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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1999
Commission File Number 000-26565
LIBERATE TECHNOLOGIES
(Exact name of registrant as specified in its charter)
Delaware 94-3245315
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
2 Circle Star Way, San Carlos, California 94070-6200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (650) 701-4000
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 [ ]
Although the registrant has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the period that the
registrant was required to file such reports, the registrant did not become
subject to such filing requirements until the registration statement on Form S-1
was declared effective by the Securities and Exchange Commission on July 27,
1999.
The number of shares outstanding of the Registrant's common stock as of
September 30, 1999 was 41,783,770.
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LIBERATE TECHNOLOGIES
FORM 10-Q
For The Quarter Ended August 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at August 31, 1999
and May 31, 1999............................................................... 1
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended August 31, 1999 and 1998....................... 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended August 31, 1999 and 1998................................................. 3
Notes to Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 23
Item 2. Changes in Securities and Use of Proceeds.......................................... 23
Item 3. Defaults in Securities............................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders................................ 24
Item 5. Other Information.................................................................. 25
Item 6. Exhibits and Reports on Form 8-K................................................... 25
Signature................................................................................... 26
</TABLE>
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Part I. Financial Information
Item 1. Financial Statements
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 82,464 $ 33,657
Short term investments......................................................... 63,896 19,751
Accounts receivable, net ...................................................... 1,515 644
Receivable from affiliate, net................................................. 989 482
Prepaid warrants............................................................... 3,310 1,504
Prepaid expenses and other current assets...................................... 2,523 1,911
----------- -----------
Total current assets......................................................... 154,697 57,949
PROPERTY AND EQUIPMENT, net....................................................... 4,135 2,269
OTHER ASSETS:
Advanced royalties............................................................. 824 279
Purchased intangibles, net..................................................... 6,085 7,606
Other.......................................................................... 78 79
----------- -----------
Total assets................................................................. $ 165,819 $ 68,182
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 1,025 $ 1,643
Accrued liabilities............................................................ 8,209 8,911
Accrued payroll and related expenses........................................... 2,156 2,248
Deferred revenues.............................................................. 36,804 38,787
Note payable to affiliate...................................................... 52 52
----------- -----------
Total current liabilities.................................................... 48,246 51,641
LONG TERM DEBT.................................................................... -- 4,315
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY:
Convertible preferred stock.................................................... -- 330
Common stock................................................................... 418 6
Contributed and paid-in-capital................................................ 283,421 166,979
Deferred stock compensation.................................................... (7,501) (6,579)
Warrants....................................................................... 3,687 1,522
Stockholder notes receivable................................................... (247) (348)
Accumulated other comprehensive income......................................... 13 28
Accumulated deficit............................................................ (162,218) (149,712)
----------- -----------
Total stockholders' equity .................................................. 117,573 12,226
----------- -----------
Total liabilities and stockholders' equity................................... $ 165,819 $ 68,182
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three months ended
--------------------------
August 31, August 31,
1999 1998
------------ -------------
<S> <C> <C>
REVENUES:
License and royalty............................................................. $ 1,482 $ 1,139
Service......................................................................... 3,806 2,169
------------ -------------
Total revenues................................................................ 5,288 3,308
------------ -------------
COST OF REVENUES:
License and royalty............................................................. 522 600
Service......................................................................... 5,562 1,199
------------ -------------
Total cost of revenues........................................................ 6,084 1,799
------------ -------------
Gross margin.................................................................. (796) 1,509
------------ -------------
OPERATING EXPENSES:
Research and development........................................................ 5,342 4,041
Sales and marketing............................................................. 3,216 2,145
General and administrative...................................................... 1,424 814
Amortization of purchased intangibles........................................... 1,521 1,521
Amortization of warrants........................................................ 359 --
Amortization of deferred stock compensation..................................... 504 7
------------ -------------
Total operating expenses...................................................... 12,366 8,528
------------ -------------
Loss from operations.......................................................... (13,162) (7,019)
INTEREST AND OTHER INCOME, net..................................................... 697 81
------------ -------------
Loss before income tax (provision) benefit.................................... (12,465) (6,938)
INCOME TAX (PROVISION) BENEFIT..................................................... (41) 271
------------ -------------
Net loss...................................................................... (12,506) (6,667)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT............................................ (15) --
------------ -------------
Comprehensive loss............................................................ $ (12,521) $ (6,667)
============ =============
BASIC NET LOSS PER SHARE........................................................... $ (0.91) $ (31.01)
============ =============
SHARES USED IN COMPUTING BASIC NET LOSS PER SHARE.................................. 13,777 215
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Three months ended
--------------------------
August 31, August 31,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $(12,506) $(6,667)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................ 1,870 1,866
Amortization of warrants..................................................... 359 --
Provision for doubtful accounts.............................................. 75 120
Loss on disposal of property and equipment................................... 300 --
Non-cash compensation expense................................................ 504 7
Changes in operating assets and liabilities, net of acquisition:
Increase in accounts receivable............................................ (946) (146)
Increase in receivable from affiliate, net................................. (507) (121)
Increase in prepaid expenses and other current assets...................... (612) (254)
Increase in other assets................................................... (544) (24)
Decrease in accounts payable............................................... (618) (80)
Increase (decrease) in accrued liabilities................................. (702) 466
Decrease in accrued payroll and related expenses........................... (92) (232)
Decrease in deferred revenues.............................................. (1,983) (120)
Increase in interest payable............................................... -- 50
------------ ------------
Net cash used in operating activities.................................... (15,402) (5,135)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (2,515) (182)
Purchase of short term investments............................................. (44,145) --
------------ ------------
Net cash used in investing activities................................... (46,660) (182)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net..................................... 97,970 --
Proceeds from private placement, net........................................... 12,125 --
Proceeds from issuance of stock option exercises, net.......................... 789 50
------------ ------------
Net cash provided by financing activities................................ 110,884 50
------------ ------------
Effect of exchange rates on cash.................................................. (15) --
------------ ------------
Net increase (decrease) in cash and cash equivalents.............................. 48,807 (5,267)
Cash and cash equivalents, beginning of period.................................... 33,657 12,138
------------ ------------
Cash and cash equivalents, end of period.......................................... $ 82,464 $ 6,871
============ ============
Supplemental non-cash activities:
Conversion of debt and accrued interest to equity.............................. $ 4,343 $ --
============ ============
Issuance of warrants for common stock in connection with network operator
agreements.................................................................... $ 2,165 $ --
============ ============
Deferred stock compensation.................................................... $ 1,426 $ 127
============ ============
Income taxes................................................................... $ 41 $ 21
============ ============
Stockholder notes receivable................................................... $ 101 $ 5
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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LIBERATE TECHNOLOGIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Liberate Technologies ("Liberate" or "the Company") and its
wholly owned subsidiary. All intercompany accounts and transactions have been
eliminated in the accompanying condensed consolidated financial statements.
The condensed consolidated financial statements included herein have been
prepared by Liberate, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, Liberate believes that
disclosures are adequate to make the information presented not misleading.
In the opinion of management, the condensed consolidated financial
statements reflect all adjustments that are necessary for the fair
presentation of results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for the
full fiscal year or for any future period. These financial statements should
be read in conjunction with Liberate's audited consolidated financial
statements and notes to consolidated financial statements included in
Liberate's initial public offering on Form S-1/A filed with the Securities
and Exchange Commission on July 27, 1999.
NOTE 2. OFFERINGS OF COMMON STOCK
On August 2, 1999, Liberate completed an initial public offering in which
it sold 6,250,000 shares of common stock at $16 per share. In addition,
Liberate sold 451,050 shares of common stock at $16 per share in connection
with the exercise of the underwriters' overallotment. The total aggregate
proceeds from these transactions were $107.2 million. Underwriters' discounts
and other related costs were $9.2 million resulting in net proceeds of $98.0
million. The net proceeds were predominately held in cash equivalents and
short term investments at August 31, 1999. Shortly before the offering,
Liberate recorded a one-for-six reverse stock split of its outstanding stock.
Upon the closing of the offering, all of our preferred stock, par value $0.01
per share, automatically converted into 33,089,335 shares of common stock.
Immediately following the closing of the offering, Liberate sold 813,802
shares of common stock in a private placement to Lucent Technologies for an
aggregate of $12.1 million. In addition, we issued 421,940 shares of common
stock to Middlefield Ventures, an affiliate of Intel, in connection with the
cancellation of a convertible promissory note in the amount of $4.0 million
payable by Liberate to Middlefield. Related to this transaction, the accrued
interest on the convertible promissory note was charged to additional paid in
capital. Finally, during the quarter ended August 31, 1999, we issued 247,889
shares of common stock, calculated on a post reverse stock split basis, to
employees, consultants and other service providers pursuant to the exercise
of stock options.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
131 changes the way companies report selected segment information in annual
financial statements and requires companies to report selected segment
information in interim financial reports to stockholders. SFAS 131 was
effective for the Company's year ending May 31, 1999. The Company operates
solely in one segment, the development, manufacturing and sale of information
appliance software for consumer, corporate and educational marketplaces. As
of August 31, 1999, the Company's long term assets are located primarily in
the United States. The Company's revenues by geographic area are as follows:
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<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
August 31, August 31,
(in thousands) 1999 1998
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<S> <C> <C>
United States $2,782 $1,688
Japan 797 781
England 960 367
Canada 53 360
Other 696 112
----------- -----------
Total revenues $5,288 $3,308
=========== ===========
</TABLE>
Export sales consist of sales to customers in foreign countries. During the
three months ended August 31, 1999 and 1998 export sales were 47% and 49%,
respectively.
NOTE 4. CALCULATION OF NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share are based on
the weighted average shares outstanding in each period. The effect of
outstanding stock options and warrants are excluded from the calculation of
diluted net loss per share, as their inclusion would be antidilutive.
Previously issued preferred stock, which converted to common stock, is
weighted from the time the shares were converted. At August 31, 1999 options
to purchase 6,879,405 shares of common stock and warrants to purchase 374,999
shares of common stock were outstanding and were excluded from the
calculation of loss per share.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
August 31, August 31,
(in thousands, except per share data) 1999 1998
--------------- ---------------
<S> <C> <C>
Net loss $ (12,506) $(6,667)
=============== ===============
Weighted average shares of common stock outstanding 13,777 215
--------------- ---------------
Basic and diluted net loss per share $ (0.91) $ (31.01)
=============== ===============
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
LITIGATION. In December 1998, one of the Company's former employees filed an
action in the California Superior Court for the County of San Mateo against the
Company for, among other things, unpaid commissions of approximately $1.5
million, constructive employment termination, intentional misrepresentation and
negligent misrepresentation. In September 1999, that former employee sought to
amend his complaint against the Company, adding a claim for damages for failure
to pay wages under the California Labor Code and seeking the imposition of a
constructive trust over withheld commissions and any enhancement in value of
that money. The plaintiff in this case alleges that the Company did not honor
the terms of a proposed bonus plan, and that the Company sought to change the
bonus plan arrangement only after the Company had discovered that the proposed
plan would have resulted in substantial payments to the plaintiff. The Company
believes that these claims are without merit and that it has strong defenses
against this lawsuit. Accordingly, the Company intends to vigorously defend this
action.
COMMITMENTS. During the quarter ended August 31, 1999, the Company signed a
first amendment to the Technology License and Distribution Agreement with Sun
Microsystems, Inc. The amendment calls for Liberate to pay certain minimum
royalties in exchange for the right to certain of Sun's technology and to
maintain the status as a preferred vendor of Sun technology. The minimum
guaranteed royalties of approximately $3.8 million are to be paid to Sun through
the period ended December 31, 2004.
In September 1999, the Company relocated its headquarters to a new,
approximately 78,000 square foot, facility in San Carlos, California. The lease
provides for initial monthly rent payments of approximately $0.2 million with
annual
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increases of 3 percent. The lease terminates in August 2009. Oracle
Corporation initially provided a $10.0 million guarantee to our landlord. The
Oracle guarantee has subsequently been replaced with a security deposit
provided by the Company in the form of an Irrevocable Letter of Credit of
approximately $2.5 million. The Irrevocable Letter of Credit is secured by a
Certificate of Deposit in the amount equal to the Irrevocable Letter of
Credit. Over the term of the lease total payments will be approximately $33.4
million.
The Company has subsequently exercised its option to lease additional space
of approximately 100,000 square feet in an adjacent building currently under
construction. The initial monthly rent is estimated at approximately $0.3
million with annual increases of 3 percent. Over the term of this lease total
payments are estimated to be approximately $45.3 million. This lease will
terminate 10 years from occupancy, estimated to be late spring or early
summer of 2000. The security deposit will increase to approximately $5.0
million for both buildings. The Company intends to sublease three-quarters of
this building through short term subleases ranging from one to three years to
ensure that additional space is available for the Company's growth and
expansion in the future.
The Company previously leased its headquarters, furniture and equipment
from Oracle. Oracle has agreed to terminate the Company's Redwood Shores,
California office lease, furniture and equipment lease and service agreement
lease without penalty, effective September 1999.
In August 1999, the Company entered into a master lease agreement with
Steelcase Financial Services Inc. for office furniture. In October 1999, the
initial office equipment lease schedule was executed for approximately $0.8
million. Payments for the initial lease schedule will total approximately $0.9
million over the three-year term.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 23E of the
Securities Act of 1934, as amended. These statements relate to future events
or our future financial performance. Any statements contained in this
document that are not statements of historical fact may be deemed to be
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "intend," "believe," "estimate," "predict," "potential" or
"continue," or the negative of such terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Form 10-Q to conform such statements to
actual results or to changes in our expectations.
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this Form 10-Q. Readers are also urged to carefully review and
consider the various disclosures made by us which attempt to advise interested
parties of the factors which affect our business, including without limitation
the disclosures made under the caption "Risk Factors," and the factors and risks
discussed in our Registration Statement on Form S-1/A declared effective on July
27, 1999 by the Securities and Exchange Commission (No. 333-78781).
OVERVIEW
Liberate is a leading provider of a complete software platform for delivering
Internet-enhanced content and applications to information appliances, such as
television set-top boxes and game consoles. Liberate's Internet-based client and
server software allows network operators, such as telecommunications companies,
cable and satellite television operators and Internet service providers to
provide consumers access to network operator-branded applications and services.
We began operations in December 1995 as a division of Oracle to develop server
and client software for the consumer, corporate and educational markets. In
April 1996, we were incorporated as a Delaware corporation. In August 1997, we
acquired Navio Communications. Navio was a development stage company involved in
designing Internet application and server software for the consumer market.
We began shipping our initial products and generating revenues in the last
quarter of fiscal 1997. We generate revenues by licensing our server and client
products and providing related services to network operators and information
appliance manufacturers. Network operators generally pay up-front license fees
for our server software. We recognize server license revenues upon final
delivery of the licensed product, when collection is probable and when the fair
market value and the fee for each element of the transaction is fixed and
determinable. We also generate service revenues from maintenance provided in
connection with server licenses. Maintenance fees typically represent a
percentage of associated license fees.
We license our client software and provide related services to both network
operators and information appliance manufacturers. Information appliance
manufacturers pay us royalties on a per unit basis. Typically, we recognize
these royalty fees upon shipment of the device by the manufacturer. Network
operators also pay per subscriber royalty fees when information appliance
owners activate the operators' service. Generally, network operators pay
these royalty fees upon activation, either in the form of an up front payment
or on a subscription basis. Up front royalty fees are recognized when a
network operator reports to us that a user has activated the service. These
network operators pay an additional per subscriber maintenance fee typically
on an annual basis for the duration of the activation period. Subscription
based royalty fees are recognized quarterly when reported by the network
operators. A portion of this subscription based royalty fee is allocated to
service revenues as maintenance and is also recognized quarterly.
In addition to the maintenance services we offer in connection with our
software licenses, which include upgrades and technical support, we also provide
comprehensive consulting, engineering and training services to network operators
and information appliance manufacturers. Revenues generated from these services
generally are recognized as the services are performed while maintenance fees
are recognized ratably over the term of the maintenance contract.
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Deferred revenues consist primarily of payments received from customers for
prepaid license and royalty fees and prepaid services for undelivered product
and services. Deferred revenues decreased from $38.8 million at May 31, 1999 to
$36.8 million at August 31, 1999. This decrease resulted primarily from
recognition of previously deferred revenue, as well as a conscious effort to
de-emphasize customer prepayments of future licenses and royalties.
For the quarter ended August 31, 1999, the following customers each provided
for 10% or more of our total revenues: Wind River, Cable & Wireless, US West and
Intel. For the quarter ended August 31, 1998, the following customers each
provided for 10% or more of our total revenues: Wind River, Cable & Wireless,
Nintendo, Fujitsu and Bell Canada.
International sales accounted for approximately 47% and 49% of our total
revenues for the three months ended August 31, 1999 and 1998, respectively. We
anticipate international sales to continue to represent a significant portion of
total revenues.
RESULTS OF OPERATIONS
Revenues
Total revenues were $5.3 million for the quarter ended August 31, 1999,
representing an increase of approximately $2.0 million or 60% over the quarter
ended August 31, 1998.
License and royalty revenues totaled $1.5 million for the quarter ended August
31, 1999, representing an increase of approximately $0.3 million or 30% over the
quarter ended August 31, 1998. This increase was primarily related to increased
royalty revenues reflecting an increase in our customer base, including certain
customers entering the trial and deployment phases.
Service revenues totaled $3.8 million for the quarter ended August 31, 1999,
representing an increase of $1.6 million or 75% over the quarter ended August
31, 1998. This increase was primarily related to increases in our consulting
revenues resulting from the creation of our professional services organization
in the first quarter of fiscal 1999, as well as overall increases in the level
of billable custom development projects.
Cost of Revenues
Total cost of revenues were $6.1 million for the quarter ended August 31,
1999, representing an increase of $4.3 million over the quarter ended August
31, 1998.
License and royalty. Cost of license and royalty revenues consists
primarily of license and support fees paid to third parties for technology
incorporated into our products. Cost of license and royalty revenues were
$0.5 million and $0.6 million for the quarters ended August 31, 1999 and
1998, respectively. These amounts represented 35% and 53% of license and
royalty revenues for the quarters ended August 31, 1999 and 1998,
respectively. The decrease in cost of license and royalty revenues in dollar
amounts was due primarily to the full amortization of certain prepaid inbound
licenses. We expect the cost of license and royalty revenues, as a percentage
of license and royalty revenues, to fluctuate in future periods, but with a
general decreasing trend. Amortization of certain third party costs will have
the effect of decreasing license and royalty costs as a percentage of license
and royalty revenues as these revenues increase. However, introduction of new
third party technology may offset the effect of the amortized costs or
increase cost of license and royalty revenues as a percentage of license and
royalty revenues.
Service. Cost of service revenues consists of employee compensation,
payments to independent consultants and related overhead. Cost of service
revenues were $5.6 million for the quarter ended August 31, 1999,
representing an increase of $4.4 million over the quarter ended August 31,
1998. These amounts represented 146% and 55% of service revenues for the
quarters ended August 31, 1999 and 1998, respectively. The increase in dollar
amounts and as a percentage of service revenues was due primarily to the
expansion of the professional service organization required to meet the
growth in customer installation, training and deployment of our products. The
increase in cost of services as a percentage of service revenues was due
primarily to our investment in the services portion of our business by
providing certain services on a discounted basis to our customers in an
effort to encourage successful deployment. We expect cost of service revenues
to increase in absolute dollar amounts to the extent existing and new
customers install and deploy our products. We also expect the cost of service
revenues, as a percentage of service revenues, to fluctuate in future
periods. We anticipate the
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percentage will fluctuate in the near term due to continued expansion of
services as existing and new customers install and deploy our products and we
continue to provide and support limited trial installations of our products
at discounted prices to network operators in order to continue to increase
our market share.
Liberate expects total cost of revenues to increase substantially in absolute
dollars in future periods as a result of providing continued services to support
customer implementations, as well as higher third party license costs as
deployments increase.
Research and Development Expenses
Research and development expenses consist primarily of salary and other
related costs for personnel and independent consultants as well as costs related
to outsourced development projects to support product development. Research and
development expenses were $5.3 million for the quarter ended August 31, 1999, an
increase of $1.3 million or 32% over the quarter ended August 31, 1998. The
increase is primarily due to an increase in staffing and related expenses, as
well as more outsourced development projects, in particular a project with
General Instrument. This was offset by an increase in the level of billable
custom development projects, which when billable to customers, the related costs
are classified as cost of service revenues. The classification of costs between
research and development and cost of service revenues may fluctuate between
categories depending on the level of projects that are billable at any point in
time.
We believe that continued investment in research and development is
critical to attaining our strategic objectives, and, as a result, expect
research and development expenses to increase significantly in absolute
dollar amounts in future periods. However, if revenues increase, we expect
research and development expenses to decline as a percentage of total
revenues in the long term.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and other related
costs for sales and marketing personnel, sales commissions, travel, facilities
for regional offices, public relations, marketing materials and tradeshows.
Sales and marketing expenses were $3.2 million for the quarter ended August 31,
1999, representing an increase of $1.1 million or 50% over the quarter ended
August 31, 1998. The increase was primarily related to increased staffing and
related expenses, increased commissions and increased spending on trade shows.
We believe these expenses will increase in absolute dollar amounts in future
periods as we expand our direct sales and marketing efforts domestically and
abroad. However, if revenues increase, we expect these costs to decrease as a
percentage of total revenues in the long term.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other
related costs for legal, human resource and finance employees, as well as
legal and other professional fees. General and administrative expenses were
$1.4 million for the quarter ended August 31, 1999, representing an increase
of $0.6 million or 75% over the quarter ended August 31, 1998. The increase
was primarily due to increased staffing which resulted in higher expenses, as
well as increased spending on outsourced professional services such as legal
and recruiting. We believe these expenses will increase in absolute dollar
amounts as we continue to add personnel to support our expanding operations
and assume the responsibilities of a public company. However, if revenues
increase, we expect general and administrative expenses to decrease as a
percentage of total revenues in the long term.
Amortization of Purchased Intangibles
Amortization of purchased intangibles represents the purchase price of Navio
in excess of identified tangible and intangible assets. Approximately $18.3
million of purchased intangibles was recorded in August of 1997 and is being
amortized on a straight-line basis over an estimated useful life of three years.
Amortization of Deferred Stock Compensation
Deferred stock compensation represents the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price of such options at the date of grant. In fiscal 1999, we began recording
deferred stock compensation in connection with stock options granted to
employees and others. These amounts are
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amortized on a straight-line basis over the 48 month vesting period of such
options. Amortization of deferred stock compensation was $0.5 million for the
quarter ended August 31, 1999 compared to amortization of deferred stock
compensation of $7,000 for the quarter ended August 31, 1998. The majority of
the stock option grants being amortized were granted in the latter half of
fiscal 1999. In June 1999, we recorded approximately $1.4 million, net of
terminations, of deferred stock compensation related to additional stock
option grants. We expect that deferred stock compensation expense recorded in
quarters after August 31, 2002 will decrease ratably from quarter to quarter
through the quarter ending August 31, 2003.
Amortization of Warrants
Warrant expense represents the amortization of warrants based on their
estimated fair value, as determined using the Black-Scholes model, as of the
earlier of the grant date or the date it becomes probable that the warrants
will be earned. Pursuant to Emerging Issues Task Force No. 96-18, the
warrants will continue to be revalued in situations where they are granted
prior to establishment of a performance commitment. In April and May 1999, we
entered into agreements with several network operators that require us to
issue warrants to purchase up to an aggregate of 2,299,996 shares of common
stock if the network operators satisfy commercial milestones. For the quarter
ended May 31, 1999, we recorded warrants to purchase up to 208,333 shares of
common stock as being earned by two network operators for signing license
agreements. During the quarter ended August 31, 1999, we recorded additional
warrants to purchase up to 166,666 shares of common stock as being earned by
two additional network operators for signing license agreements. At August
31, 1999, approximately $3.3 million of prepaid warrants have been recorded
on the consolidated balance sheet and will be expensed over the warrants'
respective amortization periods. Amortization for the quarter ended August
31, 1999 was approximately $0.4 million.
Interest and Other Income, Net
Interest and other income, net includes interest income on Liberate's cash,
cash equivalents and short term investments, net of expenses, as well as bank
charges and losses on disposals of fixed assets. Interest and other income, net
was $0.7 million for the quarter ended August 31, 1999, an increase of $0.6
million over the quarter ended August 31, 1998. The increase was primarily due
to interest income on proceeds from Liberate's private placement offering,
public offering of common stock and Lucent offering, offset slightly by losses
on disposals of fixed assets. Proceeds from Liberate's offerings are expected to
increase interest income generated in the near term when compared to prior
fiscal periods.
Income Tax (Provision) Benefit
Income tax (provision) benefit includes income tax benefit and foreign
withholding tax expense. Income tax provision of approximately $41,000 for the
quarter ended August 31, 1999 consisted primarily of foreign withholding tax
expense. Income tax benefit of approximately $271,000 for the quarter ended
August 31, 1998 was comprised of the benefits received under a tax sharing
agreement with Oracle that provides for our consolidation into Oracle's tax
group for income tax payment purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1999, our principal source of liquidity was approximately
$146.4 million of cash, cash equivalents and short term investments.
On August 2, 1999 Liberate completed an initial public offering in which it
sold 6,250,000 shares of common stock at $16 per share. In addition, Liberate
sold 451,050 shares of common stock at $16 per share in connection with the
exercise of the underwriters' overallotment. The total aggregate proceeds
from these transactions were $107.2 million. Underwriters' discounts and
other related costs were $9.2 million for net proceeds of $98.0 million. The
net proceeds were predominately held in cash equivalents and short term
investments at August 31, 1999. Immediately following the closing of the
offering, Liberate also sold 813,802 shares of common stock in a private
placement to Lucent Technologies for an aggregate of $12.1 million.
Cash used in operations was $15.4 million for the quarter ended August 31,
1999, an increase of $10.3 million over cash used in operations of $5.1
million for quarter ended August 31, 1998. This increase was primarily due to
a
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higher net loss (related primarily to increased staffing), an increase in
accounts receivable, a decrease in accrued liabilities and a decrease in
deferred revenue for the quarter ended August 31, 1999.
Net cash used in investing activities was $46.7 million for the quarter ended
August 31, 1999, an increase of $46.5 million over cash used in investing
activities of $0.2 million for the quarter ended August 31, 1998. This increase
was due to the purchase of short term investments during the quarter combined
with purchases of property and equipment in connection with the build out of our
new facilities.
Net cash from financing activities was $110.9 million for the quarter ended
August 31, 1999, an increase of $110.8 million over net cash from financing
activities of $0.1 million for the quarter ended August 31, 1998. This
increase was primarily due to cash generated from stock offerings.
In April 1999, Liberate and General Instrument entered into a manufacturer's
agreement whereby General Instrument will develop hardware using Liberate's
software. Under the manufacturer's agreement, Liberate will pay General
Instrument $10.0 million in development fees for certain services to be
performed by General Instrument to help fund the hardware development over a
three year period. Amounts expensed under this agreement for the quarter ended
August 31, 1999 were approximately $0.8 million.
See Footnote 5, Commitments and Contingencies, in the Notes to Condensed
Consolidated Financial Statements for further information.
We currently anticipate that our current cash, cash equivalents and short term
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter,
cash generated from operations, if any, may not be sufficient to satisfy our
liquidity requirements. We may therefore need to sell additional equity or raise
funds by other means. Any additional financing, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could seriously harm our business and operating results. If additional funds
were raised through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies, including us, our
customers and our potential customers, may need to be upgraded to comply with
such "Year 2000" requirements.
We have developed and implemented a company-wide program to identify and
remedy the Year 2000 issues. The scope of our Year 2000 readiness program
includes the review and evaluation of:
- Our IT systems, such as hardware and software utilized in the
operation of our business;
- Our non-IT systems or embedded technology, such as micro controllers
contained in various equipment and facilities;
- The readiness of third parties, including customers, suppliers and
other key vendors; and
- Our client and server software products.
Although we have inventoried our principal internal information technology
systems and believe that they are Year 2000 compliant, some of our internal
information technology systems are not yet certified. We anticipate that we
will complete our certification of these systems by November 1, 1999. We have
received Year 2000 compliance statements from the suppliers of some of our
principal internal systems, and have sought similar statements from other
vendors. Our review of the internal systems of third parties with whom we
have material interactions is ongoing. Because we and our customers are
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substantially dependent upon the proper functioning of our computer systems,
a failure of our systems to be Year 2000 complaint could materially disrupt
our operations which could seriously harm our business.
We have tested our client and server products to determine that they are Year
2000 compliant, when configured and used in accordance with the related
documentation and our customer's hardware platform. We have performed
operational tests for each of our products by testing various future dates in
each of the products' functional areas from installation to standard operation
on our customers' platforms. In addition, the transition from year 1999 to year
2000 was simulated for our client and server software. According to the results
of our tests, our products should not abnormally end or provide incorrect or
invalid results due to date data, including dates that represent a different
century, provided the underlying operating system and customer hardware platform
are Year 2000 compliant.
The Year 2000 problem may also affect third party software products that are
incorporated into our client and server tools, applications and other software
products that we modify and license to our customers. When we incorporate third
party software products into our products, we generally discuss Year 2000 issues
with these third parties and sometimes perform internal testing on their
products. We do not, however, guarantee or certify that the software licensed by
these suppliers is Year 2000 compliant. Any failure by third parties to provide
Year 2000 compliant software products that we incorporate into our products
could result in financial loss, harm to our reputation, and liability to others
and could seriously harm our business.
Although we are in the process of inquiring as to the Year 2000 readiness of
our customers, we do not currently have extensive information concerning the
Year 2000 compliance status of our customers. We completed the delivery of our
customer inquiries to all of our customers then existing at July 31, 1999 and
continue to make similar inquiries to new customers after that date. Our current
or potential customers may incur significant expense to achieve Year 2000
compliance. If our customers are not Year 2000 compliant, they may experience
material costs to remedy problems, or they may face litigation costs. In either
case, Year 2000 issues could reduce or eliminate the budgets that current or
potential customers could have to license our products.
Because our Year 2000 compliance efforts are part of ongoing system upgrades,
we have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We may incur additional costs related to Year 2000 compliance for
administrative personnel to manage the testing, review and remediation, and
outside vendor and contractor assistance. Although we currently do not expect
future Year 2000 compliance costs to be material, we may experience material
problems and costs with Year 2000 compliance that could seriously harm our
business, including:
- Operational disruptions and inefficiencies for us, our customers and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- Business disputes and claims for pricing adjustments by our customers,
some of which could result in litigation or contract termination; and
- Harm to our reputation to the extent that our customers' products
experience errors or interruptions of service.
The worst case scenario for Year 2000 problems for us would be to cease normal
operations for an indefinite period of time while we attempted to respond to
Year 2000 problems in our internal systems and our software products without
having full internal operations capabilities. Although we do not believe that
our business would come to a standstill in the worst case scenario, we could
experience severe operational disruptions and inefficiencies resulting in
product delivery delays and a corresponding decrease in revenues.
Although it is not yet fully developed, we expect to complete our Year 2000
contingency plan well in advance of December 31, 1999. We are designing our Year
2000 contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness for our critical operations. The cost of developing
and implementing our plan may be material.
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RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
We were incorporated in April 1996 and began shipping our initial products to
customers in the last quarter of fiscal 1997. Our limited operating history
makes evaluation of our business and prospects difficult. Companies in an early
stage of development frequently encounter heightened risks and unexpected
expenses and difficulties. For us, these risks include the:
- Limited number of network operators that have deployed products and
services incorporating our technology;
- Limited number of information appliance manufacturers that have
incorporated our technology into their products;
- Delays in deployment of high speed networks and Internet-enhanced
services and applications by our network operator customers; and
- Our unproven long term business model, which depends on generating the
majority of our revenues from royalty fees paid by network operators
and information appliance manufacturers.
These risks, expenses and difficulties apply particularly to us because our
market, the information appliance software market, is new and rapidly evolving.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We incurred net losses of approximately $3.3 million in fiscal 1996, $19.0
million in fiscal 1997, $94.4 million for fiscal 1998, $33.1 million in
fiscal 1999 and $12.5 million for the quarter ended August 31, 1999. Our net
losses of $94.4 million in fiscal 1998 included a $58.1 million charge
related to acquired in process research and development. As of August 31,
1999, we had an accumulated deficit of approximately $162.2 million. Since
our inception, we have not had a profitable quarter and may never achieve or
sustain profitability. Although our revenues increased from fiscal 1997 to
fiscal 1998 and from fiscal 1998 to fiscal 1999, we may not be able to
sustain our historical revenue growth rates. We also expect to continue to
incur increasing cost of revenues, research and development, sales and
marketing and general and administrative expenses. If we are to achieve
profitability given our planned expenditure levels, we will need to generate
and sustain substantially increased license and royalty revenues; however, we
are unlikely to be able to do so for the foreseeable future. As a result, we
expect to incur significant and increasing losses and negative cash flows for
the foreseeable future. In addition, approximately 66% of our revenues
through August 31, 1999 have been derived from services provided by us and
not from license and royalty fees paid by network operators and information
appliance manufacturers in conjunction with the deployment of products and
services incorporating our software products. If we are unable to derive a
greater proportion of our revenues from these license and royalty fees, our
losses will likely continue indefinitely.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE
Our quarterly operating results have varied in the past and are likely to vary
significantly from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not a good indication
of our future performance. Moreover, we expect to derive substantially all of
our revenues for the near term from license fees and related consulting and
support services. Over the longer term, to the extent deployments increase, we
expect to derive an increasing portion of our revenues from royalties paid by
network operators and information appliance manufacturers. If deployments do not
increase or this transition otherwise does not occur, we are unlikely to be able
to generate or sustain substantially increased revenue and our operating results
will be seriously harmed.
In the short term, we expect our quarterly revenues to be significantly
dependent on the sale of a small number of relatively large orders for our
products and services, which generally have a long sales cycle. As a result, our
quarterly operating results may fluctuate significantly if we are unable to
complete one or more substantial sales in any given quarter. In many cases, we
recognize revenues from services on a percentage of completion basis. Our
ability to recognize these revenues may be delayed if we are unable to meet
service milestones on a timely basis. Moreover, because our expenses are
relatively fixed in the near term, any shortfall from anticipated revenues could
result in losses for the quarter.
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Although we have limited historical financial data, in the past we have
experienced seasonality in our quarter ending August 31. These seasonal trends
may continue to affect our quarter-to-quarter revenues.
THE MARKET FOR INFORMATION APPLIANCES IS NEW AND MAY NOT DEVELOP AS WE
ANTICIPATE
Because the information appliance market is newly emerging, the potential size
of this new market opportunity and the timing of its development are uncertain.
As a result, our profit potential is unproven. We are dependent upon the
commercialization and broad acceptance by consumers and businesses of a wide
variety of information appliances including, among others, television set-top
boxes, game consoles, smart phones and personal digital assistants. Initial
commercialization efforts in this industry have been primarily focused on
television set-top boxes. Broad acceptance of all information appliances,
particularly television set-top boxes, will depend on many factors. These
factors include:
- The willingness of large numbers of consumers to use devices other
than personal computers to access the Internet;
- The development of content and applications for information
appliances; and
- The emergence of industry standards that facilitate the distribution
of content over the Internet to these devices.
If the market for information appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as fast as anticipated, if
at all.
OUR SUCCESS DEPENDS ON NETWORK OPERATORS INTRODUCING, MARKETING AND PROMOTING
PRODUCTS AND SERVICES FOR INFORMATION APPLIANCES BASED ON OUR TECHNOLOGY
Our success depends on large network operators introducing, marketing and
promoting products and services based on our technology. There are, however,
only a limited number of large network operators worldwide. Moreover, only a
limited number of network operators have introduced or are in the process of
deploying products and services incorporating our technology and services for
information appliances. In addition, none of our network operator customers
are contractually obligated to introduce, market or promote products and
services incorporating our technology, nor are any of our network operator
customers contractually required to achieve any specific introduction
schedule. Accordingly, even if a network operator initiates a customer trial
of products incorporating our technology, that operator is under no
obligation to continue its relationship with us or to launch a full scale
deployment of these products. Further, our agreements with network operators
are not exclusive, so network operators with whom we have agreements may
enter into similar license agreements with one or more of our competitors.
Moreover, because the large scale deployment of products and services
incorporating our technology by network operators is complex, time consuming and
expensive, each deployment of these products and services requires our expertise
to tailor our technology to the customer's particular product offering. This
customization process requires a lengthy and significant commitment of resources
by our customers and us. This commitment of resources may slow deployment, which
could, in turn, delay market acceptance of these products and services. Unless
network operators introduce, market and promote products and services
incorporating our technology in a successful and timely manner, our software
platform will not achieve widespread acceptance, information appliance
manufacturers will not use our software in their products and our revenues will
not grow as fast as anticipated, if at all.
IF INFORMATION APPLIANCE MANUFACTURERS DO NOT MANUFACTURE PRODUCTS THAT
INCORPORATE OUR TECHNOLOGY, OR IF THESE PRODUCTS DO NOT ACHIEVE ACCEPTANCE, WE
MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
We do not manufacture hardware components that incorporate our technology.
Rather, we license software technology to information appliance manufacturers.
Accordingly, our success will depend, in part, upon our ability to convince a
number of information appliance manufacturers to manufacture products
incorporating our technology and the successful introduction and commercial
acceptance of these products. Our efforts in this regard are significantly
dependent on network operators deploying services using our server software.
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While we have entered into a number of agreements with information appliance
manufacturers, none of these manufacturers are contractually obligated to
introduce or market information appliances incorporating our technology, nor are
any of them contractually required to achieve any specific production schedule.
Moreover, our agreements with information appliance manufacturers are not
exclusive, so information appliance manufacturers with whom we have agreements
may enter into similar license agreements with one or more of our competitors.
Our failure to convince information appliance manufacturers to incorporate our
software platform into their products, or the failure of these products to
achieve broad acceptance with consumers and businesses, will result in revenues
that do not grow as fast as expected, if at all.
COMPETITION FROM BIGGER, BETTER CAPITALIZED COMPETITORS COULD RESULT IN PRICE
REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE
Competition in the information appliance software market is intense. Our
principal competitors on the client software side include Microsoft, OpenTV and
Spyglass. On the server side, our primary competitor is Microsoft. We expect
additional competition from other established and emerging companies. We expect
competition to persist and intensify as the information appliance market
develops and competitors focus on additional product and service offerings.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins, longer sales cycles, reduced revenues and loss of market
share.
Many of our existing and potential competitors, particularly Microsoft, have
longer operating histories, a larger customer base, greater name recognition and
significantly greater financial, technical, sales and marketing and other
resources than we do. This may place us at a disadvantage in responding to our
competitors' pricing strategies, technological advances, advertising campaigns,
strategic partnerships and other initiatives. In addition, many of our
competitors have well established relationships with our current and potential
customers. Moreover, some of our competitors, particularly Microsoft, have
significant financial resources which have enabled them in the past and may
enable them in the future to make large strategic investments in our current and
potential customers. Such investments may enable competitors to strengthen
existing relationships or quickly establish new relationships with our current
or potential customers. For example, as a result of a recent investment in AT&T,
Microsoft obtained a nonexclusive licensing agreement under which AT&T will
purchase at least 7.5 million licenses of Microsoft software for television
set-top boxes. Investments such as this may discourage our potential or current
customers who receive the investment from deploying our information appliance
software, regardless of their views of the relative merits of our products and
services.
ORACLE'S OWNERSHIP OF OUR STOCK AND OTHER RELATIONSHIPS WITH US COULD LIMIT THE
ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND
OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS
Based on 41,779,552 shares outstanding on August 31, 1999, Oracle beneficially
owns approximately 47% of our outstanding capital stock. In addition, in May
1999, we entered into a voting agreement with Oracle, Comcast, Cox
Communications and MediaOne. Under this agreement, among other things, Comcast,
Cox and MediaOne have agreed to vote the shares of our common stock held by them
in order to elect a representative designated by Oracle to our board of
directors. Currently, two of our six directors are directors and officers of
Oracle. As a result, Oracle, acting both through our board of directors and
through its ownership of our capital stock, may exert significant influence over
us. This concentration of ownership could also have the effect of delaying or
preventing a third party from acquiring control over us at a premium over the
then current market price of our common stock.
In addition, Oracle provides us with a distribution channel for our products
in Asia/Pacific, Europe and the United States and assists us in providing our
customers with support. We have also entered into several commercial,
technological and financial arrangements with Oracle on which our business
depends. If Oracle terminates these arrangements, if Oracle does not fulfill its
obligations under these arrangements, if Oracle ever acts in a way that is
adverse to our interests, or if we are no longer eligible to receive the
benefits of these arrangements, we may need to find alternative distribution
channel partners, seek alternative technologies for our products and services
and find alternative financial resources.
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WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES
We currently derive, and we expect to continue to derive, a significant
portion of our revenues from a limited number of customers. For the quarter
ended August 31, 1999, our four largest customers accounted for approximately
55% of our total revenues, with Wind River Systems accounting for 20% of our
total revenues and Cable & Wireless accounting for 13% of our total revenues.
For the quarter ended August 31, 1998, our five largest customers accounted for
approximately 71% of our total revenues, with Wind River Systems accounting for
30% of our total revenues and Cable & Wireless accounting for 11% of our total
revenues. We expect that we will continue to be dependent upon a limited number
of customers for a significant portion of our revenues in future periods,
although the customers may vary from period to period. As a result, if we fail
to successfully sell our products and services to one or more customers in any
particular period, or a large customer purchases less of our products or
services, defers or cancels orders, or terminates its relationship with us, our
revenues could decline significantly.
OUR LENGTHY SALES CYCLE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE
We believe that the purchase of our products and services involves a
significant commitment of capital and other resources by a customer. In many
cases, the decision for our customers to use our products and services requires
them to change their established business practices and conduct their business
in new ways. As a result, we may need to educate our potential customers on the
use and benefits of our products and services. In addition, our customers
generally must consider a wide range of other issues before committing to
purchase and incorporate our technology into their offerings. As a result of
these and other factors, including the approval at a number of levels of
management within a customer's organization, our sales cycle averages from six
to 12 months and may sometimes be significantly longer. Because of the length of
our sales cycle, we have a limited ability to forecast the timing and amount of
specific sales.
In addition, we base our quarterly revenue projections, in part, upon our
expectation that specific sales will occur in a particular quarter. In the past,
our sales have occurred in quarters other than those anticipated by us. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of financial analysts and investors.
DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS
Despite frequent testing of our software's scalability in a laboratory
environment, the ability of our software platform to support and manage a
substantial number of users in an actual deployment is uncertain. If our
software platform does not efficiently scale to support and manage a substantial
number of users while maintaining a high level of performance, demand for our
products and services and our ability to sell additional products to our
existing customers will be significantly reduced.
INTERNATIONAL REVENUES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES;
ACCORDINGLY, IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS IN A TIMELY
MANNER, OUR GROWTH IN INTERNATIONAL REVENUES WILL BE LIMITED
International revenues accounted for approximately 47% of our total
revenues for the quarter ended August 31, 1999 and approximately 49% for the
quarter ended August 31, 1998. We anticipate that a significant portion of
our revenues for the foreseeable future will be derived from sources outside
the United States, especially as we increase our sales and marketing
activities with respect to international licensing of our technology.
Accordingly, our success will depend, in part, upon international economic
conditions and upon our ability to manage international sales and marketing
operations. To date, we have relied primarily on Oracle for the international
distribution of our products and services in Asia/Pacific. To successfully
expand international sales, we must establish additional foreign operations,
hire additional personnel, and increase our foreign direct and indirect sales
forces. This expansion will require significant management attention and
resources, which could divert attention from other aspects of our business.
To the extent we are unable to expand our international operations in a
timely manner, our growth in international sales, if any, will be limited.
Moreover, substantially all of our revenues and costs to date have been
denominated in U.S. dollars. However, expanded international operations may
result in increased foreign currency payables. Although we may from time to time
undertake
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foreign exchange hedging transactions to cover a portion of our foreign
currency transaction exposure, we do not currently attempt to cover potential
foreign currency exposure. Accordingly, any fluctuation in the value of
foreign currency could seriously harm our ability to increase international
revenues.
WE MAY HAVE TO CEASE OR DELAY PRODUCT SHIPMENTS IF WE ARE UNABLE TO OBTAIN KEY
TECHNOLOGY FROM THIRD PARTIES
We rely on technology licensed from third parties, including applications that
are integrated with internally developed software and used in our products. Most
notably, we license certain Java and Jini technologies from Sun Microsystems,
VxWorks real time operating system from Wind River Systems, font technology from
BitStream and multimedia architecture from RealNetworks. These third party
technology licenses may not continue to be available to us on commercially
reasonable terms, or at all, and we may not be able to obtain licenses for other
existing or future technologies that we desire to integrate into our products.
If we cannot maintain existing third party technology licenses or enter into
licenses for other existing or future technologies needed for our products we
would be required to cease or delay product shipments while we seek to develop
alternative technologies.
WE DO NOT CURRENTLY HAVE LIABILITY INSURANCE TO PROTECT AGAINST THIRD PARTY
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE EXPENSIVE TO DEFEND
We expect that, like other software product developers, we will increasingly
be subject to infringement claims as the number of products and competitors
developing information appliance software grows and the functionality of
products in different industry segments overlaps. From time to time, we hire or
retain employees or consultants who have worked for independent software vendors
or other companies developing products similar to those offered by us. These
prior employers may claim that our products are based on their products and that
we have misappropriated their intellectual property. We cannot guarantee that:
- An infringement claim will not be asserted against us in the future;
- The assertion of such a claim will not result in litigation;
- We would prevail in such litigation; or
- We would be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable
terms, or at all.
We currently do not have liability insurance to protect against the risk that
licensed third party technology infringes the intellectual property of others.
Any claims relating to our intellectual property, regardless of their merit,
could seriously harm our ability to develop and market our products and manage
our day-to-day operations because they could:
- Be time consuming and costly to defend;
- Divert management's attention and resources;
- Cause product shipment delays;
- Require us to redesign our products; or
- Require us to enter into royalty or licensing agreements.
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WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF OUR TECHNOLOGY CAUSES A FAILURE
OF OUR NETWORK OPERATOR CUSTOMERS' SYSTEMS
Our technology is integrated into the products and services of our network
operator customers. Accordingly, a defect, error or performance problem with our
technology could cause our customers' telecommunication, cable and satellite
television or Internet service systems to fail for a period of time. Any such
failure will cause severe customer service and public relations problems for our
customers. As a result, any failure of our network operator customers' systems
caused by our technology could result in:
- Delayed or lost revenue due to adverse customer reaction;
- Negative publicity regarding us and our products and services; and
- Claims for substantial damages against us, regardless of our
responsibility for such failure.
Any claim could be expensive and require the expenditure of a significant amount
of resources regardless of whether we prevail. We currently do not have
liability insurance to protect against this risk.
OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH THE LATEST TECHNOLOGICAL
CHANGES BUT WE HAVE EXPERIENCED AND MAY IN THE FUTURE EXPERIENCE DELAYS IN
COMPLETING DEVELOPMENT AND INTRODUCTION OF NEW SOFTWARE PRODUCTS
The market for information appliance software is characterized by evolving
industry standards, rapid technological change and frequent new product
introductions and enhancements. Our technology enables network operators to
deliver content and applications to information appliances over the Internet.
Accordingly, our success will depend in large part upon our ability to adhere to
and adapt our products to evolving Internet protocols and standards. Therefore,
we will need to develop and introduce new products that meet changing customer
requirements and emerging industry standards on a timely basis. In the past, we
have experienced delays in completing the development and introduction of new
software products. We may encounter such delays in the development and
introduction of future products as well. In addition, we may:
- Fail to design our current or future products to meet customer
requirements;
- Fail to develop and market products and services that respond to
technological changes or evolving industry standards in a timely or
cost effective manner; and
- Encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or
that shorten the life cycles of our existing products and services.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
MAY HARM OUR COMPETITIVENESS
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology. We rely primarily
on a combination of trademark laws, copyright laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
technology. In addition, we have 17 patent applications pending in the United
States. Patents may not be issued from these or any future applications. Even if
they are issued, these patents may not survive a legal challenge to their
validity or provide significant protection for us.
The steps we have taken to protect our proprietary rights may not be adequate
to prevent misappropriation of our proprietary information. Further, we may not
be able to detect unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. Our competitors may also independently develop
similar technology. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Any failure by us to meaningfully protect our intellectual property could result
in competitors offering products that incorporate our most technologically
advanced features, which could seriously reduce demand for our products and
services.
18
<PAGE>
FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR ABILITY TO DELIVER PRODUCTS
IN A TIMELY MANNER, FULFILL EXISTING CUSTOMER COMMITMENTS AND ATTRACT AND RETAIN
NEW CUSTOMERS
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources,
especially as more network operators and information appliance manufacturers
incorporate our software into their products and services. This potential for
rapid growth is particularly significant in light of the large customer bases of
network operators and information appliance manufacturers and the frequent need
to tailor our products and services to our customers' unique needs. To the
extent we add several customers simultaneously or add customers whose product
needs require extensive customization, we may need to significantly expand our
operations. Moreover, we expect to significantly expand our domestic and
international operations by, among other things, expanding the number of
employees in professional services, research and development and sales and
marketing.
This additional growth will place a significant strain on our limited
personnel, financial and other resources. Our future success will depend, in
part, upon the ability of our senior management to manage growth effectively.
This will require us to implement additional management information systems, to
further develop our operating, administrative, financial and accounting systems
and controls, to hire additional personnel, to develop additional levels of
management within the corporation, to locate additional office space in the
United States and internationally and to maintain close coordination among our
development, accounting, finance, sales and marketing, consulting services and
customer service and support organizations. Failure to accomplish any of these
requirements would seriously harm our ability to deliver products in a timely
fashion, fulfill existing customer commitments and attract and retain new
customers.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel, none of whom, except
Mitchell E. Kertzman, our President and Chief Executive Officer, has an
employment agreement with us. If one or more members of our senior management
team or key technical personnel were unable or unwilling to continue in their
present positions, these individuals would be very difficult to replace and our
ability to manage day-to-day operations, develop and deliver new technologies,
attract and retain customers, attract and retain other employees and generate
revenues, would be seriously harmed.
OUR PLANNED EXPANSION OF OUR INDIRECT DISTRIBUTION CHANNELS WILL BE EXPENSIVE
AND MAY NOT SUCCEED
To date, we have sold our products and services principally through our direct
sales force. In the future, we intend to expand the number and reach of our
indirect channel partners, primarily overseas, through distribution agreements
similar to the one we have with Oracle. The development of these indirect
channels will require the investment of significant company resources, which
could seriously harm our business if our efforts do not generate significant
revenues. Moreover, we may not be able to attract indirect channel partners that
will be able to effectively market our products and services. The failure to
recruit indirect channel partners that are able to successfully market our
products and services could seriously hinder the growth of our business.
WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET,
AND POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE
We may acquire other businesses in the future in order to remain
competitive or to acquire new technologies. As a result of these
acquisitions, we may need to integrate product lines, technologies, widely
dispersed operations and distinct corporate cultures. The product lines or
technologies of the acquired companies may need to be altered or redesigned
in order to be made compatible with our software products or the software
architecture of our customers. These integration efforts may not succeed or
may distract our management from operating our existing business. Our failure
to successfully manage future acquisitions could seriously harm our operating
results. In addition, our stockholders would be diluted if we finance the
acquisitions by incurring convertible debt or issuing equity securities.
DEMAND FOR OUR PRODUCTS AND SERVICES WILL NOT INCREASE IF THE INTERNET DOES NOT
CONTINUE TO GROW AND IMPROVE
Acceptance of our software platform depends substantially upon the widespread
adoption of the Internet for commerce, communications and entertainment. As is
typical in the case of an emerging industry characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
introductions, demand for and acceptance of
19
<PAGE>
recently introduced Internet products and services are subject to a high
level of uncertainty. In addition, critical issues concerning the commercial
use of the Internet remain unresolved and may affect the growth of Internet
use, especially in the consumer markets we target. The adoption of the
Internet for commerce, communications and access to content and applications,
particularly by those that have historically relied upon alternative means of
commerce, communications and access to content and applications, generally
requires understanding and acceptance of a new way of conducting business and
exchanging information. Moreover, widespread application of the Internet
outside of the United States will require reductions in the cost of Internet
access to prices affordable to the average consumer.
To the extent that the Internet continues to experience an increase in users,
an increase in frequency of use or an increase in the amount of data transmitted
by users, we cannot guarantee that the Internet infrastructure will be able to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in development or adoption of new
standards or protocols required to handle increased levels of Internet activity,
or due to increased government regulation. Changes in, or insufficient
availability of, telecommunications or similar services to support the Internet
could also result in slower response times and could adversely impact use of the
Internet generally. If use of the Internet does not continue to grow or grows
more slowly than expected, or if the Internet infrastructure, standards,
protocols or complementary products, services or facilities do not effectively
support any growth that may occur, demand for our products and services will
decline significantly.
INCREASING GOVERNMENT REGULATION COULD CAUSE DEMAND FOR OUR PRODUCTS AND
SERVICES TO DECLINE SIGNIFICANTLY
We are subject not only to regulations applicable to businesses generally, but
also laws and regulations directly applicable to the Internet. Although there
are currently few such laws and regulations, state, federal and foreign
governments may adopt a number of these laws and regulations governing any of
the following issues:
- User privacy;
- Copyrights;
- Consumer protection;
- Taxation of e-commerce;
- The online distribution of specific material or content; and
- The characteristics and quality of online products and services.
We do not engage in e-commerce, nor do we distribute content over the
Internet. However, one or more states or the federal government could enact
regulations aimed at companies, like us, which provide software that facilitates
e-commerce and the distribution of content over the Internet. The likelihood of
such regulation being enacted will increase as the Internet becomes more
pervasive and extends to more people's daily lives. Any such legislation or
regulation could dampen the growth of the Internet and decrease its acceptance
as a communications and commercial medium. If such a reduction in growth occurs,
demand for our products and services will decline significantly.
20
<PAGE>
WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO
FUND OUR CONTINUED OPERATIONS
Since our inception, cash used in our operations has substantially exceeded
cash received from our operations, and we expect this trend to continue for the
foreseeable future. We expect that the net proceeds from our initial public
offering and the private placement will be sufficient to meet our working
capital and capital expenditure needs for at least the twelve months following
the offering. After that, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, or at all. If we need additional capital and cannot raise it on
acceptable terms, we may not be able to, among other things:
- Develop or enhance our products and services;
- Acquire complementary technologies, products or businesses;
- Open new offices, in the United States or internationally;
- Hire, train and retain employees; or
- Respond to competitive pressures or unanticipated requirements.
PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DETER TAKEOVERS AND
PREVENT YOU FROM RECEIVING A PREMIUM FOR YOUR SHARES
Provisions of our certificate of incorporation and bylaws as well as
provisions of Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY
In the past, securities class action litigation has often been brought against
a company following periods of volatility in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. Due to the potential
volatility of our stock price, we may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.
WE MAY INCUR NET LOSSES OR INCREASED NET LOSSES IF WE ARE REQUIRED TO RECORD A
SIGNIFICANT ACCOUNTING EXPENSE RELATED TO THE ISSUANCE OF WARRANTS
Under the terms of letter agreements with particular network operators
entered into in April and May 1999, we agreed to issue warrants to purchase
up to an aggregate of 2,299,996 shares of our common stock if these network
operators satisfy commercial milestones. In the event the milestones are met,
we will be required to record a significant non-cash accounting expense based
upon the value of the warrants at the time the milestones are satisfied. If
we are required to record non-cash accounting expenses related to these
warrants, we could incur net losses or increased net losses for a given
period and this could seriously harm our operating results and stock price.
As of August 31, 1999, we had recorded warrants to purchase up to 374,999
shares of our common stock as being earned by four network operators for
satisfying commercial milestones. In connection with the issuance of these
warrants, approximately $0.4 million was recorded as a charge to operations
for the quarter ended August 31, 1999.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
INTEREST RATE RISK
As of August 31, 1999, our investments consisted of $14.7 million of
short term money market securities and $121.9 million of debt securities. These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10%, prior to maturity, from
levels as of August 31, 1999, the decline of the fair value of the portfolio
would not be material.
FOREIGN CURRENCY
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our revenues
are earned in U.S. dollars. Operating expenses incurred by our foreign
subsidiaries are denominated primarily in European currencies. We currently do
not use financial instruments to hedge these operating expenses. We intend to
assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis.
22
<PAGE>
Part II. Other Information
Item 1. Legal proceedings
In December 1998, one of our former employees filed an action in the
California Superior Court for the County of San Mateo against us for, among
other things, unpaid commissions of approximately $1.5 million, constructive
employment termination, intentional misrepresentation and negligent
misrepresentation. In September 1999, that former employee sought to amend
his complaint against us, adding a claim for damages for failure to pay wages
under the California Labor Code and seeking the imposition of a constructive
trust over withheld commissions and any enhancement in value of that money.
The plaintiff in this case alleges that we did not honor the terms of a
proposed bonus plan, and that we sought to change the bonus plan arrangement
only after we had discovered that the proposed plan would have resulted in
substantial payments to the plaintiff. We believe that these claims are
without merit and that we have strong defenses against this lawsuit.
Accordingly, we intend to vigorously defend this action.
Item 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities.
During the quarter ended August 31, 1999 and prior to the closing of our
initial public offering, we granted options to purchase 870,020 shares of common
stock to employees, consultants and other service providers of Liberate under
our 1996 Stock Plan. During the quarter ended August 31, 1999, we did not grant
options to purchase shares of common stock to employees, consultants or other
service providers of Liberate under our 1999 Equity Incentive Plan.
During the quarter ended August 31, 1999, employees, consultants and other
service providers of Liberate exercised options for 247,889 shares of common
stock under all plans (including preferred shares that converted to common upon
the initial public offering).
On July 27, 1999, we effected a one-for-six reverse stock split of our common
stock.
On August 2, 1999, we issued a total of 33,089,335 shares of our common stock
to holders of all shares of Liberate's Preferred Stock in connection with the
conversion of the Preferred Stock into common stock.
On August 2, 1999, we issued 421,940 shares of common stock to Middlefield
Ventures, an affiliate of Intel, in connection with the cancellation of a
promissory note in the amount of $4.0 million and related accrued interest
payable by Liberate to Middlefield.
On August 2, 1999, we issued 813,802 shares of common stock for an aggregate
purchase price of approximately $12.5 million to Lucent Technologies.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act of 1933 ("the Act") in reliance upon Section 4(2) of
the Act or Rule 701 promulgated under Section 3(b) of the Act.
(d) Use of Proceeds.
On August 2, 1999, we completed the initial public offering of our common
stock. The managing underwriters in the offering were Credit Suisse First
Boston, Hambrecht & Quist and Charles Schwab & Co., Inc. The shares of common
stock sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1/A (No. 333-78781). The
Securities and Exchange Commission declared the Registration Statement effective
on July 27, 1999.
In our initial public offering Liberate sold 6,250,000 shares of common
stock at $16 per share. In addition, we sold 451,050 shares of common stock
at $16 per share in connection with the exercise of the underwriters'
overallotment. The total aggregate proceeds from these transactions were
$107.2 million. Underwriters' discounts and other related costs were $9.2
million resulting in net proceeds of $98.0 million. The net proceeds were
predominately held in cash equivalents and short term investments at August
31, 1999. Immediately following the closing of the offering, Liberate
23
<PAGE>
also sold 813,802 shares of common stock in a private placement to Lucent
Technologies for an aggregate of $12.1 million.
The following table sets forth the estimated underwriters' discount and other
related costs incurred in connection with the offering. None of the amounts
shown was paid directly or indirectly to any director or officer of Liberate or
their associates, persons owning 10 percent or more of any class of equity
securities of Liberate or an affiliate of Liberate.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Underwriters' discount $ 7,505
SEC registration fee 75
NASD fee 11
Nasdaq National Market fee 106
Printing and engraving 400
Legal fees and expenses 503
Accounting fees and expenses 451
Blue sky fees and expenses 10
Transfer agent fees 10
Miscellaneous 175
----------
Total $ 9,246
==========
</TABLE>
The net proceeds will be used and have been applied to working capital for
Liberate and were predominantly held in cash equivalents and short term
investments at August 31, 1999.
Item 3. Defaults in Securities
None.
Item 4. Submission of Matters to a Vote of Securities Holders
During the quarter ended August 31, 1999, we submitted the following matters
to our stockholders for approval by written consent in lieu of a stockholders'
meeting:
Effective June 16 1999, prior to our initial public offering, our stockholders
approved an amendment and restatement of our Certificate of Incorporation,
which, among other things, (i) effected a one-for-six reverse stock split of
Liberate's outstanding common stock and (ii) deleted references to Liberate's
Series B common stock. Our stockholders also approved an additional amendment
and restatement of our Certificate of Incorporation to be filed upon the closing
of Liberate's initial public offering which, among other things, (A) increased
the number of authorized shares of capital stock of Liberate, (B) eliminated the
right of stockholders to take action by written consent, and (C) required the
affirmative vote of 75% of Liberate's voting stock to amend certain provisions
of our Certificate of Incorporation. Stockholders holding 31,814,891 shares (on
an as if converted into common stock basis) or 94.6% of the shares outstanding
at that time, consented to the foregoing amendments.
Effective June 16, 1999, prior to our initial public offering, our
stockholders approved our 1999 Equity Incentive Plan, pursuant to which
1,525,749 shares of Liberate's common stock have been reserved for issuance,
and our 1999 Employee Stock Purchase Plan, pursuant to which 833,333 shares
of Liberate's common stock has been reserved for issuance. Stockholders
holding 31,814,891 shares (on an as if converted into common stock basis) or
94.6% of the shares outstanding at that time, consented to the adoption of
the foregoing plans.
Effective June 16, 1999, prior to our initial public offering, our
stockholders approved (i) an amendment and restatement of our bylaws, which,
among other things, permit only stockholders owning at least 50% of our capital
stock to call a special meeting of the stockholders and provide for
indemnification of officers and directors of Liberate to the full extent
authorized or permitted under Delaware law; and (ii) a form of indemnification
agreement to be entered into with each of the officers and directors of
Liberate. Stockholders holding 31,814,891 shares (on an as if converted into
common stock basis) or 94.6% of the shares outstanding at that time, consented
to the foregoing amendments and agreements.
24
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
3.4* Amended and Restated Bylaws of Liberate, as amended to date.
3.5* Sixth Amended and Restated Certificate of Incorporation of Liberate,
as amended to date.
4.1* Specimen Certificate of Liberate's common stock.
10.1* Indemnification Agreement entered into between Liberate and its
directors and executive officers.
10.5* 1999 Equity Incentive Plan.
10.6 1999 Employee Stock Purchase Plan.
10.18* Cooperation Agreement, dated July 1, 1999, between Liberate and Intel,
as amended.
10.35* Stock Purchase Agreement, dated June 30, 1999, between Liberate and
Lucent Technologies Inc.
10.37 Master Lease Agreement, dated August 2, 1999, with Steelcase
Financial Services Inc.
10.38 Irrevocable Letter of Credit dated September 3, 1999 and Standby
Letter of Credit Agreement.
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to Liberate's Registration Statement on
Form S-1, as amended (File No. 333-78781)
(b) Reports on Form 8-K
None
25
<PAGE>
Signature
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
undersigned, thereunto duly authorized.
Liberate Technologies
Date: October 13, 1999 by: /S/ NANCY J. HILKER
----------------------
Nancy J. Hilker,
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. EXHIBIT
- ----------- -------
<S> <C>
3.4* Amended and Restated Bylaws of Liberate, as amended to date.
3.5* Sixth Amended and Restated Certificate of Incorporation of Liberate,
as amended to date.
4.1* Specimen Certificate of Liberate's common stock.
10.1* Indemnification Agreement entered into between Liberate and its
directors and executive officers.
10.5* 1999 Equity Incentive Plan.
10.6 1999 Employee Stock Purchase Plan.
10.18* Cooperation Agreement, dated July 1, 1999, between Liberate and
Intel, as amended.
10.35* Stock Purchase Agreement, dated June 30, 1999, between Liberate
and Lucent Technologies Inc.
10.37 Master Lease Agreement, dated August 2, 1999, with Steelcase
Financial Services Inc.
10.38 Irrevocable Letter of Credit dated September 3, 1999 and Standby
Letter of Credit Agreement.
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to Liberate's Registration Statement on
Form S-1, as amended (File No. 333-78781)
(b) Reports on Form 8-K
None
27
<PAGE>
EXHIBIT 10.6
LIBERATE TECHNOLOGIES
1999 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED MAY 17, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURPOSE OF THE PLAN...........................................1
SECTION 2. ADMINISTRATION OF THE PLAN....................................1
(a) Committee Composition.......................................1
(b) Committee Responsibilities..................................1
SECTION 3. ENROLLMENT AND PARTICIPATION..................................1
(a) Offering Periods............................................1
(b) Enrollment..................................................1
(c) Duration of Participation...................................1
SECTION 4. EMPLOYEE CONTRIBUTIONS........................................2
(a) Frequency of Payroll Deductions.............................2
(b) Amount of Payroll Deductions................................2
(c) Changing Withholding Rate...................................2
(d) Discontinuing Payroll Deductions............................2
(e) Limit on Number of Elections................................2
SECTION 5. WITHDRAWAL FROM THE PLAN......................................2
(a) Withdrawal..................................................2
(b) Re-Enrollment After Withdrawal..............................2
SECTION 6. CHANGE IN EMPLOYMENT STATUS...................................3
(a) Termination of Employment...................................3
(b) Leave of Absence............................................3
(c) Death.......................................................3
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES..........................3
(a) Plan Accounts...............................................3
(b) Purchase Price..............................................3
(c) Number of Shares Purchased..................................3
(d) Available Shares Insufficient...............................4
(e) Issuance of Stock...........................................4
(f) Unused Cash Balances........................................4
(g) Stockholder Approval........................................4
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP................................4
(a) Five Percent Limit..........................................4
(b) Dollar Limit................................................5
i
<PAGE>
SECTION 9. RIGHTS NOT TRANSFERABLE.......................................5
SECTION 10. NO RIGHTS AS AN EMPLOYEE.....................................5
SECTION 11. NO RIGHTS AS A STOCKHOLDER...................................6
SECTION 12. SECURITIES LAW REQUIREMENTS..................................6
SECTION 13. STOCK OFFERED UNDER THE PLAN.................................6
(a) Authorized Shares...........................................6
(b) Anti-Dilution Adjustments...................................6
(c) Reorganizations.............................................6
SECTION 14. AMENDMENT OR DISCONTINUANCE..................................6
SECTION 15. INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN...................7
SECTION 16. DEFINITIONS..................................................7
(a) "Board"....................................................7
(b) "Code".....................................................8
(c) "Committee"................................................8
(d) "Company"..................................................8
(e) "Compensation".............................................8
(f) "Corporate Reorganization".................................8
(g) "Eligible Employee"........................................8
(h) "Exchange Act".............................................8
(i) "Fair Market Value"........................................8
(j) "IPO"......................................................9
(k) "Offering Period"..........................................9
(l) "Participant"..............................................9
(m) "Participating Company"....................................9
(n) "Plan".....................................................9
(o) "Plan Account".............................................9
(p) "Purchase Price"...........................................9
(q) "Stock"....................................................9
(r) "Subsidiary"...............................................9
</TABLE>
ii
<PAGE>
LIBERATE TECHNOLOGIES
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board to be effective as of the date of the
IPO. The purpose of the Plan is to provide Eligible Employees with an
opportunity to increase their proprietary interest in the success of the
Company by purchasing Stock from the Company on favorable terms and to pay
for such purchases through payroll deductions. The Plan is intended to
qualify under section 423 of the Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee.
(b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan
and make all other policy decisions relating to the operation of the Plan.
The Committee may adopt such rules, guidelines and forms as it deems
appropriate to implement the Plan. The Committee's determinations under the
Plan shall be final and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) OFFERING PERIODS. While the Plan is in effect, two Offering Periods
shall commence in each calendar year. The Offering Periods shall consist of
the six-month periods commencing on each April 1 and October 1, except that
the first Offering Period shall commence on the date of the IPO and end on
March 31, 2000.
(b) ENROLLMENT. Any individual who, on the day preceding the first day
of an Offering Period, qualifies as an Eligible Employee may elect to become
a Participant in the Plan for such Offering Period by executing the
enrollment form prescribed for this purpose by the Committee. The enrollment
form shall be filed with the Company at the prescribed location not later
than 10 days prior to the commencement of such Offering Period.
(c) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the
end of the Offering Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who discontinued
employee contributions under Section 4(d) or withdrew from the Plan under
Section 5(a) may again become a Participant, if he or she then is an Eligible
Employee, by following the procedure described in Subsection (b) above. A
Participant whose employee contributions were discontinued automatically
under Section 8(b) shall automatically resume participation at the beginning
of the earliest Offering Period ending in the next calendar year, if he or
she then is an Eligible Employee.
<PAGE>
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to Subsection (b)
below, shall occur on each payday during participation in the Plan.
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a
whole percentage of the Eligible Employee's Compensation, but not less than
1% nor more than 15%.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment
form with the Company at the prescribed location at any time. The new
withholding rate shall be effective as soon as reasonably practicable after
such form has been received by the Company. The new withholding rate shall be
a whole percentage of the Eligible Employee's Compensation, but not less than
1% nor more than 15%.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a
new enrollment form with the Company at the prescribed location at any time.
Payroll withholding shall cease as soon as reasonably practicable after such
form has been received by the Company. In addition, employee contributions
may be discontinued automatically pursuant to Section 8(b). A Participant who
has discontinued employee contributions may resume such contributions by
filing a new enrollment form with the Company at the prescribed location.
Payroll withholding shall resume as soon as reasonably practicable after such
form has been received by the Company.
(e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than
two elections under Subsection (c) or (d) above during any Offering Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Offering Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls
in the Plan under Section 3(c). Re-enrollment may be effective only at the
commencement of an Offering Period.
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SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). A transfer from one
Participating Company to another shall not be treated as a termination of
employment.
(b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick
leave or another BONA FIDE leave of absence, if the leave was approved by the
Company in writing. Employment, however, shall be deemed to terminate 90 days
after the Participant goes on a leave, unless a contract or statute
guarantees his or her right to return to work. Employment shall be deemed to
terminate in any event when the approved leave ends, unless the Participant
immediately returns to work.
(c) DEATH. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him
or her for this purpose on the prescribed form or, if none, to the
Participant's estate. Such form shall be valid only if it was filed with the
Company at the prescribed location before the Participant's death.
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its
books in the name of each Participant. Whenever an amount is deducted from
the Participant's Compensation under the Plan, such amount shall be credited
to the Participant's Plan Account. Amounts credited to Plan Accounts shall
not be trust funds and may be commingled with the Company's general assets
and applied to general corporate purposes. No interest shall be credited to
Plan Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock
purchased at the close of an Offering Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last trading
day in such Offering Period; or
(ii) 85% of the Fair Market Value of such share on the last trading
day before the commencement of such Offering Period or, in the case of
the first Offering Period under the Plan, 85% of the price at which one
share of Stock is offered to the public in the IPO.
(c) NUMBER OF SHARES PURCHASED. As of the last day of each Offering
Period, each Participant shall be deemed to have elected to purchase the
number of shares of Stock calculated in accordance with this Subsection (c),
unless the Participant has previously elected to withdraw from the Plan in
accordance with Section 5(a). The amount then in the Participant's Plan
Account shall be divided by the Purchase Price, and the number of shares that
results shall be purchased from the Company with the funds in the
Participant's Plan Account. The foregoing notwithstanding, no Participant
shall purchase more than 750 shares of Stock with respect to any Offering
Period nor more than the amounts of Stock set forth in Sections 8(b) and
13(a). The
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Committee may determine with respect to all Participants that any fractional
share, as calculated under this Subsection (c), shall be (i) rounded down to
the next lower whole share or (ii) credited as a fractional share.
(d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate
number of shares that all Participants elect to purchase during an Offering
Period exceeds the maximum number of shares remaining available for issuance
under Section 13(a), then the number of shares to which each Participant is
entitled shall be determined by multiplying the number of shares available
for issuance by a fraction, the numerator of which is the number of shares
that such Participant has elected to purchase and the denominator of which is
the number of shares that all Participants have elected to purchase.
(e) ISSUANCE OF STOCK. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as
soon as reasonably practicable after the close of the applicable Offering
Period, except that the Committee may determine that such shares shall be
held for each Participant's benefit by a broker designated by the Committee
(unless the Participant has elected that certificates be issued to him or
her). Shares may be registered in the name of the Participant or jointly in
the name of the Participant and his or her spouse as joint tenants with right
of survivorship or as community property.
(f) UNUSED CASH BALANCES. Any amount remaining in the Participant's
Plan Account that represents the Purchase Price for a fractional share shall
be carried over in the Participant's Plan Account to the next Offering
Period. Any amount remaining in the Participant's Plan Account that
represents the Purchase Price for whole shares that could not be purchased by
reason of Subsection (c) or (d) above, Section 8(b) or Section 13(a) shall be
refunded to the Participant in cash, without interest.
(g) STOCKHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless
and until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) FIVE PERCENT LIMIT. Any other provision of the Plan
notwithstanding, no Participant shall be granted a right to purchase Stock
under the Plan if such Participant, immediately after his or her election to
purchase such Stock, would own stock possessing more than 5% of the total
combined voting power or value of all classes of stock of the Company or any
parent or Subsidiary of the Company. For purposes of this Subsection (a), the
following rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he or
she has a right or option to purchase under this or any other plan; and
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(iii) Each Participant shall be deemed to have the right to
purchase 750 shares of Stock under this Plan with respect to each
Offering Period.
(b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period that
commenced in the current calendar year, the limit shall be equal to (A)
$25,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased in the current calendar year (under
this Plan and all other employee stock purchase plans of the Company or
any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period that
commenced in the immediately preceding calendar year, the limit shall be
equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that
the Participant previously purchased (under this Plan and all other
employee stock purchase plans of the Company or any parent or Subsidiary
of the Company) in the current calendar year and in the immediately
preceding calendar year.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which
such Stock is purchased. Employee stock purchase plans not described in
section 423 of the Code shall be disregarded. If a Participant is precluded
by this Subsection (b) from purchasing additional Stock under the Plan, then
his or her employee contributions shall automatically be discontinued and
shall resume at the beginning of the earliest Offering Period ending in the
next calendar year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by beneficiary
designation or the laws of descent and distribution. If a Participant in any
manner attempts to transfer, assign or otherwise encumber his or her rights
or interest under the Plan, other than by beneficiary designation or the laws
of descent and distribution, then such act shall be treated as an election by
the Participant to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
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SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Offering
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance
and delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of
1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange or
other securities market on which the Company's securities may then be traded.
SECTION 13. STOCK OFFERED UNDER THE PLAN.
A) AUTHORIZED SHARES. The number of shares of Stock available for
purchase under the Plan (which includes the International Employee Stock
Purchase Plan if and to the extent implemented) shall be 833,333 (subject to
adjustment pursuant to this Section 13). On June 1 of each year, commencing
with June 1,2000, the aggregate number of shares of Stock available for
purchase during the life of the Plan (which includes the International
Employee Stock Purchase Plan if and to the extent implemented) shall
automatically be increased by a number equal to the lesser of (a) 2% of the
total number of shares of Stock then outstanding or (b) 833,333 (subject to
adjustment pursuant to this Section 13).
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock
offered under the Plan, the 750-share limitation described in Section 7(c)
and the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other
increase or decrease in such shares effected without receipt or payment of
consideration by the Company, the distribution of the shares of a Subsidiary
to the Company's stockholders or a similar event.
(c) REORGANIZATIONS. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period then in progress shall terminate and shares shall be
purchased pursuant to Section 7, unless the Plan is continued or assumed by
the surviving corporation or its parent corporation. The Plan shall in no
event be construed to restrict in any way the Company's right to undertake a
dissolution, liquidation, merger, consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan
at any time and without notice. Except as provided in Section 13, any
increase in the aggregate number of shares of Stock to be issued under the
Plan shall be subject to approval by a vote of the stockholders of the
Company. In addition, any other amendment of the Plan shall be subject to
approval by a
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vote of the stockholders of the Company to the extent required by an
applicable law or regulation.
SECTION 15. INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN.
Adoption of the Plan by the Board and approval of the Plan by the
stockholders of the Company shall constitute adoption by the Board and
approval by the stockholders of the Company of the International Employee
Stock Purchase Plan described herein. If the laws of a foreign jurisdiction
require an amendment to the Plan that (a) would disqualify the Plan as a plan
that satisfies the requirements of Code Section 423 or (b) would not be
required under any law of the United States including Code Section 423, then
a separate but identical employee stock purchase plan may be implemented for
Foreign Participants (as defined below). The plan for Participants who are
not Foreign Participants will continue to be called the Plan, and the plan
for Foreign Participants will be called the International Employee Stock
Purchase Plan. A separate plan document will be created to evidence the
International Employee Stock Purchase Plan when it is implemented. Except as
otherwise amended to comply with applicable laws of a foreign jurisdiction,
the terms of the International Employee Stock Purchase Plan will be identical
to the Plan.
Each Participant who (a) is not a U.S. citizen or (b) is a U.S. citizen
working abroad who is not paid in U.S. currency ("Foreign Participant") will
be automatically deemed to participate in this International Employee Stock
Purchase Plan, instead of the Plan. With respect to each such Foreign
Participant, the initial offering period for this International Employee
Stock Purchase Plan shall be deemed to have commenced at the same time as the
offering period that is in progress under the Plan when the International
Employee Stock Purchase Plan is initially implemented.
The Plan and the International Employee Stock Purchase Plan (if and to
the extent implemented) will have the same share reserve. Thus, the number of
shares of Stock available for purchase in the aggregate over the term of the
Plan (which includes the International Employee Stock Purchase Plan if and to
the extent implemented) shall be 833,333 (subject to adjustment pursuant to
Section 13). As of June 1 of each year, commencing with the year 2000, the
aggregate number of shares of Stock available for purchase during the life of
the Plan (which includes the International Employee Stock Purchase Plan if
and to the extent implemented) shall automatically increase by a number equal
to the lesser of (a) 2% of the total number of shares of Stock then
outstanding or (b) 833,333 (subject to adjustment pursuant to Section 13). If
the International Employee Stock Purchase Plan is implemented, the share
issuances under the Plan shall reduce on a share-for-share basis the number
of shares available for issuance under the International Employee Stock
Purchase Plan, and share issuances under the International Employee Stock
Purchase Plan shall reduce on a share-for-share basis the number of shares
available for issuance under the Plan.
SECTION 16. DEFINITIONS.
(a) "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
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(b) "CODE" means the Internal Revenue Code of 1986, as amended.
(c) "COMMITTEE" means the Compensation Committee of the Board.
(d) "COMPANY" means Liberate Technologies, a Delaware corporation.
(e) "COMPENSATION" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation, commissions, overtime pay and shift premiums, plus
(ii) any pre-tax contributions made by the Participant under section 401(k)
or 125 of the Code. "Compensation" shall exclude all non-cash items, moving
or relocation allowances, cost-of-living equalization payments, car
allowances, tuition reimbursements, imputed income attributable to cars or
life insurance, severance pay, fringe benefits, contributions or benefits
received under employee benefit plans, income attributable to the exercise of
stock options, and similar items. The Committee shall determine whether a
particular item is included in Compensation.
(f) "CORPORATE REORGANIZATION" means:
(i) The consummation of a merger or consolidation of the Company
with or into any other entity or any other corporate reorganization; or
(ii) The sale, transfer of other disposition of all or
substantially all of the Company's assets or the complete liquidation or
dissolution of the Company.
(g) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company
who meets the following requirements: his or her customary employment is for
more than five months per calendar year and for more than 20 hours per week.
The foregoing notwithstanding, an individual shall not be considered an
Eligible Employee if his or her participation in the Plan is prohibited by
the law of any country which has jurisdiction over him or her or if he or she
is subject to a collective bargaining agreement that does not provide for
participation in the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means the market price of Stock, determined by
the Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on the
date in question, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by The Nasdaq National
Market;
(ii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date;
or
(iii) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
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Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in THE WALL STREET JOURNAL or as
reported directly to the Company by Nasdaq or a stock exchange. Such
determination shall be conclusive and binding on all persons.
(j) "IPO" means the initial offering of Stock to the public pursuant to
a registration statement filed by the Company with the Securities and
Exchange Commission.
(k) "OFFERING PERIOD" means a six-month period with respect to which
the right to purchase Stock may be granted under the Plan, as determined
pursuant to Section 3(a).
(l) "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 3(b).
(m) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present
or future Subsidiary designated by the Committee as a Participating Company,
as indicated on Exhibit A.
(n) "PLAN" means this Liberate Technologies 1999 Employee Stock
Purchase Plan, as it may be amended from time to time.
(o) "PLAN ACCOUNT" means the account established for each Participant
pursuant to Section 7(a).
(p) "PURCHASE PRICE" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(q) "STOCK" means the Common Stock of the Company.
(r) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
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EXHIBIT A
PARTICIPATING COMPANIES
Liberate Technologies
Network Computer Incorporated Nederland B.V.
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STEELCASE FINANCIAL SERVICES INC. EXHIBIT 10.37
A STEELCASE COMPANY
- -------------------------------------------------------------------------------
MASTER LEASE AGREEMENT NUMBER 12809
THIS MASTER LEASE AGREEMENT is dated and effective as of AUGUST 2, 1999, (the
"Effective Date"), by and between Steelcase Financial Services Inc., a
Michigan corporation, located at 1111 44th Street S.E., P.O. Box 3163, Grand
Rapids, MI 49501-3163 (together with any successors or assigns, the
"Lessor"), and the Lessee indicated below (the "Lessee").
LESSEE
Full Legal Name Trade Name
LIBERATE TECHNOLOGIES
Mailing Address City State Zip
1000 BRIDGE PARKWAY REDWOOD CITY CA 94065-
Type of Legal Entity State of Organization Date of Establishment
CORPORATION DE 1996
1. LEASE. Lessor hereby leases to Lessee and Lessee hereby leases from
Lessor all of the tangible personal property listed on each Equipment
Schedule executed from time to time pursuant to this Agreement (each, an
"Equipment Schedule"). Each Equipment Schedule shall be substantially in the
form annexed hereto as Annex A, shall incorporate by reference therein all of
the terms and conditions of this Agreement and shall include such other terms
and conditions upon which the parties have agreed (each Equipment Schedule,
together with this Agreement as it relates to such Schedule, is referred to
herein as a "Lease"). With respect to each Lease, capitalized terms not
defined in this Agreement shall have the meanings stated in the applicable
Equipment Schedule.
2. NET LEASE. EACH LEASE IS A NET LEASE, AND LESSEE SHALL PAY ALL COSTS AND
EXPENSES OF EVERY CHARACTER, WHETHER FORESEEN OR UNFORESEEN, ORDINARY OR
EXTRAORDINARY, IN CONNECTION WITH THE USE, POSSESSION, STORAGE, MAINTENANCE
AND REPAIR OF THE EQUIPMENT. LESSEE IS UNCONDITIONALLY OBLIGATED TO PAY
PERIODIC RENT AND ALL OTHER AMOUNTS DUE UNDER EACH LEASE REGARDLESS OF ANY
DEFECT IN OR DAMAGE TO THE EQUIPMENT, LOSS OF POSSESSION OR USE OF THE
EQUIPMENT OR DESTRUCTION OF THE EQUIPMENT FROM ANY CAUSE WHATSOEVER. LESSEE'S
OBLIGATIONS UNDER EACH LEASE SHALL CONTINUE UNTIL SPECIFICALLY TERMINATED AS
PROVIDED THEREIN. LESSEE IS NOT ENTITLED TO ANY ABATEMENT, REDUCTION,
RECOUPMENT, DEFENSE, OR SET-OFF AGAINST PERIODIC RENT OR OTHER AMOUNTS DUE TO
LESSOR UNDER EACH LEASE, WHETHER ARISING OUT OF SUCH LEASE (INCLUDING ANY
BREACH, DEFAULT OR MISREPRESENTATION OF LESSOR) OR OUT OF LESSOR'S STRICT
LIABILITY OR NEGLIGENCE, OR OTHERWISE.
3. TERM. The term of this Agreement shall commence on the Effective Date
and shall continue in effect thereafter as long as any Lease remains in
effect. The term of each Lease shall commence on the Lease Commencement Date
as set forth in a Delivery and Acceptance Certificate signed by the Lessee in
substantially the form annexed hereto as Annex B (the "Lease Commencement
Date") and shall continue thereafter for the lease term set forth in the
applicable Equipment Schedule (the "Lease Term"). Unless Lessee shall have
given due notice of the exercise of one of the options available to Lessee
under Section 13 hereof or shall have given Lessor written notice of
nonrenewal at least 30 days prior to the expiration of any Lease Term, such
Lease Term shall automatically renew for successive monthly periods until
terminated by Lessee or Lessor upon at least 30 days prior written notice.
4. RENT. Lessee agrees to pay Periodic Rent in the amount specified in each
Equipment Schedule (the "Periodic Rent"). The initial Periodic Rent payment
for each Lease shall be due on the date the Equipment is accepted by Lessee
and subsequent Periodic Rent payments shall be due as specified on the
applicable Equipment Schedule. All Periodic Rent and other amounts payable
under each Lease (collectively referred to herein as "Rent") shall be paid to
Lessor at the address specified on the applicable Equipment Schedule or at
such other address as Lessor may specify thereafter in writing. If any
Periodic Rent or other Rent payment is not paid within 10 days of its due
date, Lessee agrees to pay as additional Rent a late charge equal to 5% of
such unpaid Rent payment plus 1 1/2% per month of any amount due and unpaid
for more than 30 days, or, if less, the maximum amount permitted under
applicable law. Periodic Rent payable during any automatic renewal period
described in Section 3 hereof shall be equal to the highest Periodic Rent
payable during the initial Lease Term.
Lessee hereby agrees that the amount of the Periodic Rent payments and
Purchase Option Price under each Lease shall be adjusted to reflect any
change in the Cost to Lessor set forth in the applicable Equipment Schedule as
a result of Equipment change orders or returns, invoicing errors or other
similar events. In the event of any such adjustment, Lessor will furnish to
Lessee a written notice stating the final Cost to Lessor, Periodic Rent and
Purchase Option Price.
5. DISCLAIMER OF WARRANTIES. LESSEE ACKNOWLEDGES AND AGREES THAT: (a) EACH
ITEM OF EQUIPMENT IS OF A TYPE, DESIGN, QUALITY AND MANUFACTURE SELECTED BY
LESSEE, ACCEPTABLE TO LESSEE AND SUITABLE FOR LESSEE'S PURPOSES; (b) LESSOR
IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT OR THE REPRESENTATIVE OF
EITHER; (c) LESSOR IS NOT REQUIRED TO ENFORCE ANY MANUFACTURER'S WARRANTIES
ON BEHALF OF ITSELF OR LESSEE; (d) LESSOR HAS NOT INSPECTED AND IS NOT
OBLIGATED TO INSPECT THE EQUIPMENT; (e) LESSOR LEASES THE EQUIPMENT TO LESSEE
AS IS WITHOUT WARRANTY OR REPRESENTATION EITHER EXPRESS OR IMPLIED, AND THE
LESSOR EXPRESSLY DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, AS TO (i) THE
TITLE, CONDITION, FITNESS FOR USE FOR A PARTICULAR PURPOSE, DESIGN,
COMPLIANCE WITH SPECIFICATIONS, OPERATION, OR MERCHANTABILITY THEREOF, (ii)
THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCERNABLE, (iii) THE
ABSENCE OF INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT OR (iv) ANY
OTHER MATTER WHATSOEVER, IT BEING AGREED THAT ALL SUCH RISKS, AS BETWEEN THE
LESSOR AND THE LESSEE, ARE TO BE BORNE BY THE LESSEE.
6. USE, OPERATION AND RETURN OF EQUIPMENT.
(a) Lessee agrees at its own expense to: (i) maintain the Equipment in
good appearance and condition, reasonable wear and tear excepted; and (ii)
use the Equipment in the manner for which it was intended and in compliance
with all applicable laws and manufacturer requirements and recommendations.
(b) Lessee agrees not to attach to the Equipment any accessory,
equipment, or device not leased from Lessor unless it is easily removable
without damaging the Equipment. Lessee agrees to pay all costs for parts,
alterations, and additions to the Equipment (including those required by
law), all of which immediately shall become the property of Lessor. Lessor
and Lessee intend that the Equipment shall remain personal property to Lessor.
(c) Provided that no Default, as defined herein, has occurred and is
continuing, Lessee is authorized on behalf of Lessor to enforce in its own
name (and at its own expense) any warranty, indemnity, or rights to damages
relating to the Equipment which Lessor has against the supplier of such
Equipment.
Form: ML1001 Page 1 of 4
Rev: August 29, 1997
<PAGE>
STEELCASE FINANCIAL SERVICES INC.
A STEELCASE COMPANY
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LIBERATE TECHNOLOGIES 12809
(d) Not later than the expiration date of each Lease Term, Lessee
agrees, at its own expense and risk, to: (i) effect any repairs necessary to
place the applicable Equipment in the same condition as when received by
Lessee, reasonable wear and tear excepted; (ii) cause such Equipment to be
disassembled and crated in a workmanlike manner in accordance with the
manufacturer's recommendations (if any); and (iii) deliver such Equipment,
freight prepaid, to a carrier selected by Lessor for shipment to a location
in the continental U.S. selected by Lessor. "Reasonable wear and tear" does
not include (i) burns, tears in material or large scratches, gouges, dents,
discolorations or stains, (ii) damage to drawers, runners, or locks such that
they are not in good working order or (iii) the loss of all keys for any
locks.
(e) If Lessee shall, for any reason whatsoever, fail to return any
Equipment at the time required by the applicable Lease, the obligations of
Lessee as provided in such Lease shall continue in effect with respect to
such Equipment until such Equipment is returned to the Lessor, and the amount
of each Periodic Rent payment shall be equal to the highest Periodic Rent
payment during the Lease Term of such Lease. However, this Section 6(e) shall
not be construed as permitting Lessee to fail to meet its obligation to
return the Equipment in accordance with the requirements of the applicable
Lease or constitute waiver of any Default.
7. LOSS OR DAMAGE. Lessee shall bear the risk of any disappearance of,
damage to or loss of any item of Equipment from any cause whatsoever (a
"Casualty Occurrence"). Lessee shall promptly notify Lessor in writing of any
Casualty Occurrence. Upon a Casualty Occurrence: (a) if the affected
Equipment is repairable, Lessee shall, at Lessee's expense, promptly restore
the Equipment to good repair, condition and working order in accordance with
the manufacturer's recommendations and to the reasonable satisfaction of
Lessor; or (b) if the affected Equipment is an actual or constructive total
loss or otherwise is not repairable, Lessee shall pay to Lessor on or before
the next Periodic Rent Payment Date (such payment date, the "Casualty Payment
Date") an amount equal to the sum of (i) all amounts due and unpaid under the
applicable Lease as of the Casualty Payment Date (including all Periodic Rent
payments in respect of such Equipment, which shall be pro rated to the
Casualty Payment Date, and any indemnity obligations), plus (ii) the present
value of all future Periodic Rent payments for such Equipment, discounted on
an annual basis at a discount rate equal to the ask yield to maturity of the
U.S. Treasury Bill issue maturing in 180 days (or the issue maturing closest
thereto), as published in the Wall Street Journal for the immediately
preceding Rent Payment Date (or the next preceding business day if such date
is not a business day), which Lessee agrees is a commercially reasonable
rate (the "Discount Rate") from the scheduled payment dates to the Casualty
Payment Date, plus (iii) the present value of the greater of (x) the
anticipated residual value of the affected Equipment at the end of the
relevant Lease Term, as determined by the Lessor for purposes of calculating
the relevant Periodic Rent and Purchase Option Price or (y) the then expected
fair market value of the affected Equipment at the end of the relevant Lease
Term, in each case discounted on an annual basis at the Discount Rate from
the expiration of the Lease Term to the Casualty Payment Date; provided, that
if the Purchase Option Price is a fixed amount, the value calculated pursuant
to the foregoing clause (iii) shall not exceed the present value of such
fixed Purchase Option Price, discounted on an annual basis at the Discount
Rate from the expiration date of the relevant Lease term to the Casualty
Payment Date. If Lessee is required to repair the affected Equipment pursuant
to clause (a) of the foregoing sentence, the insurance proceeds actually
received by Lessor, if any, pursuant to Section 8 hereof shall be applied
first to pay any amounts then due under this Agreement or any Lease and then
shall be paid to Lessee upon proof satisfactory to Lessor that such repair
has been completed as required herein. In the event Lessee is obligated to pay
to Lessor the amounts set forth in clause (b) of the foregoing sentence,
Lessee shall be entitled to a credit against such amounts equal to the amount
of insurance proceeds actually received by Lessor, if any, pursuant to
Section 8 hereof on account of such Equipment and upon payment in full of all
amounts set forth in such clause (b), Lessor shall assign to Lessee and
Lessee's insurers, as their interests may appear, all of Lessor's interest
in such Equipment on an as is, where is basis, without representation or
warranty, express or implied, and the Lease in respect of such Equipment
shall terminate.
8. INSURANCE. Lessee agrees, at its own expense, to keep the Equipment
insured with companies acceptable to Lessor and to maintain primary coverage
consisting of (a) actual cash value all risk insurance on the Equipment,
naming Lessor and Lessee as sole loss payees, as their interests may appear,
and (b) combined limit public liability and property damage insurance of not
less than $1,000,000 per occurrence (or such other amounts as Lessor
reasonably may require by notice to Lessee) naming Lessee as insured and
Lessor as an additional insured. The insurance shall provide for not less
than 30 days prior written notice to Lessor of any material change,
cancellation or non-renewal of the policy. Premiums for all such insurance
shall be prepaid. Lessee shall deliver evidence of such insurance to Lessor
upon request, and shall promptly provide to Lessor all information pertinent
to any occurrence which may become the basis of a claim. Lessee will not make
claims adjustments with insurers except with Lessor's prior written consent.
9. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and warrants
to Lessor that as of the date hereof:
(a) Lessee has adequate power and capacity to enter into this Agreement
and each Lease, any documents relating to the purchase of Equipment and any
other documents required to be delivered in connection herewith or therewith
(collectively, the "Documents"); the Documents have been duly authorized,
executed, and delivered by Lessee and constitute valid, legal, and binding
agreements, enforceable in accordance with their terms; there are no legal or
other proceedings presently pending or threatened against Lessee which may
impair its ability to perform under the Documents or affect the validity
thereof; and all information which has been supplied to Lessor is accurate and
complete.
(b) Lessee's execution of the Documents and its leasing of the Equipment
does not and will not (i) violate Lessee's organizational documents or any
judgment, order or law applicable to this Agreement or any Lease or Lessee;
(ii) violate or require consent under any agreement to which Lessee is a
party or to which Lessee's property is subject; or (iii) result in the creation
of any lien, security interest, or other encumbrance upon the Equipment
except in favor of the Lessor.
(c) All financial data of Lessee or of any consolidated group of
companies of which it is a member ("Lessee Group") delivered to Lessor have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis with prior periods and fairly present the
financial position and results of operations of Lessee, or of the Lessee
Group, as of the stated date and for the indicated periods. Since the date of
the most recently delivered financial data, there has been no material
adverse change in the financial or operating condition of the Lessee or of
the Lessee Group.
(d) If Lessee is a corporation, partnership or limited liability
company, it is and will be validly existing and in good standing under the
laws of the state of its organization; the persons signing the Lease are
acting with the full authority of the board of directors, partners, members
or managers, as the case may be, and such persons hold the offices indicated
below their signatures, which are genuine.
10. COVENANTS OF LESSEE.
(a) Lessee agrees that title to each item of Equipment shall remain with
the Lessor at all times and the Lessee shall have no right, title or interest
therein except as expressly set forth in each Lease. Lessee agrees that it
will keep the Equipment free and clear from all claims, liens, and
encumbrances (except in favor of the Lessor) and will not assign, sublet, or
grant a security interest in the Equipment or in any Lease without Lessor's
prior written consent. As additional security for the performance of Lessee's
obligations hereunder and under each Lease, Lessee hereby grants to Lessor a
first priority security interest in its interest in the Equipment and any
proceeds thereof. Lessee irrevocably appoints Lessor (acting directly or
through any agent) its attorney-in-fact to execute such UCC financing
Statements as Lessor shall deem necessary or expedient to perfect or protect
such security interest, and Lessee agrees to execute and deliver, at Lessee's
expense, such other or additional documents or instruments as Lessor shall
reasonably deem necessary or expedient to perfect or protect such security
interest. Lessee shall notify Lessor in writing, with full particulars,
within 10 days after it learns of the attachment of any lien to any Equipment
and of the Equipment's location.
Form: ML1001 Page 2 of 4
Rev: August 29, 1997
<PAGE>
STEELCASE FINANCIAL SERVICES INC.
A STEELCASE COMPANY
- -------------------------------------------------------------------------------
LIBERATE TECHNOLOGIES 12809
(b) LESSEE COVENANTS AND AGREES THAT THE EQUIPMENT WILL NOT BE USED FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, AND WILL BE USED SOLELY FOR
COMMERCIAL OR BUSINESS PURPOSES.
(c) Lessee shall not relocate any unit of Equipment from the Equipment
Location set forth in the applicable Equipment Schedule without the prior
written approval of Lessor (which shall not be unreasonably withheld). Lessee
agrees to notify Lessor immediately in writing of any change in Lessee's
corporate or business name or in the location of its chief executive office.
(d) Upon reasonable written notice to Lessee, Lessor may inspect the
Equipment during normal business hours. At Lessor's request, Lessee will
attach identifying labels to each unit of Equipment in a location reasonably
suitable for such labels and in a form approved by Lessor showing Lessor's
ownership interest therein.
(e) Lessor may assign this Agreement and/or any Lease. Lessee waives and
agrees not to assert against any assignee any defense, set off, recoupment,
claim or counterclaim which Lessee has or may at any time have against Lessor
for any reason whatsoever; provided that no such assignment shall extinguish
or impair any rights Lessee may have against Lessor.
(f) Upon Lessor's request, Lessee shall within 90 days of the close of
each fiscal year of Lessee, deliver to Lessor duplicate copies of Lessee's
balance sheet and profit and loss statement, certified by a recognized firm
of certified public accountants. Upon request, Lessee will deliver to Lessor
duplicate copies of Lessee's most recent quarterly financial report.
(g) At the request of Lessor, upon execution of this Agreement and each
Equipment Schedule pursuant hereto, Lessee shall provide Lessor with copies
of the resolutions or other actions or documents authorizing such execution,
certified by an appropriate officer of Lessee and such other documents as
Lessor may reasonably request.
(h) If more than one Lessee is named in this Lease, the liability of each
Lessee shall be joint and several.
(i) Lessee hereby agrees that any action by Lessee against Lessor for any
default under this Agreement or any Lease shall be commenced within one year
after the cause of action accrues.
(j) Lessee acknowledges that Lessee has selected the manufacturer and
supplier of the Equipment to be leased under each Lease and that: (i) Lessor
has not selected, manufactured or supplied any Equipment and will acquire
Equipment only in connection with the applicable Lease thereof; and (ii)
Lessee is entitled under Article 2A of the Uniform Commercial Code (the
"UCC") to the promises and warranties, including those of any third party,
provided to Lessor by the supplier of the Equipment in connection with or as
part of the contract by which Lessor acquires the Equipment, and Lessee is
entitled to communicate with the supplier of the Equipment and to receive an
accurate and complete statement of those promises and warranties, including
any disclaimers and limitations thereof or of any remedies.
(k) To the extent permitted by applicable law, Lessee hereby waives all
rights and remedies conferred upon a lessee in respect of each Lease under
Article 2A of the UCC.
(l) Lessee acknowledges and agrees that to the extent that the Periodic
Rent under any Lease is deemed to include finance charges ("interest"),
Lessee agrees to pay all such Interest. The rate of any such deemed Interest
is not intended to exceed the maximum amount of interest permitted to be
charged or collected by applicable law. If such Interest exceeds such
maximum, then the Interest payable will be reduced to the legally permitted
maximum amount of interest, and any excessive interest will be used to reduce
the deemed principal amount of Lessee's obligation or refunded.
11. INDEMNIFICATION.
(a) Taxes. Lessee agrees to indemnify and hold Lessor harmless on an
after tax basis from all fees, taxes (excluding taxes on Lessor's net
income), levies, assessments or withholdings of any nature together with
penalties and interest (collectively, "Taxes") assessed against Lessor, Lessee,
this Agreement, any Lease or the Equipment, arising out of the purchase
(including purchase by Lessee), sale, ownership, delivery, leasing,
possession, use, operation, or return of the Equipment or any proceeds
thereof. Lessee shall pay Lessor on demand as additional Rent any Taxes paid
by Lessor.
(b) General. Lessee agrees, whether or not any Equipment Schedules are
executed hereunder, to assume liability for, and does hereby agree to
indemnify, protect, save and keep harmless the Lessor from and against any
and all liabilities, obligations, losses, damages, penalties, claims
(including claims by any employee of the Lessee or any of its contractors),
actions, suits and related costs, expenses and disbursements, including
reasonable legal fees and expenses of whatsoever kind and nature ("Losses),
imposed on, asserted against or incurred by Lessor, in any way relating to or
arising out of (i) this Agreement or any Lease, including the enforcement
thereof or (ii) the construction, financing, purchase, acceptance, rejection,
installation, ownership, delivery, lease, sublease, possession, use,
operation, maintenance, repair, condition, sale (including pursuant to
Section 12 hereof), abandonment or return of the Equipment (including
without limitation latent and other defects, whether or not discoverable by
the Lessor or the Lessee, and any claim for patent, trademark or copyright
infringement or arising under the strict liability doctrine in tort);
provided, that Lessee shall not be obligated to indemnify Lessor for any
Losses to the extent resulting from the Lessor's willful misconduct, gross
negligence or willful breach of this Agreement or any Lease.
12. DEFAULT.
(a) Each of the following events shall constitute a default hereunder (a
"Default") whether voluntary or involuntary, by operation of law or otherwise:
(i) Lessor has not received a Periodic Rent payment or any other Rent within
10 days after its due date; or (ii) Lessee violates any other term of this
Agreement or any Lease and fails to correct such violation within 30 days after
written notice thereof from Lessor; or (iii) Lessee or any guarantor becomes
insolvent, is liquidated or dissolved, stops doing business, or assigns its
rights or property for the benefit of creditors; or (iv) a petition is filed
by or against Lessee or any guarantor under Title 11 of the United States
Code or any successor or similar law; or (v) (for individuals) Lessee or any
guarantor dies or a guardian is appointed for such person; or (vi) Lessee (or
any affiliate) is in default under or fails to fulfill the terms of any other
agreement between Lessee and lessor or any affiliate of either; or (vii) the
Equipment or any part thereof is abused, illegally used or misused; or (viii)
any representation or warranty made by Lessee or any guarantor herein or in
any Lease or in any statement, certificate or agreement furnished in
connection therewith shall prove to be untrue in any material respect as of
the date made.
(b) At any time after a Default hereunder and during the continuance
thereof, Lessor may declare this Agreement and each Lease to be in default
and at any time thereafter the Lessor may do any one or more of the
following: (i) cancel this Agreement and/or all or part of any Lease; (ii)
proceed by appropriate action to enforce performance at Lessee's expense of
the applicable covenants and terms of the applicable Lease or to recover
damages (including reasonable attorneys' fees) for the breach thereof; (iii)
demand that the Lessee, and in such case the Lessee shall, return all or any
part of the Equipment promptly in the manner required by and in accordance
with Section 6 hereof as if such Equipment were being returned at the end of
the Lease Term; (iv) enter, with or without legal process, any premises and
take possession of all or any part of the Equipment without any liability to
Lessee by reason of such entry; (v) sell, lease or otherwise dispose of all
or any part of the Equipment at a public or private sale, which may be
conducted where the Equipment is then located, with or without display of the
Equipment; (vi) declare immediately due and payable all sums due and to
become due under this Agreement and each Lease; (vii) demand that the Lessee,
and in such case the Lessee shall, pay to Lessor as liquidated damages for
loss of a
Form: ML1001 Page 3 of 4
Rev: August 29, 1997
<PAGE>
STEELCASE FINANCIAL SERVICES INC.
A STEELCASE COMPANY
- -------------------------------------------------------------------------------
LIBERATE TECHNOLOGIES 12809
bargain and not as a penalty (the "Liquidated Damages") an amount equal to
the sum of (A) all amounts due and unpaid under each Lease (including any
indemnity obligations) plus interest thereon from the due date thereof at a
per annum interest rate equal to the prime rate of interest then in effect as
published in The Wall Street Journal, plus 2 percentage points (the "Default
Rate:); plus (B) the present value of all future Periodic Rent payments for
such Equipment, discounted on an annual basis at the Discount Rate from the
scheduled payment dates; plus (C) the present value of the greater of (x) the
anticipated residual value of the affected Equipment at the end of the
relevant Lease Term, as determined by the Lessor for purposes of calculating
the relevant Periodic Rent and Purchase Option Price or (y) the then expected
fair market value of the affected Equipment at the end of the relevant Lease
Term, in each case discounted on an annual basis at the Discount Rate from
the expiration date of the relevant Lease Term, provided that,
notwithstanding the foregoing, if the Purchase Option Price is a fixed
amount, the value calculated pursuant to this clause (C) shall not exceed the
present value of such fixed Purchase Option Price, discounted on an annual
basis at the Discount Rate from the expiration date of the relevant Lease
Term; plus (D) all commercially reasonable costs and expenses incurred by
Lessor in enforcing Lessor's rights hereunder or under any Lease (including
without limitation all costs of repossession, recovery, storage, repair,
sale, re-lease and reasonable attorneys' fees), together with interest
thereon at the Default Rate; or (viii) exercise any other right or remedy
which may be available to it under the UCC or any other applicable law. The
proceeds of any sale or lease will be applied in the following order of
priorities: (1) to pay all of Lessor's expenses in taking, holding, preparing
for sale or lease and disposing of Equipment, including all reasonable
attorneys' fees and legal expenses; then (2) to pay any late charges and all
interest accrued at the Default Rate; then (3) to pay accrued but unpaid
Periodic Rent payments, then (4) to pay any unpaid Rent, Liquidated Damages
and all other due but unpaid sums. Any remaining proceeds shall be paid to
Lessee. If the proceeds of any sale or lease are not enough to pay the
amounts owed to Lessor under this Section, Lessee will pay the deficiency.
(c) In case of failure by the Lessee to procure or maintain insurance,
or to pay any fees, assessments, charges or taxes arising with respect to the
Equipment, Lessor shall have the right, but shall not be obligated, to effect
such insurance or pay such fees, assessments, charges or taxes, as the case
may be, and, in that event, the cost thereof shall be payable by Lessee to
Lessor upon demand, together with interest at the Default Rate from the date
of disbursement by Lessor.
(d) Lessor's remedies for Default may be exercised instead of or in
addition to each other or any other legal or equitable remedies. Lessor has
the right to set off any sums received from any source (including insurance
proceeds) against Lessee's obligations under each Lease. Lessee waives its
right to object to the notice of the time or place of sales or lease and to
the manner and place of any advertising. Lessee waives any defense based on
statutes of limitations or laches in actions for damages. Lessor's waiver of
any Default is not a waiver of its rights with respect to a different or
later Default.
13. OPTIONS.
So long as no Default has occurred and is continuing, upon the
expiration of any Lease, Lessee shall have the option (i) to purchase all but
not less than all of the Equipment leased under such Lease on an AS IS, WHERE
IS basis without representation or warranty, for a cash purchase price equal
to the lesser of the Purchase Option Price (plus applicable sales tax) stated
on the applicable Equipment Schedule or the Equipment's Fair Market Value
(plus any applicable sales taxes) determined as of the end of the applicable
Lease Term; or (ii) to extend the Lease Term of such Lease at the then Fair
Market Rental of the Equipment for an additional 24 months, or such other
term as may be approved by Lessor in its sole discretion. Lessee may exercise
the foregoing options only by giving irrevocable written notice thereof to
Lessor at least 90 days before the end of the Lease Term or, if the Lease
Term has been automatically renewed for one or more monthly periods as
provided in Section 3 hereof, at least 30 days before the end of the Lease
Term. If the Lease is renewed, the Lessee's obligations (other than the
amount of the Periodic Rent payments) shall remain unchanged. "Fair Market
Value" or "Fair Market Rental" means the price or rental which a willing
buyer or lessee (who is neither a lessee in possession nor a used equipment
dealer) would pay for the Equipment in an arm's length transaction to a
willing seller or lessor who is under no compulsion to sell or lease. In
determining "Fair Market Value," the Equipment shall be assumed to have been
maintained as required by the Lease and returned in full compliance with
Section 6(d) hereof. In determining "Fair Market Rental," the equipment shall
be assumed to have been maintained as required by the Lease and, in the case
of Equipment which requires installation, to be installed in the facility of
the prospective lessee.
14. MISCELLANEOUS.
(a) Time is of the essence of this Lease. So long as there is no
Default, Lessor shall not interfere with Lessee's quiet enjoyment of the
Equipment.
(b) All required notices will be considered to have been given if sent by
registered or certified mail or overnight courier service to the Lessor or
Lessee at the address stated on the applicable Equipment Schedule, or at such
other place as such addressee may have designated in writing.
(c) Each Lease constitutes the entire agreement of the parties with
respect to the lease of the Equipment and supersedes and incorporates all
prior oral or written agreements or statements. Neither this Agreement nor
any Lease may be changed except by written agreement signed by authorized
representative of the party against whom it is to be enforced. If any
provision of this Agreement or any Lease is declared invalid under applicable
law, the affected provision will be considered omitted or modified to conform
to applicable law. All other provisions will remain in full force and effect.
(d) All of Lessor's rights (including indemnity rights) under this
Agreement and each Lease shall survive any expiration or termination of each
Lease and this Agreement and shall be enforceable by Lessor.
(e) This Agreement and each Lease shall be deemed to be made in Michigan
and shall be governed by and construed in accordance with internal Michigan
law applicable to contracts made and performed in Michigan without regard to
conflicts of laws principles. LESSEE WAIVES ALL RIGHTS TO TRIAL BY JURY IN
ANY LITIGATION ARISING FROM OR RELATED TO THIS AGREEMENT OR ANY LEASE AND
LESSEE SUBMITS TO THE JURISDICTION OF THE FEDERAL DISTRICT COURT FOR THE
WESTERN DISTRICT OF MICHIGAN OR ANY STATE COURT OF COMPETENT JURISDICTION
WITHIN KENT COUNTY, MICHIGAN AND WAIVES ANY RIGHT TO ASSERT THAT ANY ACTION
INSTITUTED BY LESSOR IN ANY SUCH COURT IS IN THE IMPROPER VENUE OR SHOULD BE
TRANSFERRED TO A MORE CONVENIENT FORUM.
LESSOR: LESSEE:
STEELCASE FINANCIAL SERVICES, INC. LIBERATE TECHNOLOGIES
/s/ Mitchell E. Kertzman
- ---------------------------------- ----------------------------------------
Signature Signature
Mitchell E. Kertzman
- ---------------------------------- ----------------------------------------
Print or Type Name Print or Type Name
CEO and President
- ---------------------------------- ----------------------------------------
Print or Type Title Print or Type Title
August 16, 1999
- ---------------------------------- ----------------------------------------
Date Date
Form: ML1001 Page 4 of 4
Rev: August 29, 1997
<PAGE>
EXHIBIT 10.38
INTERNATIONAL TRADE SERVICES
525 MARKET STREET, 25TH FLOOR
SAN FRANCISCO, CA 94105
WELLS
FARGO WELLS FARGO BANK, N.A.
TRADE SERVICES DIVISION, NORTHERN CALIFORNIA
525 MARKET STREET, 25TH FLOOR
SAN FRANCISCO, CALIFORNIA 94105
IRREVOCABLE LETTER OF CREDIT
BENEFICIARY:
Circle Star Center Associates, L.P. Letter of Credit No. NZS332014
C/o The Mozart Development Company
1068 East Meadow Circle Date: September 3, 1999
Palo Alto, CA 94303
Attn.: John Mozart, President
Ladies and Gentlemen:
At the request and for the account of Liberate Technologies, 2 Circle
Star Way, San Carlos, CA 94070, we hereby establish our irrevocable Letter
of Credit in your favor in the amount of Two Million Five Hundred Twenty One
Thousand Three Hundred Three and 20/100 United States Dollars
(US$2,521,303.20). This Letter of Credit is available with us at our above
office by payment of your draft drawn on us at sight accompanied by your
signed and dated statement worded as follows:
"The undersigned, an authorized representative of Circle Star
Center Associates, L.P., hereby certifies that Circle
Star Center Associates, L.P. is entitled to draw
under Wells Fargo Bank, N.A. Letter of Credit No.
NZS332014 dated September 3, 1999."
Partial drawings are permitted. (More than one draft may be drawn and
presented under the Letter of Credit.
Each draft must be marked "DRAWN UNDER WELLS FARGO BANK, N.A. LETTER OF
CREDIT NO. NZS332014."
This Letter of Credit expires at our above office on October 7, 2009.
Each draft presented hereunder must be accompanied by this original
credit for our endorsement thereon of the amount of such draft.
1
<PAGE>
THIS IS AN INTEGRAL PART OF OUR LETTER OF CREDIT NO. NZS332014
This Letter of Credit is transferable. Transfer may be affected only
through ourselves and only upon payment of our usual transfer fee and upon
presentation to us at our above-specified office of a duly executed
instrument of transfer in form and substance acceptable to us together with
the original of this Letter of Credit. Transfer of this Letter of Credit may
not change the place of expiration of this letter of Credit from our
above-specified office.
If any instructions accompanying a drawing under this Letter of Credit
request that payment is to be made by transfer to an account with us or at
another bank, we and/or such other bank may rely on an account number
specified in such instructions.
This Letter of Credit is subject to the Uniform Customs and Practice For
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 ("UCP") and the laws of the State of California, and, in
the case of any conflict between such laws and the UCP, the laws of the State
of California will control.
Very truly yours,
WELLS FARGO BANK, N.A.
By: /s/ Brian T. O'Connell
-----------------------------------
Authorized Signature
BRIAN T. O'CONNELL
2
<PAGE>
STANDBY LETTER OF CREDIT AGREEMENT
In consideration of Wells Fargo Bank, National Association, at the
request and for the account of Applicant, issuing a standby letter of credit
pursuant to the Application for Standby Letter of Credit on the front of this
Agreement and pursuant to the terms and conditions of this Agreement,
Applicant hereby agrees that the terms and conditions hereinafter set forth
shall apply to the Application, to the Credit issued by Wells Fargo pursuant
to the Application, to the issuance of the Credit, and to transactions under
the Application, the Credit and this Agreement.
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth after each term: "AGREEMENT" shall mean
this Standby Letter of Credit Agreement as it may be revised or amended from
time to time pursuant to its terms. "APPLICANT" shall mean the person or
persons or the entity or entities signing the Application. "APPLICATION"
shall mean the Application for Standby Letter of Credit on the front of this
Agreement and/or an application for amendment of the Credit or any
combination of such applications, as the context may require. "BENEFICIARY"
shall mean the person or entity named on the Application as the beneficiary
or any person or entity who is the transferee of such beneficiary.
"COLLATERAL" shall mean the Property, together with the proceeds of such
Property, securing any or all the obligations and liabilities of Applicant to
Wells Fargo at any time existing under or in connection with any Letter of
Credit Document and/or any Loan Document. "COMMISSION FEE" shall mean the
fee, computed at the commission fee rate specified by Wells Fargo, charged by
Wells Fargo at the time or times specified by Wells Fargo on the amount of
the Credit and on the amount of each increase in the Credit for the time
period the Credit is outstanding. "CREDIT" shall mean an instrument or
document titled "Irrevocable Standby Letter of Credit" or "Irrevocable
Standby Credit", or any instrument or document whatever it is titled or
whether or not it is titled functioning as a standby letter of credit, issued
under or pursuant to the Application, and all renewals, extensions and
amendments of such instrument or document. "DEMAND" shall mean any draft,
electronic or telegraphic transmission or other written demand drawn or made,
or purported to be drawn or made, under or in connection with the Credit.
"DOCUMENT" shall mean any instrument, statement, certificate or other
document referred to in or related to the Credit or required by the Credit to
be presented with any Demand. "DOLLARS" shall mean the lawful currency at any
time for the payment of public or private debts in the United States of
America. "EVENT OF DEFAULT" shall mean any of the events set forth in Section
13 of this Agreement. "EXPIRATION DATE" shall mean the date the Credit
expires. "GUARANTOR" shall mean any person or entity guaranteeing the payment
and/or performance of any or all the obligations of Applicant to Wells Fargo
under or in connection with any Letter of Credit Document and/or any Loan
Document. "HOLDING COMPANY" shall mean any company or other entity
controlling Wells Fargo. "LETTER OF CREDIT DOCUMENT" shall mean this
Agreement, the Application, the Credit and each Demand. "LOAN DOCUMENT" shall
mean each and any promissory note, credit agreement, loan agreement, security
agreement, pledge agreement, guarantee or other agreement or writing signed
by Wells Fargo and/or Applicant and/or any Guarantor relating to, evidencing
or guaranteeing any loan or other extension of credit made by Wells Fargo to
Applicant under or in connection with any Letter of Credit Document.
"NEGOTIATION FEE" shall mean the fee, computed at the negotiation fee rate
specified by Wells Fargo, charged by Wells Fargo on the amount of each Demand
when each Demand is honored. "PAYMENT OFFICE" shall mean such office of Wells
Fargo specified by Wells Fargo as the office where reimbursements and other
payments under or in connection with any Letter of Credit Document are to be
made by Applicant. "PRIME RATE" shall mean the rate of interest most recently
announced at Wells Fargo's principal office in San Francisco, California as
its Prime Rate, with the understanding that the Prime Rate is one of Wells
Fargo's base rates and serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto, and is
evidenced by the recording thereof after its announcement in such internal
publication or publications as Wells Fargo may designate. "PROPERTY" shall
mean all forms of property, whether tangible or intangible, real, personal or
mixed. "RATE OF EXCHANGE" shall mean Wells Fargo's then current selling rate
of exchange in San Francisco, California for sales of the currency of payment
of any Demand, or of any fees or expenses or other amounts payable under this
Agreement, for cable transfer to the country of which such currency is the
legal tender. "UCP" shall mean the Uniform Customs and Practice for
Documentary Credits, an International Chamber of Commerce publication, or any
substitution therefor or replacement thereof. "UNPAID AND UNDRAWN BALANCE"
shall mean at any time and from time to time the entire amount which has not
been paid by Wells Fargo under the Credit, including, but not limited to, the
amount of each Demand on which Wells Fargo has not yet effected payment as
well as the amount undrawn under the Credit. "WELLS FARGO" shall mean Wells
Fargo Bank, National Association, a national banking association.
SECTION 2. HONORING DEMANDS AND DOCUMENTS. Applicant agrees that Wells
Fargo may receive, accept and honor, as complying with the terms of the
Credit, any Demand and any Documents accompanying such Demand; provided,
however, that (a) such Demand and accompanying Documents appear on their face
to comply substantially with the provisions of the Credit, and (b) such
Demand and accompanying Documents are, or appear on their face to be, signed
or issued by (i) a person or entity authorized under the Credit to draw, sign
or issue such Demand and such accompanying Documents, or (ii) an
administrator, executor, trustee in bankruptcy, debtor in possession,
assignee for the benefit of creditors, liquidator, receiver or other legal
representative or successor in interest by operation of law of any such
person or entity.
SECTION 3. REIMBURSEMENT FOR PAYMENT OF DEMANDS. Applicant agrees to
reimburse Wells Fargo for all amounts paid by Wells Fargo on each Demand,
including, but not limited to, all amounts paid by Wells Fargo on each Demand
to any paying, negotiating or other bank. If in connection with the issuance
of the Credit, Wells Fargo agrees to pay any other bank the amount of any
payment or negotiation made by such other bank under the Credit upon receipt
by Wells Fargo of a cable, telex or other written telecommunication advising
Wells Fargo of such payment or negotiation, or authorizes any other bank to
debit Wells Fargo's account for the amount of such payment or negotiation,
Applicant agrees to reimburse Wells Fargo for all such amounts paid by Wells
Fargo, or debited to Wells Fargo's account with such other bank, even if any
Demand or Document specified in the Credit fails to arrive in whole or in
part or if, upon the arrival of any such Demand or Document, the terms of the
Credit have not been complied with or such Demand or Document does not
conform to the requirements of the Credit or is not otherwise in order.
SECTION 4. FEES AND EXPENSES. Applicant agrees to pay to Wells Fargo (a)
all Commission Fees, Negotiation Fees, cable fees, amendment fees, non-usance
fees and cancellation fees of, and all out-of-pocket expenses incurred by,
Wells Fargo under or in connection with any Letter of Credit Document, and
(b) all fees and charges of banks other than Wells Fargo under or in
connection with any Letter of Credit Document if the Application (i) does not
indicate who will pay such fees and charges, (ii) indicates that such fees
and charges are to paid by Applicant, or (iii) indicates that such fees and
charges are to be paid by the Beneficiary and the Beneficiary does not, for
any reason whatsoever, pay such fees or charges. There shall be no refund of
any portion of any Commission Fee in the event the Credit is used, reduced,
amended, modified or terminated before its Expiration Date.
SECTION 5. DEFAULT INTEREST. Unless otherwise specified in any Loan
Document or on the Application and agreed to by Wells Fargo, all amounts to
be reimbursed by Applicant to Wells Fargo pursuant to Section 3 of this
Agreement and all fees and expenses to be paid by Applicant to Wells Fargo
pursuant to Section 4 of this Agreement, and all other amounts due from
Applicant to Wells Fargo under or in connection with the Letter of Credit
Documents, will bear interest (to the extent permitted by law), payable on
demand, from the date Wells Fargo paid the amounts to be reimbursed or the
date such fees, expenses and other amounts were due until such amounts are
reimbursed in full or such fees, expenses and other amounts are paid in full,
at that interest rate per annum, calculated for the actual days elapsed in a
year of 360 days, which is two percent (2%) above the Prime Rate in effect
from time to time.
SECTION 6. TIME AND METHOD OF REIMBURSEMENT AND PAYMENT. Unless otherwise
specified in this Section 6, in any Loan Document or on the Application and
agreed to by Wells Fargo, all amounts to be reimbursed by Applicant to Wells
Fargo pursuant to Section 3 of this Agreement, all fees and expenses to be
paid by Applicant to Wells Fargo pursuant to Section 4 of this Agreement, all
interest due to Wells Fargo pursuant to Section 5 of this Agreement, and all
other amounts due to Wells Fargo from Applicant under or in connection with
the Letter of Credit Documents will be reimbursed or paid at the Payment
Office in Dollars in immediately available funds without setoff or
counterclaim on demand or, at Wells Fargo's option, by Wells Fargo debiting
any of Applicant's accounts with Wells Fargo without presentment, protest,
demand for reimbursement or payment, notice of dishonor or any other notice
whatsoever, all of which are hereby expressly waived by Applicant. Such debit
will be made (a) at the time each Demand is paid by Wells Fargo or, if
earlier, at the time each amount is paid by Wells Fargo to any paying,
negotiating or other bank, (b) at the time each fee and expense referenced in
Section 4 of this Agreement is to be paid, (c) at the time interest is due to
Wells Fargo pursuant to Section 5 of this Agreement, and (d) at the time each
other amount is due under or in connection with the Letter of Credit
Documents. If any Demand or any fee, expense, interest or other amount
payable under or in connection with the Letter of Credit Documents is payable
in a currency other than Dollars, Applicant agrees to reimburse Wells Fargo
for all amounts paid by Wells Fargo on such Demand, and/or to pay Wells Fargo
all such fees, expenses, interest and other amounts, in one of the three
following ways, as determined by Wells Fargo in its sole discretion in each
case, (i) at such place as Wells Fargo shall direct, in such other currency,
or (ii) at the Payment Office in the Dollar equivalent of the amount of such
other currency calculated at the Rate of Exchange on the date determined by
Wells Fargo in its sole discretion, or (iii) at the Payment Office in the
Dollar equivalent, as determined by Wells Fargo (which determination shall be
deemed correct absent manifest error), of such fees, expenses, interest or
other amounts or of the actual cost to Wells Fargo of paying such Demand.
SECTION 7. AGREEMENTS OF APPLICANT. Applicant agrees that (a) unless
otherwise specifically provided in any Loan Document, Wells Fargo shall not
be obligated to issue any other letter of credit for the account of Applicant
or to make other extensions of credit to Applicant or in any other manner to
extend any financial consideration to Applicant; (b) Wells Fargo may, as
Wells Fargo deems appropriate, modify or alter and use in the Credit the
terminology contained on the Application; (c) Wells Fargo has not given
Applicant any legal or other advice with regard to any Letter of Credit
Document or Loan Document; (d) if Wells Fargo at any time discusses with
Applicant the wording for the Credit, any such discussion will not constitute
legal or other advice by Wells Fargo or any representation or warranty of
Wells Fargo that any wording or the Credit will satisfy Applicant's needs;
(e) Applicant is responsible for the wording of the Credit, including, but
not limited to, any drawing conditions, and will not rely on Wells Fargo in
any way in connection with the wording of the Credit or the structuring of
any transaction related to the Credit; (f) Applicant and not Wells Fargo is
responsible for entering into the contracts relating to the Credit between
Applicant and the Beneficiary and for causing the Credit to be issued; (g)
unless the Application specifies whether the Documents to be presented with a
Demand under the Credit must be sent to Wells Fargo in one parcel or in two
parcels or may be sent to Wells Fargo in any number of parcels, Wells Fargo
may, if it so desires, make such determination and specify in the Credit
whether such Documents must be sent in one parcel or two parcels or may be
sent in any number of parcels; (h) Wells Fargo shall not be deemed the agent
of Applicant, the Beneficiary or any other user of the Credit, and neither
Applicant nor the Beneficiary nor any other user of the Credit shall be
deemed an agent of Wells Fargo; (i) Applicant will promptly examine all
Documents and the Credit if and when they are delivered to Applicant by Wells
Fargo and, in the event of any claim of noncompliance of any Documents or the
Credit with Applicant's instructions or the Application, or in the event of
any other irregularity, will promptly notify Wells Fargo in writing of such
noncompliance or irregularity, Applicant being conclusively deemed to have
waived any such claim of noncompliance or irregularity unless such notice is
given promptly; (j) all directions and correspondence relating to any Letter
of Credit Document are to be sent at the risk of Applicant; (k) if the Credit
has a provision concerning the automatic extension of the Expiration Date of
the Credit, Wells Fargo may, at its sole option, give notice of nonrenewal of
the Credit and if Applicant does not at any time want the Credit to be
renewed Applicant will so notify Wells Fargo at least fifteen (15) calendar
days before Wells Fargo is to notify the Beneficiary of the Credit or any
advising bank of such nonrenewal pursuant to the terms of the Credit; (l)
Applicant will not seek to obtain, apply for, or acquiesce in any temporary
restraining order, restraining order, preliminary injunction, permanent
injunction or any type of pretrial or permanent injunctive relief or any
similar relief, however named, restraining, prohibiting or enjoining Wells
Fargo, any of Wells Fargo's correspondents or any advising, confirming,
negotiating, paying or other bank from paying or negotiating any Demand or
honoring any other obligation under or in connection with the Credit; and (m)
except for any of Applicant's obligations which are specifically affected by
the actions referred to in subsection (vi) of this Section 7(m), Applicant's
obligations under or in connection with each Letter of Credit Document and
each Loan Document shall be absolute, unconditional and irrevocable, and
shall be performed strictly in accordance with the terms of each such Letter
of Credit Document and each such Loan Document under all circumstances
whatsoever, including, but not limited to, the following circumstances and
the circumstances listed in Section 12(b) through (s) of this Agreement: (i)
any lack of validity or enforceability of any Letter of Credit Document, any
Loan Document, any Document or any agreement relating to any Letter of Credit
Document, any Loan Document, or any Document; (ii) any amendment of or waiver
relating to, or any consent to or departure from, any Letter of Credit
Document, any Loan Document, or any Document; (iii) any release or
substitution at any time of any Property which may be held as Collateral;
(iv) the existence of any claim, set-off, defense or other right which
Applicant may have at any time against Wells Fargo or the Beneficiary (or any
person or entity for whom the Beneficiary may be acting) or any other person
or entity, whether under or in connection with any Letter of Credit Document,
any Loan Document, any Document or any Property referred to in or
<PAGE>
related to any Letter of Credit Document, any Loan Document, or any Document
or under or in connection with any unrelated transaction; (v) any breach of
contract or other dispute between or among any two or more of Applicant,
Wells Fargo, the Beneficiary, any transferee of the Beneficiary, any person
or entity for whom the Beneficiary or any transferee of the Beneficiary may
be acting, or any other person or entity; or (vi) any delay, extension of
time, renewal, compromise or other indulgence granted or agreed to by Wells
Fargo with or without notice to, or approval by, Applicant in respect of any
of Applicant's indebtedness or other obligations to Wells Fargo under or in
connection with any Letter of Credit Document or any Loan Document.
SECTION 8. COMPLIANCE WITH LAWS AND REGULATIONS. Applicant represents
and warrants to Wells Fargo that the Application, the Credit and the
transactions under the Application and/or the Credit will not contravene any
law or regulation of the government of the United States or any state
thereof. Applicant agrees (a) to comply with all federal, state and foreign
exchange regulations and other government laws and regulations now or
hereafter applicable to any Letter of Credit Document, to any payments under
or in connection with any Letter of Credit Document, or to each transaction
under or in connection with any Letter of Credit Document, and (b) to
reimburse Wells Fargo for such amounts as Wells Fargo may be required to
expend as a result of such laws or regulations, any change in such laws or
regulations or any change in the interpretation of such laws or regulations
by any court or administrative government authority charged with the
administration of such laws or regulations.
SECTION 9. TAXES, RESERVES AND CAPITAL ADEQUACY REQUIREMENTS. In
addition to, and notwithstanding, any other provision of any Letter of Credit
Document or any Loan Document, in the event that any law, treaty, rule,
regulation, guideline, request, order, directive or determination (whether or
not having the force of law) of or from any government authority, including,
but not limited to, any court, central bank or government regulatory
authority, or any change therein or in the interpretation or application
thereof, (a) does or shall subject Wells Fargo to any tax of any kind
whatsoever with respect to the Letter of Credit Documents or the Loan
Documents, or change the basis of taxation of payments to Wells Fargo of any
amount payable thereunder (except for changes in the rate of tax on the net
income of Wells Fargo); or (b) does or shall impose, modify or hold
applicable any reserve, special deposit, assessment, compulsory loan, Federal
Deposit Insurance Corporation insurance or similar requirement against assets
held by, deposits or other liabilities in or for the account of, advances or
loans by, other credit extended by or any other acquisition of funds by, any
office of Wells Fargo; or (c) does or shall impose, modify or hold applicable
any capital adequacy requirements (whether or not having the force of law);
or (d) does or shall impose on Wells Fargo any other condition; and the
result of any of the foregoing is (i) to increase the cost to Wells Fargo of
issuing or maintaining the Credit or of performing any transaction under any
Letter of Credit Document or any Loan Document, or (ii) to reduce any amount
receivable by Wells Fargo under any Letter of Credit Document or any Loan
Document, or (iii) to reduce the rate of return on the capital of Wells Fargo
or the Holding Company to a level below that which Wells Fargo or the Holding
Company could have achieved but for any imposition, modification or
application of any capital adequacy requirement (taking into consideration
the policy of Wells Fargo or the Holding Company, as the case may be, with
respect to capital adequacy), and any such increase or reduction is material
(as determined by Wells Fargo in its sole discretion); then, in any such
case, Applicant agrees to pay to Wells Fargo such amount or amounts as may be
necessary to compensate Wells Fargo or the Holding Company for (1) any such
additional cost, (2) any reduction in the amount received by Wells Fargo
under any Letter of Credit Document or any Loan Document, or (3) to the
extent allocable (as determined by Wells Fargo in its sole discretion) to any
Letter of Credit Document or any Loan Document, any reduction in the rate of
return on the capital of Wells Fargo or the Holding Company.
SECTION 10. COLLATERAL. In addition to, and not in substitution for, any
Property delivered, conveyed, transferred or assigned to Wells Fargo under
any Loan Document as security for any or all of the obligations and
liabilities of Applicant to Wells Fargo at any time existing under or in
connection with any Letter of Credit Document or any Loan Document, Applicant
grants to Wells Fargo a security interest in and to the following Collateral,
whether or not any such Collateral is in Wells Fargo's possession or control
or in the possession or control of Wells Fargo's agents or correspondents or
in transit to, or set apart for, Wells Fargo or any of Wells Fargo's agents
or correspondents, until such time as all the obligations and liabilities of
Applicant to Wells Fargo at any time existing under or in connection with
each Letter of Credit Document and each Loan Document have been fully paid
and discharged, all as security for such obligations and liabilities: (a) all
the property, claims, demands, right, title and interest of Applicant in and
to the balance of every deposit account of Applicant with Wells Fargo now or
at any time hereafter existing, and all evidences of such deposit accounts,
(b) all Property belonging to Applicant or in which Applicant may have an
interest, now or at any time hereafter delivered, conveyed, transferred,
assigned, pledged or paid to Wells Fargo or its agents or correspondents in
any manner whatsoever, whether as security or for safekeeping or otherwise,
including, but not limited to, any items received for collection or
transmission, and the proceeds of such items, whether or not such Property is
in whole or in part released to Applicant on trust or bailee receipt or
otherwise, and (c) where more than one person or entity is an Applicant, all
right, title and interest of each Applicant in and to all the Property which
any Applicant may now or hereafter obtain as security for the obligations of
the other Applicants or Applicant to such Applicant arising under or in
connection with the transaction to which the Credit relates. Further, in
addition to, and not in substitution for, any Property delivered, conveyed,
transferred or assigned to Wells Fargo under any Loan Document as security
for any or all of the obligations and liabilities of Applicant to Wells Fargo
at any time existing under or in connection with any Letter of Credit
Document or any Loan Document, Applicant agrees to deliver, convey, transfer
and assign to Wells Fargo, on demand, as security, Property of a value and
character satisfactory to Wells Fargo (x) if Wells Fargo at any time feels
insecure about Applicant's ability or willingness to repay any amounts which
Wells Fargo has paid or may pay in the future on any Demand or in honoring
any other obligation of Wells Fargo under or in connection with the Credit,
or (y) without limiting the generality of the foregoing subsection (x), if
any temporary restraining order, restraining order, preliminary injunction,
permanent injunction or any type of pretrial or permanent injunctive relief
or any similar relief, however named, is obtained restraining, prohibiting or
enjoining Wells Fargo, any of Wells Fargo's correspondents or any advising,
confirming, negotiating, paying or other bank from paying or negotiating any
Demand or honoring any other obligation under or in connection with the
Credit. Applicant agrees that the receipt by Wells Fargo or any of Wells
Fargo's agents or correspondents at any time of any kind of security,
including, but not limited to, cash, shall not be deemed a waiver of any of
Wells Fargo's rights or powers under this Agreement. Applicant agrees to sign
and deliver to Wells Fargo on demand of Wells Fargo all such deeds of trust,
security agreements, financing statements and other documents as Wells Fargo
shall at any time request which are necessary or desirable (in the sole
opinion of Wells Fargo) to grant to Wells Fargo an effective and perfected
security interest in and to any or all of the Collateral. Applicant agrees to
pay all filing and recording fees related to the perfection of any security
interest granted to Wells Fargo in accordance with this Section 10. Applicant
hereby agrees that any or all of the Collateral may be held and disposed of
by Wells Fargo as provided in this Agreement. Upon any transfer, sale,
delivery, surrender or endorsement of any Document or Property which is or
was part of the Collateral, Applicant will indemnify and hold Wells Fargo and
Wells Fargo's agents and correspondents harmless from and against each and
every claim, demand, action or suit which may arise against Wells Fargo or
any such agent or correspondent by reason of such transfer, sale, delivery,
surrender or endorsement.
SECTION 11. INDEMNIFICATION. Except to the extent caused by Wells
Fargo's lack of good faith, and notwithstanding any other provision of this
Agreement, applicant agrees to reimburse and indemnify Wells Fargo for (a)
all amounts paid by Wells Fargo to the Beneficiary under or in connection
with any guarantee or similar undertaking issued by the Beneficiary to a
third party at the request of Applicant, whether such request is communicated
directly by Applicant or through Wells Fargo to the Beneficiary, and (b) all
damages, losses, liabilities, actions, claims, suits, penalties, judgments,
obligations, costs or expenses, of any kind whatsoever and howsoever caused,
including, but not limited to, attorneys' fees and interest, paid, suffered
or incurred by, or imposed upon, Wells Fargo directly or indirectly arising
out of or in connection with (i) any Letter of Credit Document, any Loan
Document, any Document or any Property referred to in or related to the
Credit; (ii) the issuance of the Credit; (iii) any transfer of the Credit;
(iv) any guarantee or similar undertaking, or any transactions thereunder,
issued by the Beneficiary to a third party at the request of Applicant,
whether such request is communicated directly by Applicant or through Wells
Fargo to the Beneficiary; (v) any communication made by Wells Fargo, on the
instructions of Applicant, to the Beneficiary requesting that the Beneficiary
issue a guarantee or similar undertaking to a third party or the issuance of
any such guarantee of similar undertaking; (vi) the collection of any amounts
owed to Wells Fargo by Applicant under or in connection with any Letter of
Credit Document or any Loan Document; (vii) the foreclosure against, or other
enforcement of, any Collateral; (viii) the protection, exercise or
enforcement of Wells Fargo's rights and remedies under or in connection with
any Letter of Credit Document or any Loan Document; (ix) any court decrees or
orders, including, but not limited to, temporary restraining orders,
restraining orders, preliminary injunctions, permanent injunctions or any
type of pretrial or permanent injunctive relief or any similar relief,
however named, restraining, prohibiting or enjoining or seeking to restrain,
prohibit or enjoin Wells Fargo, any of Wells Fargo's correspondents or any
advising, confirming, negotiating, paying or other bank from paying or
negotiating any Demand or honoring any other obligation under or in
connection with the Credit; or (x) the Credit being governed by laws or rules
other than the UCP in effect on the date the Credit is issued. The indemnity
provided in this Section 11 will survive the termination of this Agreement
and the expiration or cancellation of the Credit.
SECTION 12. LIMITATION OF LIABILITY. Notwithstanding any other provision
of this Agreement, neither Wells Fargo nor any of its agents or
correspondents will have any liability to Applicant for any action, neglect
or omission, if done in good faith, under or in connection with any Letter of
Credit Document, Loan Document or the Credit, including, but not limited to,
the issuance or any amendment of the Credit, the failure to issue or amend
the Credit, or the honoring or dishonoring of any Demand under the Credit,
and such good faith action, neglect or omission will bind the Applicant.
Notwithstanding any other provision of any Letter of Credit Document, in no
event shall Wells Fargo, its officers or directors be liable or responsible,
regardless of whether any claim is based on contract or tort, for (a) any
special, consequential, indirect or incidental damages, including, but not
limited to, lost profits, arising out of or in connection with the issuance
of the Credit or any action taken by Wells Fargo in connection with any
Letter of Credit Document, any Loan Document or any Document or Property
referred to in or related to the Credit; (b) the honoring of any Demand in
accordance with any order or directive of any court or government or
regulatory body or entity requiring such honor despite any temporary
restraining order, restraining order, preliminary injunction, permanent
injunction or any type of pretrial or permanent injunctive relief or any
similar relief, however named, restraining, prohibiting or enjoining such
honor; (c) the use which may be made of the Credit; (d) the validity of any
purported transfer of the Credit or the identity of any purported transferee
of the Beneficiary; (e) any acts or omissions of the Beneficiary or any other
user of the Credit; (f) the form, validity, sufficiency, correctness,
genuineness or legal effect of any Demand or any Document, or of any
signatures or endorsements on any Demand or Document, even if any Demand or
any Document should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; (g) the honoring by Wells Fargo of any
Demand when the Demand and any Documents which accompany such Demand appear
on their face to comply substantially with the terms of the Credit or
dishonor by Wells Fargo of any Demand when the Demand and any Documents which
accompany such Demand do not strictly comply on their face with the terms of
the Credit; (h) the failure of any Demand or Document to bear any reference
or adequate reference to the Credit; (i) the failure of any Document to
accompany any Demand; (j) the failure of any person or entity to note the
amount of any Demand on the Credit or on any Document; (k) the failure of any
person or entity to surrender or take up the Credit; (l) the failure of the
Beneficiary to comply with the terms of the Credit or to meet the obligations
of the Beneficiary to Applicant; (m) the failure of any person or entity to
send or forward Documents if and as required by the terms of the Credit; (n)
any errors, inaccuracies, omissions, interruptions or delays in transmission
or delivery of any messages, directions or correspondence by mail, cable,
telegraph, wireless or otherwise, whether or not they are in cipher; (o) any
notice of nonrenewal of the Credit sent by Wells Fargo not being received on
time by the Beneficiary; (p) any inaccuracies in the translation of any
messages, directions or correspondence; (q) the Beneficiary's use of the
proceeds of any Demand; (r) the Beneficiary's failure to repay to Wells Fargo
or Applicant the proceeds of any Demand if the terms of the Credit require
such repayment; (s) any act, error, neglect, default, negligence, gross
negligence, omission, willful misconduct, lack of good faith, insolvency or
failure in business of any of Wells Fargo's agents or correspondents or of
any advising, confirming, negotiating, paying or other bank. The occurrence
of any one or more of the contingencies referred to in the preceding sentence
shall not affect, impair or prevent the vesting of any of Wells Fargo's
rights or powers under this Agreement or any Loan Document or Applicant's
obligation to make reimbursement or payment to Wells Fargo under this
Agreement or any Loan Document. The provisions of this Section 12 will
survive the termination of this Agreement and any Loan Documents and the
expiration or cancellation of the Credit.
<PAGE>
SECTION 13. EVENTS OF DEFAULT. Applicant agrees that each of the
following shall constitute an Event of Default under this Agreement: (a)
Applicant's or any Guarantor's failure to pay any principal, interest, fee or
other amount when due under or in connection with any Letter of Credit
Document or any Loan Document; (b) Applicant's failure to deliver to Wells
Fargo Property of a value and character satisfactory to Wells Fargo at any
time Wells Fargo has demanded security from Applicant pursuant to Section 10
of this Agreement; (c) the occurrence and continuance of any default or
defined event of default under any Loan Document or any other agreement,
document or instrument signed or made by Applicant or any Guarantor in favor
of Wells Fargo; (d) Applicant's or any Guarantor's failure to perform or
observe any term, covenant or agreement contained in this Agreement or any
Loan Document (other than those referred to in subsections (a), (b) and (c)
of this Section 13), or the breach of any other obligation owed by Applicant
or any Guarantor to Wells Fargo, and any such failure or breach shall be
impossible to remedy or shall remain unremedied for thirty (30) calendar days
after such failure or breach occurs; (e) any representation, warranty or
certification made or furnished by Applicant or any Guarantor under or in
connection with any Letter of Credit Document, any Loan Document or any
Collateral, or as an inducement to Wells Fargo to enter into any Letter of
Credit Document or any Loan Document or to accept any Collateral, shall be
materially false, incorrect or incomplete when made; (f) any material
provision of this Agreement or any Loan Document shall at any time for any
reason cease to be valid and binding on Applicant or any Guarantor, or shall
be declared to be null and void, or the validity or enforceability thereof
shall be contested by Applicant or any Guarantor or any government agency or
authority, or Applicant or any Guarantor shall deny that it has any or
further liability or obligation under this Agreement or any Loan Document;
(g) Applicant's or any Guarantor's failure to pay or perform when due any
indebtedness or other obligation of Applicant or such Guarantor to any person
or entity other than Wells Fargo if such failure gives the payee of such
indebtedness or the beneficiary of the performance of such obligation the
right to accelerate the time of payment of such indebtedness or the
performance of such obligation; (h) any guarantee of, or any security
covering, any indebtedness of Applicant to Wells Fargo arising under or in
connection with any Letter of Credit Document or any Loan Document fails to
be in full force and effect at any time; (i) any adverse change deemed
material by Wells Fargo occurs in the financial condition of Applicant or any
Guarantor; (j) Applicant or any Guarantor suspends the transaction of its
usual business or is expelled or suspended from any exchange; (k) Applicant
or any Guarantor dies or is incapacitated; (l) Applicant or any Guarantor
dissolves or liquidates; (m) Applicant or any Guarantor is generally not
paying its debts as they become due; (n) Applicant or any Guarantor becomes
insolvent, however such insolvency may be evidenced, or makes any general
assignment for the benefit of creditors; (o) a petition is filed by or
against Applicant or any Guarantor seeking the liquidation or reorganization
of Applicant or Guarantor under the Bankruptcy Reform Act, Title 11 of the
United States Code, as amended or recodified from time to time, or a similar
action is brought by or against Applicant or any Guarantor under any federal,
state or foreign law; (p) a proceeding is instituted by or against Applicant
or any Guarantor for any relief under any bankruptcy, insolvency or other law
relating to the relief of debtors, reorganization, readjustment or extension
of indebtedness or composition with creditors; (q) a custodian or a receiver
is appointed for, or a writ or order of attachment, execution or garnishment
is issued, levied or made against, any of the Property or assets of Applicant
or any Guarantor; (r) an application is made by any judgment creditor of
Applicant or any Guarantor for an order directing Wells Fargo to pay over
money or to deliver other Property of Applicant or such Guarantor; or (s) any
government authority or any court takes possession of any substantial part of
the Property or assets of Applicant or any Guarantor or assumes control over
the affairs of Applicant or any Guarantor.
SECTION 14. REMEDIES. Upon the occurrence and continuance of any Event
of Default, all amounts paid by Wells Fargo on any Demand which have not
previously been repaid to Wells Fargo, together with all interest on such
amounts, and the Unpaid and Undrawn Balance, if any, shall automatically be
owing by Applicant to Wells Fargo and shall be due and payable by Applicant
on demand. Applicant agrees that upon payment of the Unpaid and Undrawn
Balance to Wells Fargo Applicant shall have no further legal or equitable
interest therein, and that Wells Fargo will not be required to segregate on
its books or records the Unpaid and Undrawn Balance paid by Applicant. After
Wells Fargo receives the Unpaid and Undrawn Balance, Wells Fargo agrees to
pay to Applicant, upon termination of all of Wells Fargo's liability under
the Credit and all the Demands, a sum equal to the amount which has not been
drawn under the Credit less all amounts due and owing to Wells Fargo from
Applicant under or in connection with the Letter of Credit Documents and the
Loan Documents. Further, upon the occurrence and continuance of any Event of
Default, Wells Fargo may sell immediately, without demand for payment,
advertisement or notice to Applicant, all of which are hereby expressly
waived, any and all Collateral, received or to be received, at private sale
or public auction or at brokers' board or upon any exchange or otherwise, at
Wells Fargo's option, in such parcel or parcels, at such time or times, at
such place or places, for such price or prices and upon such terms and
conditions as Wells Fargo may deem proper, and Wells Fargo may apply the net
proceeds of such sale or sales, together with any deposit balances and any
sums credited by or due from Wells Fargo to Applicant in a general account or
otherwise, to the payment of any and all obligations and liabilities due to
Wells Fargo by Applicant under or in connection with the Letter of Credit
Documents and the Loan Documents, all without prejudice to the rights of
Wells Fargo against Applicant with respect to any and all such obligations
and liabilities which may be or remain unpaid. If any sale pursuant to the
preceding sentence be at brokers' board or at public auction or upon any
exchange, Wells Fargo may itself be a purchaser at such sale free from any
right of redemption, which Applicant hereby expressly waives and releases.
All rights and remedies of Wells Fargo existing under the Letter of Credit
Documents and the Loan Documents are in addition to, and not exclusive of,
any rights or remedies otherwise available to Wells Fargo under applicable
law.
SECTION 15. SETOFF. In addition to any rights now or hereafter granted
under applicable law, and not by way of limitation of any such rights, upon
the occurrence and continuance of any Event of Default, Wells Fargo is hereby
authorized by Applicant at any time or from time to time, without notice to
Applicant or to any other person (any such notice being hereby expressly
waived by Applicant) to set off and to appropriate and to apply any and all
deposits (general or special, including, but not limited to, indebtedness
evidenced by certificates of deposit), whether matured or unmatured, and any
other indebtedness at any time held or owing by Wells Fargo to or for the
credit or the account of Applicant, against and on account of the obligations
and liabilities of Applicant to Wells Fargo under or in connection with any
of the Letter of Credit Documents or the Loan Documents, irrespective of
whether or not Wells Fargo shall have made any demand for payment of any or
all such obligations and liabilities or declared any or all such obligations
and liabilities to be due and payable, and although any or all such
obligations and liabilities shall be contingent or unmatured.
SECTION 16. WAIVERS. Applicant agrees that no delay, extension of time,
renewal, compromise or other indulgence which may occur or be granted by
Wells Fargo under any Letter of Credit Document or any Loan Document from
time to time shall impair Wells Fargo's rights or powers under this Agreement
or the Application. Wells Fargo shall not be deemed to have waived any of its
rights under this Agreement or the Application unless such waiver is in
writing signed by an authorized representative of Wells Fargo. No such
waiver, unless expressly provided in such waiver, shall be effective as to
any transactions which occur subsequent to the date of such waiver, or as to
any continuance of any Event of Default after such waiver. No amendment or
modification of this Agreement shall be effective unless such amendment or
modification is in writing signed by authorized representatives of Wells
Fargo and Applicant.
SECTION 17. AMENDMENTS AND MODIFICATIONS TO THE CREDIT. At the request
or with the consent of Applicant, and without affecting the obligations of
Applicant under this Agreement, Wells Fargo may, but will not be obligated
to, (a) increase the amount of the Credit, (b) extend the time for, and amend
or modify the terms and conditions governing, the making and honoring of any
Demand or Document or any other terms and conditions of the Credit, or (c)
waive the failure of any Demand or Document to comply with the terms of the
Credit. No amendment to, or modification of, the terms of the Credit will
become effective if the Beneficiary or any confirming bank objects to such
amendment or modification. If the Credit is amended or modified in accordance
with this Section 17, Applicant shall be bound by, and obligated under, the
provisions of this Agreement with respect to the Credit as so amended or
modified and any action taken by Wells Fargo or any advising, confirming,
negotiating, paying or other bank in accordance with such amendment or
modification.
SECTION 18. SUCCESSORS AND ASSIGNS. Applicant agrees that the terms and
conditions of this Agreement and the Application shall bind the heirs,
executors, administrators, successors and assigns of Applicant, and that all
rights, benefits and privileges conferred on Wells Fargo under or in
connection with each Letter of Credit Document and each Loan Document shall
be and hereby are extended to, conferred upon and may be enforced by the
successors and assigns of Wells Fargo. Applicant will not assign this
Agreement or Applicant's obligations or liabilities under or in connection
with any Letter of Credit Document or any Loan document to any person or
entity without the prior written approval of Wells Fargo.
SECTION 19. GOVERNING LAW. This Agreement and the Application, and the
performance by Applicant and Wells Fargo under this Agreement and the
Application, shall be governed by and be construed in accordance with the
laws of the State of California. Unless Wells Fargo otherwise specifically
agrees in writing, the Credit, even if it is not a documentary credit, the
opening of the Credit, the performance by Wells Fargo under the Credit, and
the performance by the Beneficiary and any advising, confirming, negotiating,
paying or other bank under the Credit, shall be governed by and be construed
in accordance with the UCP in force on the date of the issuance of the Credit.
SECTION 20. JURISDICTION AND SERVICE OF PROCESS. Any suit, action or
proceeding against Applicant under or with respect to any Letter of Credit
Document may, at Wells Fargo's sole option, be brought in (a) the courts of
the State of California, (b) the United States District Courts in California,
(c) the courts of the jurisdiction of Applicant's incorporation or principal
office, or (d) the courts of the jurisdiction where the Beneficiary, any
advising, confirming, negotiating paying or other bank, or any other person
or entity has brought any suit, action or proceeding against Wells Fargo with
respect to the Credit or any Demand, and Applicant hereby submits to the
nonexclusive jurisdiction of such courts for the purpose of any such suit,
action, proceeding or judgment and waives any other preferential jurisdiction
by reason of domicile. Applicant further agrees that it will accept joinder
in any suit, action or proceeding brought in any court or jurisdiction
against Wells Fargo by the Beneficiary, any advising, confirming,
negotiating, paying or other bank or any other person or entity with respect
to the Credit or any Demand. Applicant irrevocably waives trial by jury and
any objection, including, but not limited to, any objection of the laying of
venue or any objection based on the grounds of FORUM NON CONVENIENS, which
Applicant may now or hereafter have to the bringing of any such action or
proceeding. Applicant further waives any right to transfer or change the
venue of any suit, action or proceeding brought against Applicant by Wells
Fargo under or in connection with any Letter of Credit Document. Applicant
irrevocably consents to the service of process in any action or proceeding in
any court by the mailing of copies thereof by registered or certified mail,
postage prepaid, to Applicant at its address specified on the Application or
at such other address as Applicant shall have notified to Wells Fargo in
writing, such service to be effective ten (10) days after such mailing.
SECTION 21. JOINT APPLICANTS. If the Application is signed by more than
one person or entity, each Applicant agrees that this Agreement and the
Application shall be the joint and several agreement of all such Applicants
and that all references to Applicant in this Agreement and the Application
shall refer to all such Applicants jointly and severally.
SECTION 22. SEVERABILITY. Any provision of any Letter of Credit Document
which is prohibited or unenforceable in any jurisdiction shall be, only as to
such jurisdiction, ineffective to the extent of such prohibition or
unenforceability, but all the remaining provisions of such Letter of Credit
Document and all the other Letter of Credit Documents shall remain valid.
SECTION 23. HEADINGS. The headings used in this Agreement are for
convenience of reference only and shall not define or limit the provisions of
this Agreement.
SECTION 24. COMPLETE AGREEMENT. This Agreement and the Application
contain the entire agreement of Wells Fargo and Applicant with respect to the
Credit; provided, however, that such entire agreement will also include any
written document or instrument signed by Wells Fargo and/or Applicant and
approved by Wells Fargo, which specifically references this Agreement, the
Application or the Credit. Except as specifically provided in this Agreement,
in the Application or in any written document or instrument referred to in
the preceding sentence, no statements or representations not contained in
this Agreement, the Application or such written document or instrument shall
have any force or effect on this Agreement, the Application or such written
document or instrument.
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