the respective rights, preferences and limitations set forth in
this Section 4.2 shall automatically terminate. 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 Common Stock and Special Common Stock, if any, represented by the
surrendered certificate.
(b) For purposes of this Section 4.2.2, a "Qualified
Sale" of shares of Special Common Stock shall mean a bona fide sale of the
shares by the holder thereof to a purchaser who is not directly, or acting on
behalf of, an affiliate (as that term is defined in Rule 405 promulgated under
the Securities Act of 1933, as amended (the "Securities Act")) of the holder.
4.2.3 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.
4.2.4 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.
4.3 ISSUANCE OF PREFERRED STOCK IN SERIES.
4.3.1 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
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amend the rights and preferences of the shares of any series that has been
established but is wholly unissued.
4.3.2 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 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.
4.3.3 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.
4.4 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.
4.5 NO CUMULATIVE RIGHTS. Shareholders of this Corporation shall not
have the right to cumulate votes for the election of directors.
4.6 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.
4.7 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.
4.8 CONTRACTS WITH INTERESTED SHAREHOLDERS. Subject to the
limitations set forth in RCW 23B.19.040, to the extent applicable:
4.8.1 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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4.8.2 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.
4.9 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.
4.10 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, 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.
4.11 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.
4.12 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 disposition of all or substantially all of
the property of the Corporation not in the usual and
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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
DIRECTORS
5.1 NUMBER OF DIRECTORS.
5.1.1 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.
5.1.2 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 5.1.4, 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.
5.1.3 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.
5.1.4 Notwithstanding the foregoing provisions of this Section
5.1, 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 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.
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5.2 REMOVAL.
5.2.1 Any director or the entire Board of Directors may be
removed with cause by the holders of not less than a majority of the shares then
entitled to vote at an election of directors. 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, shall have been duly given to the shareholders
together with or as a part of the notice of the meeting.
5.2.2 Where a proposal to remove a director for cause is to be
presented for shareholder consideration, 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.
5.2.3 For purposes of this Section 5.2, "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.
5.3 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.
5.4 CONTRACTS WITH INTERESTED DIRECTORS. Subject to the
limitations set forth in RCW 23B.08.700 through 23B.08.730:
5.4.1 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.
5.4.2 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.
5.5 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
5.5.1 The capitalized terms in this Section 5.5 shall have the
meanings set forth in RCW 23B.08.500.
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5.5.2 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.
5.5.3 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.
5.5.4 If, after the effective date of this Section 5.5, 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.
5.5.5 To the extent permitted by law, the rights to
indemnification and advance of reasonable Expenses conferred in this Section 5.5
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 5.5 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 such. Any amendment to or repeal of this
Section 5.5 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.
5.5.6 If any provision of this Section 5.5 or any application
thereof shall be invalid, unenforceable, or contrary to applicable law, the
remainder of this Section 5.5, 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.
5.6 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 5.6 shall not adversely affect a
director of
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this Corporation with respect to any conduct of such director occurring prior to
such amendment or repeal.
ARTICLE VI
OTHER MATTERS
6.1 CERTAIN CORPORATE GOVERNANCE MATTERS.
6.1.1 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 6.1.1(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 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.
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(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
6.1.1(g).
6.1.2 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.
6.1.3 AUTHORITY FOR SECTION 6.1. The provisions of this Section
6.1 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.
6.1.4 AMENDMENT OF SECTION 6.1. 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 6.1 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).
6.2 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.
6.3 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 18th day of August, 1998.
By: /s/ Robert Glaser, Chief Executive Officer
--------------------------------------------
Robert Glaser, Chief Executive Officer
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
REALNETWORKS, INC.
ADOPTED JULY 16, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I...................................................................................1
1.1 Annual Meeting......................................................................1
1.1.1 Time and Place of Meeting....................................................1
1.1.2 Business Conducted at Meeting................................................1
1.2 Special Meetings....................................................................2
1.3 Notice of Meetings..................................................................3
1.3.1 Notice of Special Meeting....................................................3
1.3.2 Proposed Articles of Amendment, Merger, Exchange, Sale, Lease or
Disposition...............................................................3
1.3.3 Proposed Dissolution.........................................................3
1.3.4 Declaration of Mailing.......................................................4
1.3.5 Waiver of Notice.............................................................4
1.4 Quorum; Vote Requirement............................................................4
1.5 Adjourned Meetings..................................................................4
1.6 Fixing Record Date..................................................................5
1.7 Shareholders' List for Meeting......................................................5
1.8 Ratification........................................................................5
1.9 Action by Shareholders Without a Meeting............................................6
1.10 Telephonic Meetings.................................................................6
ARTICLE II..................................................................................6
2.1 Responsibility of Board of Directors................................................6
2.2 Number of Directors; Qualification..................................................7
2.3 Election of Directors; Nominations..................................................7
2.3.1 Election and Term of Office..................................................7
2.3.2 Nominations for Directors....................................................7
2.4 Vacancies...........................................................................8
2.5 Removal.............................................................................9
2.6 Resignation.........................................................................9
2.7 Annual Meeting......................................................................9
</TABLE>
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<TABLE>
<S> <C> <C>
2.8 Regular Meetings....................................................................9
2.9 Special Meetings....................................................................9
2.10 Notice of Meeting...................................................................9
2.11 Quorum of Directors................................................................10
2.12 Dissent by Directors...............................................................11
2.13 Action by Directors Without a Meeting..............................................11
2.14 Telephonic Meetings................................................................11
2.15 Compensation.......................................................................11
2.16 Committees.........................................................................11
ARTICLE III................................................................................12
3.1 Appointment........................................................................12
3.2 Qualification......................................................................12
3.3 Officers Enumerated................................................................12
3.3.1 Chairman of the Board.......................................................12
3.3.2 President...................................................................13
3.3.3 Vice Presidents.............................................................13
3.3.4 Secretary...................................................................13
3.3.5 Treasurer...................................................................14
3.4 Delegation.........................................................................14
3.5 Resignation........................................................................14
3.6 Removal............................................................................15
3.7 Vacancies..........................................................................15
3.8 Other Officers and Agents..........................................................15
3.9 Compensation.......................................................................15
3.10 General Standards for Officers.....................................................15
ARTICLE IV.................................................................................15
4.1 Contracts..........................................................................15
4.2 Checks, Drafts, Etc................................................................16
4.3 Deposits...........................................................................16
ARTICLE V..................................................................................16
5.1 Issuance of Shares.................................................................16
</TABLE>
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<TABLE>
<S> <C> <C>
5.2 Certificates of Stock...............................................................16
5.3 Stock Records.......................................................................17
5.4 Restrictions on Transfer............................................................17
5.5 Transfers...........................................................................17
ARTICLE VI..................................................................................18
ARTICLE VII.................................................................................18
ARTICLE VIII................................................................................18
ARTICLE IX..................................................................................19
ARTICLE X...................................................................................19
10.1 Definitions.........................................................................19
10.2 Mandatory Indemnification...........................................................19
10.3 Insurance...........................................................................19
10.4 Changes in Law......................................................................20
10.5 Exclusivity; Nature of Rights; Amendment............................................20
ARTICLE XI..................................................................................20
11.1 Communications by Facsimile.........................................................20
11.2 Inspector of Elections..............................................................20
11.3 Rules of Order......................................................................21
11.4 Construction........................................................................21
11.5 Severability........................................................................21
ARTICLE XII.................................................................................21
ARTICLE XIII................................................................................22
</TABLE>
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AMENDED AND RESTATED BYLAWS OF
REALNETWORKS, 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.
1.1.1 Time and Place of 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 at a place, day, and time to be set by the Board of Directors.
1.1.2 Business Conducted at Meeting.
(a) At an annual meeting of shareholders, an item of
business may be conducted, and a proposal may be considered and acted upon, only
if such item or proposal is brought before the meeting (i) by, or at the
direction of, the Board of directors, or (ii) by any shareholder of the
corporation who is entitled to vote at the meeting and who complies with the
procedures set forth in the remainder of this Section 1.1.2. This Section 1.1.2
shall not apply to matters of procedure that, pursuant to Section 11.3(a) of
these Bylaws, are subject to the authority of the chairman of the meeting.
(b) For an item of business or proposal to be brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a shareholder's notice must be delivered to, or mailed and received at,
the principal office of the corporation not less than one hundred twenty (120)
days prior to the first anniversary of the date that the Company's proxy
statement was released to shareholders in connection with the previous year's
annual meeting, or, if the date of this year's annual meeting has been changed
by more than thirty (30) days from the date of the previous year's meeting, then
the deadline is a reasonable time before the Company begins to print and mail
its proxy materials.
(c) A shareholder's notice to the Secretary under Section
1.1.2(b) shall set forth, as to each item of business or proposal the
shareholder intends to bring before the meeting (i) a brief description of the
item of business or proposal and the reasons for bringing it before the meeting,
(ii) the name and address, as they appear on the corporation's books, of the
shareholder and of any other shareholders that the shareholder knows or
anticipates will support the item of business or proposal, (iii) the number and
class of shares of stock of the corporation that are beneficially owned on the
date of such notice by the shareholder and by any such other
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shareholders, and (iv) any financial interest of the shareholder or any such
other shareholders in such item of business or proposal.
(d) The Board of Directors, or a designated committee
thereof, may reject a shareholder's notice that is not timely given in
accordance with the terms of Section 1.1.2(b). If the Board of Directors, or a
designated committee thereof, determines that the information provided in a
timely shareholder's notice does not satisfy the requirements of Section
1.1.2(c) in any material respect, the Secretary of the corporation shall notify
the shareholder of the deficiency in the notice. The shareholder shall have an
opportunity to cure the deficiency by providing additional information to the
Secretary within such period of time, not to exceed five (5) days from the date
such deficiency notice is given to the shareholder, as the Board of Directors or
such committee shall reasonably determine. If the deficiency is not cured within
such period, or if the Board of Directors or such committee determines that the
additional information provided by the shareholder, together with information
previously provided, does not satisfy the requirements of Section 1.1.2(c) in
any material respect, then the Board of Directors or such committee may reject
the shareholder's notice.
(e) Notwithstanding the procedures set forth in Section
1.1.2(d), if a shareholder desires to bring an item of business or proposal
before an annual meeting, and neither the Board of Directors nor any committee
thereof has made a prior determination of whether the shareholder has complied
with the procedures set forth in this Section 1.1.2 in connection with such item
of business or proposal, then the chairman of the meeting shall determine and
declare at the meeting whether the shareholder has so complied. If the chairman
determines that the shareholder has so complied, then the chairman shall so
state and ballots shall be provided for use at the meeting with respect to such
item of business or proposal. If the chairman determines that the shareholder
has not so complied, then, unless the chairman, in his sole and absolute
discretion, determines to waive such compliance, the chairman shall state that
the shareholder has not so complied and the item of business or proposal shall
not be brought before the meeting.
(f) This Section 1.1.2 shall not prevent the consideration
and approval or disapproval at the annual meeting of reports of officers,
directors and committees of the Board of Directors, but, in connection with such
reports, no item of business may be conducted, and no proposal may be considered
and acted upon, unless there has been compliance with the procedures set forth
in this Section 1.1.2 in connection therewith.
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,
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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 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
the 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
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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 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
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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 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 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.
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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 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.
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2.2 Number of Directors; Qualification. The Board shall be composed
of not less than two nor more than seven directors, the specific number to be
set by resolution of the Board 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 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 of Directors; Nominations.
2.3.1 Election and 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
he/she is elected, and in each case until his/her successor shall have been
elected and qualified.
2.3.2 Nominations for Directors.
(a) Nominations of candidates for election as directors
at an annual meeting of shareholders may only be made (i) by, or at the
direction of, the Board of Directors or (ii) by any shareholder of the
corporation who is entitled to vote at the meeting and who complies with the
procedures set forth in the remainder of this Section 2.3.2.
(b) If a shareholder proposes to nominate one or more
candidates for election as directors at an annual meeting, the shareholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a shareholder's notice must be delivered to, or mailed and
received at, the principal office of the corporation not less than one hundred
twenty (120) days prior to the first anniversary of the date that the Company's
proxy statement was released to shareholders in connection with the previous
year's annual meeting, or, if the date of this year's annual meeting has been
changed by more than thirty (30) days from the date of the previous year's
meeting, then the deadline is a reasonable time before the Company begins to
print and mail its proxy materials.
(c) A shareholder's notice to the Secretary under
Section 2.3.2(b) shall set forth, as to each person whom the shareholder
proposes to nominate for election as a director (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number and class of shares of stock of the
corporation that are beneficially owned on the date of such notice by such
person and (iv) if the corporation at such time has any security registered
pursuant to Section 12 of the Exchange Act, any other information relating to
such person required to be disclosed in solicitations of proxies with respect to
nominees for election as directors pursuant to Regulation 14A under the Exchange
Act, including but not limited to information required to be disclosed by
Schedule 14A of Regulation 14A, and any other information that the shareholder
would be required to file with
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the Securities and Exchange Commission in connection with the shareholder's
nomination of such person as a candidate for director or the shareholder's
opposition to any candidate for director nominated by, or at the direction of,
the Board of Directors. In addition to the above information, a shareholder's
notice to the Secretary under Section 2.3.2(b) shall (A) set forth (i) the name
and address, as they appear on the corporation's books, of the shareholder and
of any other shareholders that the shareholder knows or anticipates will support
any candidate or candidates nominated by the shareholder and (ii) the number and
class of shares of stock of the corporation that are beneficially owned on the
date of such notice by the shareholder and by any such other shareholders and
(B) be accompanied by a written statement, signed and acknowledged by each
candidate nominated by the shareholder, that the candidate agrees to be so
nominated and to serve as a director of the corporation if elected at the annual
meeting.
(d) The Board of Directors, or a designated committee
thereof, may reject any shareholder's nomination of one or more candidates for
election as directors if the nomination is not made pursuant to a shareholder's
notice timely given in accordance with the terms of Section 2.3.2(b). If the
Board of Directors, or a designated committee thereof, determines that the
information provided in a shareholder's notice does not satisfy the requirements
of Section 2.3.2(c) in any material respect, the Secretary of the corporation
shall notify the shareholder of the deficiency in the notice. The shareholder
shall have an opportunity to cure the deficiency by providing additional
information to the Secretary within such period of time, not to exceed five (5)
days from the date such deficiency notice is given to the shareholder, as the
Board of Directors or such committee shall reasonably determine. If the
deficiency is not cured within such period, or if the Board of Directors or such
committee determines that the additional information provided by the
shareholder, together with information previously provided, does not satisfy the
requirements of Section 2.3.2(c) in any material respect, then the Board of
Directors or such committee may reject the shareholder's notice.
(e) Notwithstanding the procedures set forth in Section
2.3.2(d), if a shareholder proposes to nominate one or more candidates for
election as directors at an annual meeting, and neither the Board of Directors
nor any committee thereof has made a prior determination of whether the
shareholder has complied with the procedures set forth in this Section 2.3.2 in
connection with such nomination, then the chairman of the annual meeting shall
determine and declare at the annual meeting whether the shareholder has so
complied. If the chairman determines that the shareholder has so complied, then
the chairman shall so state and ballots shall be provided for use at the meeting
with respect to such nomination. If the chairman determines that the shareholder
has not so complied, then, unless the chairman, in his sole and absolute
discretion, determines to waive such compliance, the chairman shall state that
the shareholder has not so complied and the defective nomination shall be
disregarded.
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
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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 his/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.
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
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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 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.
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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.
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;
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(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.
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 his/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 him/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 he/she is present. The Chairman may sign
deeds, mortgages, bonds, contracts, and other instruments, except when the
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<PAGE> 17
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 the authority to appoint one or
more Assistant Secretaries and Assistant Treasurers, as he/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;
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(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.
3.3.5 Treasurer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his/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
his/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.
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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 with or without cause to remove any officer he/she
would have the power to appoint whenever in his/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 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 his/her by
the Board. No officer shall be prevented from receiving compensation in such
capacity by reason of the fact that he/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 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.
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<PAGE> 20
(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.
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. All shares of the corporation shall be
represented by certificates in such form, not inconsistent with the Articles of
Incorporation, as the Board of Directors may from time to time prescribe.
Certificates of stock shall be issued in numerical order and shall be 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. If any certificate is
manually signed by a transfer agent or a transfer clerk and by a registrar, the
signatures of the President, Vice President, Secretary or Assistant Secretary
upon that certificate may be facsimiles that are engraved or printed. If any
person who has signed or whose facsimile signature has been placed on a
certificate no longer is an officer when the certificate is issued, the
certificate may nevertheless be issued with the same effect as if the person
were still an officer at the time of its issue. 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
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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
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
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<PAGE> 22
(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.
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
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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 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.
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<PAGE> 24
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 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;
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(e) determine the result; and
(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 his/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 or 2.11 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 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,
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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 Amended and Restated Bylaws were approved, and duly
adopted by the Board of Directors of RealNetworks, Inc. on the 16th day of July,
1998.
/s/ Kelly Jo MacArthur
--------------------------------
Kelly Jo MacArthur, Secretary
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<PAGE> 1
EXHIBIT 10.1
REALNETWORKS, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED
AS OF JULY 16, 1998)
<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............................................................... 4
3.1 Administrative Committee..................................................... 4
3.2 Appointment of Administrative Committee...................................... 4
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
ARTICLE 6 STOCK OPTIONS................................................................ 6
6.1 Grant of Options............................................................. 6
6.2 Purchase Price............................................................... 6
6.3 Limitations on Grants........................................................ 6
6.4 Term of Options.............................................................. 7
6.5 Option Agreement............................................................. 7
6.6 Exercise of Options.......................................................... 7
6.7 Manner of Exercise........................................................... 8
6.8 Legends...................................................................... 8
6.9 Nontransferability........................................................... 9
6.10 Repurchase of Shares......................................................... 9
6.11 Class of Common Stock....................................................... 10
6.12 Delegation to Executive Officer of Authority to Grant Options................ 11
ARTICLE 7 GENERAL PROVISIONS.......................................................... 11
7.1 Acceleration of Options___Approved Transactions; Control Purchase........... 11
7.2 Termination of Services..................................................... 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
7.3 Right to Terminate Services................................................. 13
7.4 Nonalienation of Benefits................................................... 13
7.5 Shareholders Agreement...................................................... 13
7.6 Termination and Amendment................................................... 13
7.7 Government and Other Regulations............................................ 14
7.8 Withholding................................................................. 14
7.9 Separability................................................................ 15
7.10 Non-Exclusivity of the Plan................................................. 15
7.11 Exclusion from Pension and Profit-Sharing Computation....................... 15
7.12 No Shareholder Rights....................................................... 15
7.13 Governing Law............................................................... 15
7.14 Company's Rights............................................................ 15
</TABLE>
<PAGE> 4
REALNETWORKS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
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.
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
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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 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 Common Stock, par value $.001 per share, 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.
"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.
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"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 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.
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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 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
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<PAGE> 8
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.
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) 11,300,000, plus
(b) an additional 1,045,436 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 1,269,123 shares of Common Stock subject to
options currently outstanding under the 1995 Plan to the extent the options
terminate without 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 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.
5
ELIGIBILITY
The persons eligible to participate in the Plan and to receive Options
under the Plan ("Eligible Persons") shall 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
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under this Plan or options or similar awards under any other plan of the Company
or any of its Affiliates.
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 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
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<PAGE> 10
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 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.
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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 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
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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).
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).
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(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.
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
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<PAGE> 14
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.
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
-11-
<PAGE> 15
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,
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.
-12-
<PAGE> 16
(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 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
-13-
<PAGE> 17
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 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 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
-14-
<PAGE> 18
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.
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-
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 53,447
<SECURITIES> 45,130
<RECEIVABLES> 4,806
<ALLOWANCES> 1,155
<INVENTORY> 203
<CURRENT-ASSETS> 107,110
<PP&E> 10,562
<DEPRECIATION> 5,105
<TOTAL-ASSETS> 114,976
<CURRENT-LIABILITIES> 33,795
<BONDS> 996
0
0
<COMMON> 33
<OTHER-SE> 71,902
<TOTAL-LIABILITY-AND-EQUITY> 114,976
<SALES> 0
<TOTAL-REVENUES> 44,802
<CGS> 0
<TOTAL-COSTS> 8,651
<OTHER-EXPENSES> 63,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (23,551)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,551)
<EPS-PRIMARY> (0.74)
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