<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1999.
REGISTRATION NO. 333-78781
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
LIBERATE TECHNOLOGIES
(Exact name of Registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3245315
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1000 BRIDGE PARKWAY
REDWOOD SHORES, CA 94065
(650) 631-4600
(Address, including zip code, and telephone number, including area code, of the
Registrant's principal executive offices)
------------------------------
MITCHELL E. KERTZMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIBERATE TECHNOLOGIES
1000 BRIDGE PARKWAY
REDWOOD SHORES, CA 94065
(650) 631-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
ROBERT V. GUNDERSON, JR., ESQ. MARK A. BERTELSEN, ESQ.
BROOKS STOUGH, ESQ. JOSE F. MACIAS, ESQ.
ANTHONY J. MCCUSKER, ESQ. DON S. WILLIAMS, ESQ.
ROBERT C. SEPUCHA, JR., ESQ. MELISSA V. HOLLATZ, ESQ.
RICHARD H. ZAMBOLDI, ESQ. ELISE M. BRINCK, ESQ.
GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION
155 CONSTITUTION DRIVE 650 PAGE MILL ROAD
MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304
(650) 321-2400 (650) 493-9300
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATRION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
COMMON STOCK, $0.01 PAR VALUE PER
SHARE............................... 7,187,500 $13.00 $93,437,500 $25,976
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) A registration fee of $27,800 was paid in connection with the original
filing on May 19, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 1, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
6,250,000 Shares
[LIBERATE TECHNOLOGIES LOGO]
Common Stock
-----------
Prior to this offering, there has been no public market for the common
stock. The initial public offering price is expected to be between $11.00 and
$13.00 per share. We have applied to list the common stock on The Nasdaq Stock
Market's National Market under the symbol "LBRT."
The underwriters have an option to purchase a maximum of 937,500 additional
shares to cover over-allotments of shares.
Immediately following and contingent upon the sale of the shares in this
offering, Lucent Technologies Inc. will invest $12,500,000 in a private
placement of our common stock at a price per share equal to 96% of the initial
public offering price per share.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Liberate
Public Commissions Technologies
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston Hambrecht & Quist
Charles Schwab & Co., Inc.
The date of this prospectus is , 1999.
<PAGE>
EDGAR DESCRIPTION OF ARTWORK:
Inside front cover of prospectus--
[A diagram of a human hand with the right index finger pointing upward
toward a light.] The caption reads: Turn on the Internet-TM-
Liberate's logo is in the lower right hand corner of this page.
Gatefold page #1--
CAPTION ON TOP OF PAGE: Tapping the power of the Internet--anytime,
anywhere
SUBHEAD TO CAPTION: Liberate is a leading provider of a comprehensive
software platform for delivering Internet-enhanced content and applications to
information appliances.
The Internet has already become an integral part of the daily lives of
millions of consumers. As consumer demand for Internet-based information and
entertainment grows, network operators worldwide are positioned to capitalize on
increases in Internet traffic. By providing more outlets for Internet-based
content and applications, network operators can increase the value of their
existing phone, satellite, and cable-based networks. We offer network operators
the software needed for delivering Internet-enhanced services to a new category
of device--the information appliance. For example, by using our software,
network operators can turn a television set into an information appliance. The
following are examples of Internet content and applications running on the
Liberate software platform.
[Screen shot of Yan Can Cook Marketplace]
CAPTION BELOW YAN CAN COOK SCREEN SHOT: Content and Applications
Developers. Content and applications developers can partner with our network
operator customers to include Internet access and e-commerce with existing
television programming. These applications can generate new service revenues for
both content and applications developers and network operators.
[The left side of the diagram shows four icons of information appliances: a
"PDA" with "eNavigator" written next to the icon to indicate the Liberate
product that runs on PDAs; a "Game Console" with "eNavigator" written next to
the icon to indicate the Liberate product the runs on game consoles; an "Set-top
Box" with "TV Navigator" written next to the icon to indicate that Liberate
product that runs on a Set-top Box; and a "Set-top Box" with "TVNavigator"
written next to the icon to indicate the Liberate product that runs on a Set-top
Box. A picture of the Liberate Connect Server is located in the center of this
diagram. The icons are connected to a picture of the Liberate Connect Server by
four lines. The line connecting the Liberate Connect Server to the PDA is
labeled "wireless network"; the line connecting the Liberate Connect Server to
the Game Console is labeled "high speed telecommunications network"; the line
connecting the Liberate Connect Server to the Set-top Box is labeled
"cable/satellite television network"; and the line connecting the Liberate
Connect Server to the Set-top Box is labeled "standard telephone network." On
the right side of the diagram, the Liberate Connect Server is attached to a
circle with "Internet" written within the circle. The circle is connected by
lines to three computer icons labeled: "Liberate Applications (TV Mail, TV
Chat)"; "Network Operator and third-party applications (program guide, movies on
demand, e-commerce); and "Additional Content (news, Enhanced TV)."]
CAPTION BELOW DIAGRAM: The above diagram shows how our software platform
connects information appliances, network operators and applications developers.
Gatefold Page #2--
CAPTION ABOVE U S WEST SCREEN shot: U S WEST. U S WEST, a
telecommunications company providing services to more than 25 million consumers,
has licensed our software platform and has used it to build an interactive
service that merges features of television, the Internet and telephony. This U S
WEST TV-based service, which is currently in test phase, will allow consumers to
watch television
<PAGE>
programs, surf the Web, make telephone calls and access caller identification
functionality, all through a television set-top box equipped with a
speakerphone.
[U S WEST screen shot]
[NTL screen shot]
CAPTION BELOW NTL SCREEN SHOT: NTL. NTL, the UK's third-largest
telecommunications company, has licensed our software platform and has used it
to build and design a service that enables NTL's customers to view television
and Internet content simultaneously on their television screens. NTL launched
the new service in January 1999, and is currently in the early stages of
deployment. By offering their subscribers access to Internet services through a
customized television home page created using Liberate software, NTL offers a
branded portal to the Internet and other advanced services.
[At the bottom of the page are paragraphs that describe the diagram at the
bottom of Gatefold page #1. When the gatefold is opened, the diagram is next to
the explanatory paragraphs. The paragraphs are as follows:]
1. Liberate Connect Server connects to the network operator's subscriber
management systems and is designed to manage delivery of Internet content
and applications to numerous information appliances and millions of
consumers.
2. The Liberate software platform enables network operators to send
Internet data over many kinds of networks, including high speed cable
television and telecommunications networks, wireless networks and
standard telephone lines.
3. Liberate client software can run on many different information
appliances and employs a proprietary technology that makes it possible to
view Internet content on virtually any display device.
4. Consumers can subscribe to new Internet-based services available from
network operators.
[The Liberate logo appears below this paragraph]
Back inside cover of prospectus--
Connecting devices, consumers and network operators--our comprehensive
software platform is central to enabling the delivery of Internet-enhanced
content and applications to information appliances.
[A diagram with an outer ring that reads "Liberate Software Platform" and an
inner circle that reads "Consumers." Three circles are place on the outer ring,
and these circles read: "Internet Content and Applications Developers"; Network
Operators"; and "Information Appliance Manufacturers."]
Network Operators. Network operators can use our server software to deliver
new Internet-enhanced services to consumers on a broad range of information
appliances, thus attracting new subscribers while reducing turnover and creating
a competitive advantage over other operators.
Information Appliance Manufacturers. Our client software allows information
appliance manufacturers to cost-efficiently add Internet access services to
their products, and to market these enhanced product features to consumers.
Internet Content and Application Developers. Our entire software platform
along with our software development tools allow developers to enhance existing
Internet content and create new Internet applications and services for delivery
on a broad range of information appliances, thus enabling more consumers to
access Web content.
Consumers. Consumers benefit from access to Internet-enhanced content and
applications-- anytime, anywhere.
Outside back cover of prospectus--This page depicts Liberate's logo in the
middle of the page.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 6
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS................................... 18
USE OF PROCEEDS................................ 19
DIVIDEND POLICY................................ 19
CAPITALIZATION................................. 20
DILUTION....................................... 21
SELECTED CONSOLIDATED FINANCIAL DATA........... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 23
BUSINESS....................................... 38
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT..................................... 50
CERTAIN TRANSACTIONS........................... 60
PRINCIPAL STOCKHOLDERS......................... 65
DESCRIPTION OF CAPITAL STOCK................... 67
SHARES ELIGIBLE FOR FUTURE SALE................ 70
UNDERWRITING................................... 72
NOTICE TO CANADIAN RESIDENTS................... 74
LEGAL MATTERS.................................. 75
EXPERTS........................................ 75
WHERE YOU CAN FIND MORE INFORMATION............ 75
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
--------------
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON
THE FOLLOWING ASSUMPTIONS:
- A ONE-FOR-SIX REVERSE SPLIT OF ALL OUTSTANDING SHARES OF OUR COMMON STOCK
TO BE COMPLETED IMMEDIATELY PRIOR TO THE EFFECTIVENESS OF THIS OFFERING;
- THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF
COMMON STOCK UPON THE EFFECTIVENESS OF THIS OFFERING; AND
- THE CONVERSION OF AN OUTSTANDING CONVERTIBLE PROMISSORY NOTE INTO 421,940
SHARES OF OUR COMMON STOCK UPON THE EFFECTIVENESS OF THIS OFFERING.
--------------
Our logo and certain titles and logos of our products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS.
LIBERATE TECHNOLOGIES
We are a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to information
appliances, such as television set-top boxes, game consoles, smart phones
and personal digital assistants. Our software allows network operators, such
as telecommunications companies, cable and satellite television operators
and Internet service providers, or ISPs, and information appliance
manufacturers to provide consumers access to Internet-based applications and
services from anywhere at anytime.
Network operators are investing billions of dollars to deliver high
speed Internet access to their customers so that they can deliver new and
enhanced voice, video and data services. As a result, the number of U.S.
households with access to high speed networks is expected to grow
significantly. At the same time, network operators seek to deliver these
services to an increasing number of electronic devices being adopted by
consumers. These "information appliances," a new category of low-cost
devices used for everyday activities that are designed to be connected to
the Internet, are becoming increasingly popular with consumers. In
particular, network operators have identified the television as the most
attractive device for the delivery of these new services because it has
powerful sound and display capabilities and is so broadly owned.
We provide network operators and information appliance manufacturers
with a software platform that manages the delivery of Internet content and
applications to a large number of consumers employing many different
information appliances. Our platform includes server and client software and
adheres to Internet standards. Our server software is designed to allow
network operators to offer these services to millions of subscribers. Using
our client software, information appliance manufacturers can enhance their
products, even those with limited memory and computing resources, by adding
Internet capability. Our open platform also creates a uniform environment
for developers to enhance existing content and create new Internet
applications and services.
As of May 31, 1999, we have licensed our server and client software to
over 30 network operators and information appliance manufacturers. Our
network operator customers include America Online, Cable & Wireless, NTL and
U S WEST. Our information appliance manufacturer customers include Acer,
Fujitsu, General Instrument, Hughes Network Systems, NEC and Philips. In
addition, we have developed strategic alliances with leading technology
vendors such as Cisco Systems, Inktomi, Lucent Technologies, Netscape,
Oracle and Sun Microsystems. We have also recently solidified relationships
with several large network operators, such as Comcast, Cox Communications,
MediaOne, Rogers Communications and Shaw Communications, through a sale of
equity completed in May 1999.
We began operations as a division of Oracle in 1995 and were
incorporated in April 1996. In August 1997, we acquired Navio
Communications. We began shipping our initial products in the last quarter
of fiscal 1997. Accordingly, we have a limited operating history that makes
evaluation of our business and prospects difficult. As of May 31, 1999, we
had an accumulated deficit of $149.7 million. In addition, since our
inception, we have not had a profitable quarter and we may never achieve or
sustain profitability. In order for us to be successful, network operators
need to deploy and promote services that incorporate our technology. To
date, only a limited number of network operators have begun to deploy
services incorporating our technology and we have no ability to control if
and when additional network operators will deploy services incorporating our
technology.
Our principal executive offices are located at 1000 Bridge Parkway,
Redwood Shores, California 94065 and our telephone number is (650) 631-4600.
Our World Wide Web address is www.liberate.com. Information on our web site
does not constitute part of this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered....................................... 6,250,000 shares
Common stock offered in the private placement.............. 1,085,069 shares, assuming an initial public
offering price of $12.00
Common stock to be outstanding after this offering and the
private placement........................................ 41,351,880 shares
Use of proceeds from this offering and the private
placement................................................ For general corporate purposes, including
product development, expansion of our sales,
marketing and services capabilities and other
working capital requirements. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol..................... LBRT
</TABLE>
This table is based on shares outstanding as of May 31, 1999. This table
excludes:
- 6,403,505 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 2,365,393
additional shares of common stock available for issuance under these
stock option plans;
- 833,333 shares of common stock available for issuance under our 1999
employee stock purchase plan;
- 208,333 shares of common stock issuable upon the exercise of
outstanding warrants; and
- Warrants to purchase up to an aggregate of 2,091,663 shares of our
common stock that may be issued in the future if particular network
operator customers satisfy commercial milestones.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEARS ENDED MAY 31,
(DECEMBER 1, 1995) -------------------------------------
TO MAY 31, 1996 1997 1998 1999
-------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................ $ -- $ 275 $ 10,272 $ 17,313
Gross margin.................................. -- 275 4,263 6,787
Total operating expenses...................... 5,479 30,549 100,679 40,485
Loss from operations.......................... (5,479) (30,274) (96,416) (33,698)
Net loss...................................... (3,279) (18,989) (94,391) (33,053)
Pro forma basic net loss per share............ $ (1.17)
Shares used in computing pro forma basic net
loss per share.............................. 28,293
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1999
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 33,657 $ 113,732
Working capital.................................................................. 6,308 86,383
Total assets..................................................................... 68,182 148,257
Deferred revenues................................................................ 38,787 38,787
Long-term debt................................................................... 4,315 --
Total stockholders' equity....................................................... 12,226 96,616
</TABLE>
See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in computing
per share data.
The as adjusted consolidated balance sheet data gives effect to the net
proceeds from the sale of the 6,250,000 shares of common stock offered in this
offering by us and the sale of 1,085,069 shares of common stock issued in the
private placement, assuming an initial public offering price of $12.00 per
share, after deducting the estimated underwriting discounts and commissions and
estimated offering expenses.
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES
IN THIS OFFERING.
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;
- Uncertainty as to whether consumers will accept products and services
incorporating our technology;
- Changes by our current or potential customers in strategic direction or
vendor selection as a result of consolidation in the market or the
emergence of new technologies;
- Delays in deployment of high speed networks and Internet-enhanced services
and applications by our network operator customers;
- 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; and
- Need to expand our sales and professional services organization.
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 in fiscal 1998 and $33.1 million in fiscal
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 May 31,
1999, we had an accumulated deficit of approximately $149.7 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
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 65% of our revenues through May 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.
6
<PAGE>
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.
Although we have limited historical financial data, we have experienced and
expect to continue to experience seasonality in revenues. Revenues and operating
results in our quarter ending August 31 are typically lower relative to our
other quarters. These seasonal trends may continue to affect our
quarter-to-quarter operating results.
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 is
contractually obligated to introduce, market or promote products and services
incorporating our technology, nor are any of our
7
<PAGE>
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.
While we have entered into a number of agreements with information appliance
manufacturers, none of these manufacturers is contractually obligated to
introduce or market information appliances incorporating our technology, nor is
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 revenue 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
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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 non-exclusive
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 34,016,811 shares outstanding on May 31, 1999, Oracle will
beneficially own approximately 48% of our outstanding capital stock following
this offering and the private placement. 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, will 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 has significant influence in our day-to-day business
because, among other things, it 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. For a more detailed description of our
agreements with Oracle, you should read "Certain Transactions--Transactions with
Oracle."
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 fiscal 1998, our
five largest customers accounted for approximately 48% of our total revenues,
with Wind River Systems accounting for 16% and Thomson Multimedia accounting for
10% of our total revenues. For fiscal 1999, our five largest customers accounted
for approximately 54% of our total revenues, with Wind River Systems accounting
for 23% of our total revenues and Cable & Wireless accounting for 10% 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.
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OUR LENGTHY SALES CYCLE REDUCES THE PREDICTABILITY OF OUR REVENUES
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. Since we incur costs based on
our expectations of future revenues, our failure to predict our revenues may
seriously harm our financial condition and results of operations. In the past,
our sales have occurred in quarters other than those anticipated by us. Should
we fail to accurately predict the timing and size of individual sales in the
future, in particular if individual sales are delayed or smaller than expected,
our revenues would be less than anticipated.
WE DEPEND UPON THE ABILITY OF OUR SOFTWARE TO 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.
OUR BUSINESS WILL BE HARMED IF WE DO NOT SUCCESSFULLY EXPAND OUR INTERNATIONAL
OPERATIONS
International revenues accounted for approximately 77% of our total revenues
in fiscal 1997, 50% of our total revenues in fiscal 1998 and 51% of our total
revenues in fiscal 1999. 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 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.
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THE INABILITY TO OBTAIN KEY TECHNOLOGY FROM THIRD PARTIES MAY HARM OUR BUSINESS
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 the 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.
THIRD-PARTY PRODUCT LIABILITY CLAIMS MAY HARM OUR BUSINESS
Our technology is integrated into the products and services of our network
operator and information appliance manufacturer customers. Accordingly, we may
be subject to product liability claims by our customers or our customers' end
users for any defects, errors or performance problems of our customers'
products, regardless of whether our technology caused the problem in our
customers' products. Any of these claims 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 the
risk.
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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 16 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.
FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR BUSINESS
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.
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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.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY
SERIOUSLY HARM OUR BUSINESS
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, have 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 SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED
EMPLOYEES
Our future success depends in large part on our ability to hire, train and
retain highly qualified technical, sales, engineering, customer support,
professional services and management personnel. We are particularly dependent on
hiring additional personnel to increase our direct sales, research and
development and professional services efforts. Such skilled personnel,
especially in the information appliance software industry, are in short supply,
and this shortage is likely to continue for some time. As a result, competition
for these people is intense. Any inability to hire, train and retain a
sufficient number of qualified employees could hinder the growth of our
business.
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.
POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND SERIOUSLY HARM OUR OPERATING RESULTS
Although we have no current plans to do so, 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
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harm our operating results. In addition, our stockholders would be diluted if we
finance the acquisitions by incurring convertible debt or issuing equity
securities.
IF WIDESPREAD INTERNET ADOPTION DOES NOT CONTINUE, OR THE INTERNET CANNOT
ACCOMMODATE CONTINUED GROWTH, OUR BUSINESS WILL BE HARMED
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 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
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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.
OUR FAILURE TO DELIVER DEFECT-FREE SOFTWARE COULD RESULT IN LOSSES AND NEGATIVE
PUBLICITY
Our software products seek to add Internet functionality to a wide variety
of information appliances and to the products and services of network operators.
Because of the wide variety of architectures in these information appliances and
the wide variety of systems used by network operators, our software is complex.
As a result, it may contain defects or failures that may be detected at any
point in the products' lives. We have in the past discovered software defects in
certain of our products after their release and we may experience delays or lost
revenue to correct such defects in the future. Despite testing by us, defects
and errors may still be found in new or existing products resulting in delayed
or lost revenues, loss of market share, failure to achieve acceptance, diversion
of development resources and harm to our reputation. Moreover, third parties may
develop and spread computer viruses that may damage the functionality of our
software products. Any damage to or interruption in performance of our software
could similarly result in delayed or lost revenues and harm to our reputation.
YEAR 2000 ISSUES COULD HARM OUR BUSINESS
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 21(st) century dates from 20(th) century dates.
Because we are in the information appliance software industry, Year 2000
problems may harm not only our internal computer systems, but also the products
and services on which our revenues depend. Moreover, Year 2000 problems may harm
our customers' business, which could decrease their desire to purchase our
products and services. As a result, throughout 1999, 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.
Any failure of our customers' systems, or of our internal systems, the products
we license to our customers or the third-party equipment or software that we
utilize in our business could seriously harm our ability to manage our
day-to-day operations, develop and deliver new technologies and deliver our
products and services in a timely fashion. For a more detailed description of
our Year 2000 assessment, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE
We expect that the net proceeds from this offering and the private placement
will be sufficient to meet our working capital and capital expenditure needs for
at least the next twelve months. 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.
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WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD MAKE IT MORE DIFFICULT
FOR A THIRD PARTY TO ACQUIRE US
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. See
"Description of Capital Stock--Anti-Takeover Effects of Provisions and the
Certificate of Incorporation, Bylaws and Delaware Law."
WE ARE AT RISK OF LITIGATION DUE TO OUR EXPECTED STOCK PRICE VOLATILITY
In the past, litigation, particularly securities class action litigation,
has often been brought against a company following periods of volatility in the
market price of its securities. Because technology companies have experienced
greater than average stock price volatility, they have been subject, on average,
to a greater number of securities class action claims than companies in other
industries. Due to the potential volatility of our stock price, we may be the
target of similar litigation in the future. Securities litigation could result
in substantial costs and divert management's attention and resources, which
could seriously harm our ability to manage day-to-day operations, meet financial
commitments, attract and retain new customers and meet customers expectations.
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 May 31, 1999, we had
issued warrants to purchase up to 208,333 shares of our common stock to two
network operators for satisfying commercial milestones. In connection with the
issuance of these warrants, approximately $18,000 was recorded as a charge to
operations during fiscal 1999. For more information about these warrants, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Capital Stock--Warrants."
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock.
Accordingly, if you purchase common stock in this offering, you will experience
immediate dilution of approximately $9.99 in the book value per share of the
common stock from the price you pay for the common stock. To the extent that
outstanding options or warrants to purchase our common stock are exercised, or
options or warrants reserved for issuance are issued and exercised, each
stockholder purchasing in this offering will experience further substantial
dilution. For a more detailed discussion of the dilution you can expect to
experience, see "Dilution."
OUR STOCK PRICE COULD BE AFFECTED BY SHARES BECOMING AVAILABLE FOR SALE IN THE
FUTURE
In this offering, we will sell only 6,250,000 shares of common stock, which
will represent approximately 15.1% of the total outstanding shares of our stock.
Consequently, if new investors or our current stockholders sell substantial
amounts of our common stock, including shares issued upon the exercise of
outstanding options and warrants, in the public market following this offering,
the market price of our common stock could fall. The negative effect of such
sales on our common stock market price could be more pronounced given the
relatively small number of shares offered to the public in this offering
relative to the total number of shares of our common stock to be outstanding
following
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this offering. In addition, such sales could create the perception to the public
of difficulties or problems with our products and services. As a result, these
sales may make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
Based on the shares outstanding as of May 31, 1999 and upon completion of
this offering and the private placement, we will have outstanding 41,351,880
shares of common stock, assuming no exercise of the underwriters' over-allotment
option, no exercise of outstanding options or warrants and an initial public
offering price of $12.00 per share. Of these shares, the shares sold in this
offering are freely tradable. The remaining 35,101,880 shares, or approximately
84.9% of our stock, will become eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
-- At the date of this prospectus
27,612,298 180 days after the date of this prospectus, if the sales meet certain restrictions under the
federal securities laws
1,196,187 More than 180 days after the date of this prospectus, if the sales meet certain restrictions
under the federal securities laws
5,208,326 May 12, 2000, if the sales of shares purchased in our Series E preferred stock financing meet
certain restrictions under the federal securities laws
1,085,069 One year after the date of this prospectus, if the sales of shares purchased in our private
placement meet certain restrictions under the federal securities laws
</TABLE>
The above table gives effect to certain lock-up arrangements with the
underwriters under which our directors, officers and stockholders have agreed
not to sell or otherwise dispose of their shares of common stock. The
underwriters may remove these lock-up restrictions prior to 180 days after the
offering without prior notice.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by these forward-looking statements.
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 these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform these statements to actual results.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 6,250,000 shares of common stock
in this offering and from the sale of 1,085,069 shares of common stock in the
private placement are estimated to be approximately $80.1 million at an assumed
public offering price of $12.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
We intend to use the proceeds from this offering and the private placement
for general corporate purposes, including product development, expansion of our
sales, marketing and service capabilities and other working capital
requirements. However, we currently have no specific plan for any of the
proceeds. A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. We have no specific understandings, commitments or agreements with
respect to any such acquisition or investment. Pending such uses, the proceeds
of this offering will be invested in short-term, interest-bearing,
investment-grade securities, certificates of deposit or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
- Our actual capitalization as of May 31, 1999;
- Our pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock and the conversion of an outstanding
convertible note into 421,940 shares of our common stock; and
- Our pro forma as adjusted capitalization to give effect to the sale of
6,250,000 shares of common stock in this offering and the sale of
1,085,069 shares of common stock in the private placement, assuming an
initial public offering price of $12.00 per share in this offering, less
the estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
AS OF MAY 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt............................................................ $ 4,315 $ -- $ --
----------- ----------- -----------
Stockholders' equity:
Convertible preferred stock, $.01 par value per share, 259,749,900
shares authorized; 32,977,699 shares outstanding actual; 259,749,900
shares authorized, no shares outstanding pro forma; 20,000,000 shares
authorized, no shares outstanding pro forma as adjusted............... 330 -- --
Common stock, $.01 par value per share, 407,500,000 shares authorized,
617,172 shares issued and outstanding actual; 407,500,000 shares
authorized, 34,016,811 shares outstanding pro forma; 200,000,000
shares authorized, 41,351,880 shares outstanding pro forma as
adjusted.............................................................. 6 340 414
Contributed and paid-in capital......................................... 166,979 171,290 251,291
Deferred stock compensation............................................. (6,579) (6,579) (6,579)
Warrants................................................................ 1,522 1,522 1,522
Stockholder notes receivable............................................ (348) (348) (348)
Accumulated comprehensive income 28 28 28
Accumulated deficit..................................................... (149,712) (149,712) (149,712)
----------- ----------- -----------
Total stockholders' equity............................................ 12,226 16,541 96,616
----------- ----------- -----------
Total capitalization................................................ $ 16,541 $ 16,541 $ 96,616
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
This table excludes the following shares:
- 6,403,505 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, and 2,365,393 additional
shares of common stock available for issuance under these stock option
plans;
- 833,333 shares of common stock available for issuance under our 1999
employee stock purchase plan;
- 208,333 shares of common stock issuable upon exercise of outstanding
warrants; and
- Warrants to purchase up to an aggregate of an additional 2,091,663 shares
of our common stock that may be issued if particular network operator
customers satisfy commercial milestones.
20
<PAGE>
DILUTION
On May 31, 1999, the pro forma net tangible book value of our common stock
was approximately $3.1 million, or approximately $0.09 per share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. Assuming our sale of 6,250,000 shares of
common stock offered by this prospectus and 1,085,069 shares offered in the
private placement, assuming an initial public offering price of $12.00 per share
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable, our net tangible book value at May 31, 1999
would have been approximately $83.2 million, or $2.01 per share. This represents
an immediate increase in net tangible book value of $1.92 per share to existing
stockholders and immediate dilution in net tangible book value of $9.99 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 12.00
Pro forma net tangible book value per share as of May 31, 1999..... $ .09
Increase per share attributable to new investors................... 1.92
---------
Pro forma net tangible book value per share after this offering...... 2.01
---------
Dilution per share to new investors.................................. $ 9.99
---------
---------
</TABLE>
This table excludes options to purchase 6,403,505 shares of our common stock
and warrants to purchase 208,333 shares of our common stock that will remain
outstanding upon the completion of this offering. See Notes 7 and 8 of Notes to
Consolidated Financial Statements. Based upon an assumed offering price of
$12.00, all options and warrants outstanding upon the completion of this
offering will have exercise prices below the offering price. The exercise of
outstanding options and warrants having an exercise price less than the offering
price would increase the dilutive effect to new investors.
The following table sets forth, as of May 31, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and the average price per share paid by
existing stockholders and by the new investors in this offering and the private
placement investor, assuming that the initial public offering price is $12.00
per share before deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable.
<TABLE>
<CAPTION>
SHARES PURCHASED ASSUMING
NO EXERCISE OF
UNDERWRITERS'
OVER-ALLOTMENT OPTION TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 34,016,811 82.3% $ 167,315,000 65.7% $ 4.92
New investors............................... 6,250,000 15.1 75,000,000 29.4 $ 12.00
Private placement investor.................. 1,085,069 2.6 12,499,995 4.9 $ 11.52
------------ ----- -------------- -----------
Total................................... 41,351,880 100.0% $ 254,814,995 100.0%
------------ ----- -------------- -----------
------------ ----- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
SHARES PURCHASED ASSUMING
FULL EXERCISE OF
UNDERWRITERS'
OVER-ALLOTMENT OPTION TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 34,016,811 80.4% $ 167,315,000 62.9% $ 4.92
New investors............................... 7,187,500 17.0 86,250,000 32.4 $ 12.00
Private placement investor.................. 1,085,069 2.6 12,499,995 4.7 $ 11.52
------------ ----- -------------- -----------
Total................................... 42,289,380 100.0% $ 266,064,995 100.0%
------------ ----- -------------- -----------
------------ ----- -------------- -----------
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended May 31, 1997, 1998
and 1999 and the consolidated balance sheet data at May 31, 1998 and 1999, are
derived from audited consolidated financial statements included elsewhere in
this prospectus. The consolidated statements of operations data for the period
from our inception on December 1, 1995 to May 31, 1996, and the consolidated
balance sheet data at May 31, 1996 and 1997, are derived from audited
consolidated financial statements not included in this prospectus. The
consolidated financial statements as of and for the year ended May 31, 1998,
have been restated to give retroactive effect to the change in accounting for
our acquisition of Navio Communications, as explained in Note 3 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (DECEMBER YEARS ENDED MAY 31,
1, 1995) -------------------------------
TO MAY 31, 1996 1997 1998 1999
------------------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License and royalty........................................ $ -- $ 231 $ 4,162 $ 5,281
Service.................................................... -- 44 6,110 12,032
------- --------- --------- ---------
Total revenues........................................... -- 275 10,272 17,313
Cost of revenues:
License and royalty........................................ -- -- 3,779 2,279
Service.................................................... -- -- 2,230 8,247
------- --------- --------- ---------
Total cost of revenues................................... -- -- 6,009 10,526
------- --------- --------- ---------
Gross margin................................................. -- 275 4,263 6,787
------- --------- --------- ---------
Operating expenses:
Research and development................................... 5,479 21,721 19,981 18,171
Sales and marketing........................................ -- 7,805 14,407 11,730
General and administrative................................. -- 1,023 2,453 3,975
Amortization of purchased intangibles...................... -- -- 4,563 6,084
Amortization of warrants................................... -- -- -- 18
Restructuring charge....................................... -- -- 1,175 --
Amortization of deferred stock compensation................ -- -- -- 507
Acquired in-process research and development............... -- -- 58,100 --
------- --------- --------- ---------
Total operating expenses................................. 5,479 30,549 100,679 40,485
------- --------- --------- ---------
Loss from operations......................................... (5,479) (30,274) (96,416) (33,698)
Interest and other income (expense), net..................... -- (465) 10 59
------- --------- --------- ---------
Loss before income tax benefit............................... (5,479) (30,739) (96,406) (33,639)
Income tax benefit........................................... (2,200) (11,750) (2,015) (586)
------- --------- --------- ---------
Net loss..................................................... $ (3,279) $ (18,989) $ (94,391) $ (33,053)
------- --------- --------- ---------
------- --------- --------- ---------
Basic net loss per share..................................... $ -- $ -- $(1,780.96) $ (113.20)
Shares used in computing basic net loss per share............ -- -- 53 292
Pro forma basic net loss per share........................... $ (1.17)
Shares used in computing pro forma basic net loss per
share...................................................... 28,293
</TABLE>
<TABLE>
<CAPTION>
MAY 31,
------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ -- $ 245 $ 12,138 $ 33,657
Working capital (deficit)............................................... 75 (23,180) (18,275) 6,308
Total assets............................................................ 487 4,441 30,812 68,182
Deferred revenues....................................................... -- 45 23,868 38,787
Long-term debt.......................................................... -- -- 4,115 4,315
Accumulated deficit..................................................... (5,478) (22,268) (116,659) (149,712)
Total stockholders' equity (deficit).................................... 75 (19,256) (6,136) 12,226
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Liberate is a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to a broad range of
information appliances, such as television set-top boxes, game consoles, smart
phones and personal digital assistants. 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. In connection with the
acquisition, we changed our strategic direction and restructured our operations.
Prior to the acquisition, we focused on selling software to original equipment
manufacturers of network computer products for corporate customers. Following
the acquisition, we focused our development and marketing efforts on fewer
products targeted primarily at the consumer information appliance market and
aggressively pursued sales to a limited number of large network operators and
information appliance manufacturers. As a result of this strategic shift, we
significantly reduced our sales and engineering operations for corporate
products and increased investment in the development of client and server
software for the consumer market. In connection with the acquisition, we wrote
off approximately $58.1 million of acquired in-process research and development
in fiscal 1998. Purchased intangibles of approximately $18.3 million were
recorded in connection with the acquisition and are being amortized on a
straight-line basis over a useful life of three years. See "--Valuation of
In-Process Research and Development."
To more closely align our product offerings with this strategic shift in
direction, we entered into an agreement with Sun Microsystems in May 1999 to
transfer our NC Navigator and NC Administration Server technology to Sun while
retaining the right to ship, support and maintain these products for existing
customers using this technology. As part of this agreement, we will try to
assign our existing agreements relating to this technology to Sun. If Sun
chooses to assume these contracts and continues shipping the NC Navigator or NC
Desktop products under these contracts, we will receive a commission on sales of
these products. In addition, we have agreed not to compete in the corporate
network computer market and, specifically, network computers intended to
displace personal computers or terminals until May 2002. However, outside of
this market, we intend to continue developing new products based on network
computer technology. In fiscal 1999, sales of NC Navigator and NC Desktop
products and related services accounted for $2.5 million of our total revenues.
We have also agreed with Sun to co-develop television set-top box
technology. We will distribute the co-developed technology pursuant to a
non-exclusive license with Sun. In addition, under this license, we have agreed
to incorporate Sun's PersonalJava technology, television interface software and
Jini technology in our software products and to pay Sun a royalty. Sun has also
agreed to promote us as one of its preferred channel partners within the TV
devices market. We believe this relationship will result in co-marketing and
co-selling efforts with Sun of the jointly-developed technology on a worldwide
basis.
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
23
<PAGE>
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. We generally negotiate the amount of up-front
fees paid by network operators and royalties paid by information appliance
manufacturers on a case-by-case basis. Our maintenance fees typically range from
20% to 30% of annual license fees and activation royalties.
In addition to the maintenance services we offer in connection with our
software licenses, which include upgrades and technical support, we 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. For fiscal
1999, total service revenues were $12.0 million, representing 69% of our total
revenues. We expect service revenues to continue to account for a significant
portion of total revenues until customers begin deploying services and
information appliances incorporating our software on a large scale. Any volume
deployments should increase the portion of total revenues derived from the
payment of royalty fees.
In fiscal 1998, Wind River accounted for 16% of our total revenues and
Thomson Multimedia accounted for 10% of our total revenues. In fiscal 1999, Wind
River accounted for 23% of our total revenues and Cable & Wireless accounted for
10% of total revenues. Revenues attributable to Wind River relate to a source
code license we granted Wind River in December 1997. Wind River paid us a
license fee of $10.0 million for this license which was recorded as deferred
revenues and is being amortized over a 30-month period as license and royalty
revenues and service revenues. Wind River has integrated this source code into
their HTMLWorks and eNavigator products. Revenues attributable to Cable &
Wireless in fiscal 1999 relate to consulting services. Revenues from Thomson
Multimedia related to a one-time paid-up software license. We do not expect
Thomson Multimedia to continue to be a significant customer in future periods.
We do, however, 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.
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 increased from $45,000 at May 31, 1997 to $38.8
million at May 31, 1999. This increase resulted in part from our license to Wind
River and prepayments from network operators. Other than the deferred revenues
from the source code license to Wind River, deferred revenues can fluctuate
significantly. These fluctuations are the result of:
- When we record deferred revenues, which depends on the timing of large
prepaid license and royalty fees and service contracts; and
24
<PAGE>
- When we recognize deferred revenues, which depends on when services are
performed and when network operators and information appliance
manufacturers deploy products and services based on our technology.
International sales accounted for approximately 77% of our total revenues in
fiscal 1997, 50% of our total revenues in fiscal 1998 and 51% of our total
revenues in fiscal 1999. We anticipate international sales to continue to
represent a significant portion of total revenues.
Since inception, we have incurred net losses of $149.7 million. These losses
include a write-off of $58.1 million of acquired in-process research and
development related to the Navio acquisition and $65.4 million of research and
development expenditures. We anticipate incurring significant operating losses
for the foreseeable future as we continue to invest in research and development
and professional and engineering services to support new devices for our
software platform and large-scale deployments by our network operator customers.
In April and May 1999, we entered into letter agreements with several
network operators that required us to issue warrants to purchase up to an
aggregate of 2,299,996 shares of our common stock if the network operators
satisfy commercial milestones. Warrants to purchase up to 208,333 shares of our
common stock, if issued, will have an exercise price of $9.60 per share,
warrants to purchase up to 2,041,663 shares of our common stock, if issued, will
have an exercise price of $13.80 per share and warrants to purchase up to 50,000
shares of our common stock, if issued, will have an exercise price of either
$9.60 or $13.80 per share, depending on whether commitments are made to us by
the warrant holders. As of May 31, 1999, a total of 208,333 warrants had been
earned by network operators under these letter agreements. 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. See "Certain Transactions--Other Transactions."
RESULTS OF OPERATIONS
Because we did not begin shipping products until the last quarter of fiscal
1997 and implemented significant changes in our operations following our
restructuring in December 1997, we believe that annual and quarterly
period-to-period comparisons of our operating results involving periods prior to
February 28, 1998 are less meaningful than an analysis of recent annual and
quarterly operating results. Accordingly, we are providing a discussion and
analysis of our operating results that is primarily
25
<PAGE>
focused upon fiscal 1998 and 1999. The following table lists, for the periods
indicated, each line item as a percentage of total revenues:
<TABLE>
<CAPTION>
YEARS ENDED
MAY 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License and royalty................... 84% 41% 31%
Service............................... 16 59 69
----------- --- ---
Total revenues...................... 100 100 100
----------- --- ---
Cost of revenues:
License and royalty................... -- 37 13
Service............................... -- 22 48
----------- --- ---
Total cost of revenues.............. -- 59 61
----------- --- ---
Gross margin............................ 100 41 39
----------- --- ---
Operating expenses:
Research and development.............. 7,899 195 105
Sales and marketing................... 2,838 140 68
General and administrative............ 372 24 23
Amortization of purchased
intangibles......................... -- 44 35
Amortization of warrants.............. -- -- --
Restructuring charge.................. -- 11 --
Amortization of deferred stock
compensation........................ -- -- 3
Acquired in-process research and
development......................... -- 566 --
----------- --- ---
Total operating expenses............ 11,109 980 234
----------- --- ---
Loss from operations.................... (11,009) (939) (195)
Interest and other income (expense),
net................................... (169) -- --
----------- --- ---
Loss before income tax benefit.......... (11,178) (939) (195)
Income tax benefit...................... (4,273) (20) (3)
----------- --- ---
Net loss................................ (6,905)% (919)% (192)%
----------- --- ---
----------- --- ---
</TABLE>
FISCAL YEARS ENDED MAY 31, 1998 AND 1999
REVENUES
Total revenues increased 69% from $10.3 million in fiscal 1998 to $17.3
million in fiscal 1999.
LICENSE AND ROYALTY. License and royalty revenues increased 27% from $4.2
million in fiscal 1998 to $5.3 million in fiscal 1999. This increase was due
primarily to higher revenues recognized related to the source code license
agreement with Wind River and an increase in the number of information
appliances shipped by our licensees.
SERVICE. Service revenues increased 97% from $6.1 million in fiscal 1998 to
$12.0 million in fiscal 1999. This increase was primarily due to an increase in
engineering services provided to new and existing customers and the creation of
our professional services organization. In addition, we recorded higher
maintenance revenues as a result of a larger number of server and client
licensees.
26
<PAGE>
COST OF REVENUES
Total cost of revenues increased 75% from $6.0 million in fiscal 1998 to
$10.5 million in fiscal 1999.
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 decreased
40% from $3.8 million in fiscal 1998 to $2.3 million in fiscal 1999. These
amounts represented 91% of license and royalty revenues in fiscal 1998 and 43%
of license and royalty revenues in fiscal 1999. The decrease in cost of license
and royalty revenues in dollar amounts was due primarily to isolated costs of
approximately $980,000 incurred in fiscal 1998 relating to payments made to
support third-party sales of television set-top boxes and smart cards. In
addition, several prepaid licenses were fully amortized during fiscal 1998. We
expect cost of license and royalty revenues to increase in dollar amounts as
shipments of our products to licensees increase and as a result of additional
licensing of third party technology incorporated into our products. 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
license and royalty 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 increased 270% from $2.2 million in fiscal 1998 to $8.2 million in
fiscal 1999. These amounts represented 36% and 69% of service revenues over the
respective periods. The increase in dollar amounts and as a percentage of cost
of service revenues was due primarily to expenses associated with the
establishment and expansion of our customer support and professional services
organizations. In addition, we experienced an increase in engineering services
provided to new and existing customers. We expect cost of service revenues to
increase in dollar amounts to the extent existing and new customers install and
deploy our products. We expect the cost of service revenues, as a percentage of
service revenues, to fluctuate in future periods. The percentage will increase
in the near-term due to continued startup costs being incurred and to meet the
expansion of services as existing and new customers install and deploy our
products. The percentage will decrease over time as startup and training costs
are reduced and staffing and other costs stabilize.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. 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 decreased 9% from
$20.0 million in fiscal 1998 to $18.2 million in fiscal 1999. Our efforts
following the Navio acquisition to focus on the development of fewer products
resulted in lower average headcount and fewer outsourced development projects.
This resulted in lower research and development expenses in fiscal 1999.
Nevertheless, during this period, we also incurred expenses associated with the
development of our core products. 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 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. In May 1999, we entered into an agreement with General
Instrument where we committed to pay up to $10.0 million over a three-year
period for development services to be performed by General Instrument.
SALES AND MARKETING. 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 decreased 19%
from
27
<PAGE>
$14.4 million in fiscal 1998 to $11.7 million in fiscal 1999. In connection with
the refocusing of our product line as discussed above, we also realigned our
sales efforts which resulted in a significant reduction in the number of sales
and marketing personnel and a reduction in other sales and marketing
expenditures. We believe these expenses will increase in 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for legal, human resource and
finance employees, as well as attorney and other professional fees. General and
administrative expenses increased 62% from $2.5 million in fiscal 1998 to $4.0
million in fiscal 1999. The increase in dollar amounts was primarily due to
increased staffing. We believe these expenses will increase in 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.
RESTRUCTURING CHARGE. In the third quarter of fiscal 1998, we recognized a
restructuring charge of $1.2 million resulting primarily from a reduction in
workforce. This charge consisted primarily of severance payments and the
accelerated vesting of options. At May 31, 1999, we had $266,000 remaining in
accrued restructuring, related to severance payments that have not been paid
out.
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 recorded total deferred stock compensation of
$7.1 million, net of terminations, in connection with stock options granted to
employees and others. These amounts are amortized on a straight-line basis over
the 48-month vesting period of such options. Approximately $507,000 of
amortization expense was recorded during fiscal 1999. In June 1999, we recorded
approximately $1.6 million of deferred stock compensation. We expect to record
deferred stock compensation expense of approximately $507,000 for the quarter
ended August 31, 1999 and approximately $540,000 for the quarter ended November
30, 1999 and each quarter thereafter through August 31, 2002. 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. No deferred stock compensation expense was recorded in fiscal 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In August 1997, we acquired
Navio in a stock-for-stock exchange valued at approximately $77.1 million. The
acquisition was accounted for using the purchase method of accounting. In
connection with this acquisition we wrote off $58.1 million of acquired
in-process research and development which, in the opinion of management, had not
reached technological feasibility and had no alternative future use. See
"--Valuation of In-Process Research and Development."
WARRANT EXPENSE. Warrant expense represents the estimated fair value of
warrants, 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 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. As of May 31, 1999, we issued warrants to purchase up to
208,333 shares of common stock to two network operators for satisfying
commercial milestones. Warrants valued at $1,504,000 have been recorded as an
asset in the consolidated balance sheet and will be amortized over the greater
of the warrants' respective performance periods, or as the royalties are earned
under the license agreements between us and the network operators. The remaining
warrant value of approximately $18,000 was recorded as a charge to operations
during fiscal 1999.
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<PAGE>
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income increased from $10,000 in fiscal 1998 to $59,000 in
fiscal 1999. Net interest income increased as a result of higher average cash
balances.
INCOME TAX BENEFIT
Our income tax benefit was $2.0 million in fiscal 1998 and $586,000 in
fiscal 1999. The benefit for fiscal 1999 represents the estimated cash benefit
we will receive from Oracle related to their utilization in the consolidated
Oracle state tax returns of our state operating losses for fiscal 1999. The
benefit was calculated pursuant to a tax allocation and indemnity agreement with
Oracle which was effective after the Navio acquisition on August 11, 1997.
Pursuant to this agreement, Oracle agreed to pay us the cash attributable to the
tax savings from utilization of our operating losses. Due to the reduction in
Oracle's ownership percentage resulting from the Navio acquisition, we are no
longer included in their consolidated federal U.S. tax return. See Note 9 to
Consolidated Financial Statements.
The benefit for fiscal 1998 consists of the estimated cash benefit pursuant
to the above agreement plus the estimated assumed federal and state tax benefit
Oracle received for the period from June 1, 1997 through August 11, 1997.
As of May 31, 1999, we had federal and state net operating loss
carryforwards of approximately $24.4 million which will expire at various dates,
from 2003 to 2019, if not utilized. The Tax Reform Act of 1986 imposes
substantial restrictions on the utilization of net operating losses and tax
credits in the event of an "ownership change" of a corporation. Our ability to
utilize net operating loss carryforwards on an annual basis will be limited as a
result of a prior "ownership change" in connection with private sales of equity
securities. We have provided a full valuation allowance on the deferred tax
asset because of the uncertainty regarding its realization. Our accounting for
deferred taxes under Statement of Financial Accounting Standards No. 109
involves the evaluation of a number of factors concerning the realizability of
our deferred tax assets. In concluding that a full valuation allowance was
required, management primarily considered factors such as our history of
operating losses and expected future losses and the nature of our deferred tax
assets.
FISCAL YEARS ENDED MAY 31, 1997 AND 1998
REVENUES
Total revenues increased from $275,000 for fiscal 1997 to $10.3 million for
fiscal 1998.
LICENSE AND ROYALTY. License and royalty revenues increased from $231,000
for fiscal 1997 to $4.2 million for fiscal 1998. The increase in license and
royalty revenues was due primarily to increased shipments of our initial
products. We commenced shipment of our initial products in the last quarter of
fiscal 1997.
SERVICE. Service revenues increased from $44,000 for fiscal 1997 to $6.1
million for fiscal 1998. The increase was due primarily to an increase in
services provided to network operators and information appliance manufacturers
as a result of the introduction of our initial products in the last quarter of
fiscal 1997.
COST OF REVENUES
There were no cost of revenues in fiscal 1997. Total cost of revenues
increased to $6.0 million for fiscal 1998.
LICENSE AND ROYALTY. Cost of license and royalty revenues was $3.8 million
in fiscal 1998, representing 91% of license revenues. The increase in cost of
license and royalty revenues in absolute dollars was due primarily to isolated
costs of approximately $980,000 incurred in fiscal 1998 relating to payments
made to support third party sales of television set-top boxes and smart cards,
increases in the
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<PAGE>
number of third-party technology licenses and costs recorded in fiscal 1998 that
were associated with products that were initially shipped in the last quarter of
fiscal 1997.
SERVICE. Cost of service revenues was $2.2 million in fiscal 1998,
representing 36% of service revenues. Although modest service revenues of
$44,000 were recorded in fiscal 1997, related costs were not material. The
increase in cost of service revenues was due to the creation of our customer
support and engineering service organizations.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 8%
from $21.7 million for fiscal 1997 to $20.0 million for fiscal 1998. The
decrease in fiscal 1998 was due primarily to fewer outsourced development
projects.
SALES AND MARKETING. Sales and marketing expenses increased 85% from $7.8
million for fiscal 1997 to $14.4 million for fiscal 1998. The increase was due
to higher levels of marketing activities in the beginning of fiscal 1998 and
higher commissions related to increased prepaid licenses during the period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
140% from $1.0 million for fiscal 1997 to $2.5 million for fiscal 1998. The
increase was due to increased personnel following the acquisition of Navio and,
to a lesser extent, costs incurred for legal and other professional service fees
in fiscal 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest and other expense in fiscal 1997 of $465,000 was primarily
attributable to interest payments to Oracle on inter-company advances. The
conversion of these outstanding balances into equity in the first quarter of
fiscal 1998, and higher average cash balances during the period, resulted in net
interest income of $10,000 in fiscal 1998.
INCOME TAX BENEFIT
Our income tax benefit was $11.8 million for fiscal 1997 and $2.0 million
for fiscal 1998. The benefit for fiscal 1997 represents Oracle's assumed
estimated federal and state tax benefit for the entire fiscal year. The benefit
for fiscal 1998 represents amounts to be refunded to us from Oracle under the
tax allocation and indemnity agreement and the estimated assumed federal and
state tax benefit Oracle received for the period from June 1, 1997 to the date
of the tax allocation and indemnity agreement. See Note 9 of Notes to
Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for each of our last five quarters. This data has been derived
from unaudited consolidated financial statements that have been prepared on the
same basis as the annual audited consolidated financial statements and, in our
opinion, include all normally recurring adjustments necessary for a fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus. The consolidated results of operations
for any quarter are not necessarily indicative of the results for any future
period.
30
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1998 1998 1998 1999 1999
--------- ---------- ------------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
License and royalty......... $ 1,106 $ 1,139 $ 1,398 $ 1,525 $ 1,219
Service..................... 2,447 2,169 3,003 2,956 3,904
--------- ---------- ------------ ------------ ---------
Total revenues............ 3,553 3,308 4,401 4,481 5,123
--------- ---------- ------------ ------------ ---------
Cost of revenues:
License and royalty......... 722 600 716 638 325
Service..................... 685 1,199 1,672 1,827 3,549
--------- ---------- ------------ ------------ ---------
Total cost of revenues.... 1,407 1,799 2,388 2,465 3,874
--------- ---------- ------------ ------------ ---------
Gross margin.................. 2,146 1,509 2,013 2,016 1,249
--------- ---------- ------------ ------------ ---------
Operating expenses:
Research and development.... 4,332 4,041 4,014 4,834 5,282
Sales and marketing......... 3,463 2,145 3,258 2,673 3,654
General and
administrative............ 610 814 794 952 1,415
Amortization of purchased
intangibles............... 1,521 1,521 1,521 1,521 1,521
Amortization of warrants.... -- -- -- -- 18
Amortization of deferred
stock compensation........ -- 7 104 282 114
--------- ---------- ------------ ------------ ---------
Total operating
expenses................ 9,926 8,528 9,691 10,262 12,004
--------- ---------- ------------ ------------ ---------
Loss from operations.......... (7,780) (7,019) (7,678) (8,246) (10,755)
Interest and other income
(expense), net.............. (13) 81 68 (10) (80)
--------- ---------- ------------ ------------ ---------
Loss before income tax
provision (benefit)......... (7,793) (6,938) (7,610) (8,256) (10,835)
Income tax provision
(benefit)................... (228) (271) (287) (329) 301
--------- ---------- ------------ ------------ ---------
Net loss...................... $(7,565) $(6,667) $(7,323) $(7,927) $ (11,136)
--------- ---------- ------------ ------------ ---------
--------- ---------- ------------ ------------ ---------
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License and royalty......... 31% 34% 32% 34% 24%
Service..................... 69 66 68 66 76
--------- ---------- ------------ ------------ ---------
Total revenues............ 100 100 100 100 100
--------- ---------- ------------ ------------ ---------
Cost of revenues:
License and royalty......... 20 18 16 14 7
Service..................... 19 36 38 41 69
--------- ---------- ------------ ------------ ---------
Total cost of revenues.... 39 54 54 55 76
--------- ---------- ------------ ------------ ---------
Gross margin.................. 61 46 46 45 24
--------- ---------- ------------ ------------ ---------
Operating expenses:
Research and development.... 122 122 91 108 103
Sales and marketing......... 97 65 74 60 71
General and
administrative............ 17 25 18 21 28
Amortization of purchased
intangibles............... 43 46 35 34 30
Amortization of warrants.... -- -- -- -- --
Amortization of deferred
stock compensation........ -- -- 2 6 2
--------- ---------- ------------ ------------ ---------
Total operating
expenses................ 279 258 220 229 234
--------- ---------- ------------ ------------ ---------
Loss from operations.......... (218) (212) (174) (184) (210)
Interest and other income
(expense), net.............. -- 2 2 -- (2)
--------- ---------- ------------ ------------ ---------
Loss before income tax
provision (benefit)......... (218) (210) (172) (184) (212)
Income tax provision
(benefit)................... (6) (8) (7) (7) 6
--------- ---------- ------------ ------------ ---------
Net loss...................... (212)% (202)% (165)% (177)% (218)%
--------- ---------- ------------ ------------ ---------
--------- ---------- ------------ ------------ ---------
</TABLE>
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Navio acquisition, Oracle funded our operations primarily
through inter-company advances, capital contributions and the purchase of equity
securities. In connection with the acquisition of Navio, Oracle converted
approximately $18.0 million of outstanding inter-company payables into Liberate
equity. Following the Navio acquisition, we funded operations primarily through
sales of convertible debt, sales of equity securities and prepaid customer
licenses. In May 1999, we raised $50.0 million by selling 5,208,326 shares of
our Series E preferred stock.
Cash used in operating activities was $9.4 million for fiscal 1997, $2.2
million for fiscal 1998 and $6.5 million for fiscal 1999. Cash used in fiscal
1997 was primarily attributable to a net loss of $19.0 million, offset in part
by an increase in accounts payable to Oracle of $18.7 million. Cash used in
fiscal 1998 was primarily attributable to a net loss of $94.4 million, offset in
part by an increase of $20.8 million in deferred revenues and $6.1 million in
amortization and depreciation expenses and a $58.1 million write-off of
in-process research and development related to our acquisition of Navio. Cash
used for operating activities during fiscal 1999 was primarily due to a net loss
of $33.1 million, offset in part by $7.4 million in amortization and
depreciation expenses and an increase of $14.9 million in deferred revenues.
We used $1.7 million of cash in investing activities during fiscal 1997 and
$21.4 million of cash in investing activities during fiscal 1999. This cash was
used primarily to fund capital expenditures and purchase short-term investments.
Cash generated from investing activities of $1.2 million in fiscal 1998
consisted primarily of cash acquired in the acquisition of Navio, offset in part
by purchases of property and equipment.
Net cash generated from financing activities was $11.4 million for fiscal
1997, $12.8 million for fiscal 1998 and $49.4 million for fiscal 1999. Cash
provided by financing activities in fiscal 1997 and 1998 related primarily to
proceeds from capital contributions from Oracle and from issuances of preferred
stock and convertible notes payable. Cash generated from financing activities in
fiscal 1999 is primarily related to the Series E preferred stock financing which
occurred in May 1999.
At May 31, 1999, we had $33.7 million in cash and cash equivalents and did
not have any material commitments for capital expenditures. Under a development
agreement entered into with General Instrument in April 1999, we are committed
to pay $10.0 million in development fees for certain services to be performed by
General Instrument. These fees will be paid out in quarterly installments over a
three year period. We believe that the net proceeds of this offering, the
private placement scheduled to close immediately following the closing of this
offering and our recent Series E preferred stock financing, together with cash
and cash equivalents generated from operations, will be sufficient to meet our
working capital requirements for at least the next 12 months. If our cash
balances and cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to raise such additional funds through
public or private equity or debt financings. If additional funds are raised
through the issuance of debt securities, these securities could have certain
rights, preferences, and privileges senior to holders of common stock, and the
terms of such debt could impose restrictions on our operations. The sale of
additional equity or debt securities could result in additional dilution to our
stockholders. Additional financing may not be available at all and, if
available, such financing may not be obtainable on terms favorable to us. If we
are unable to obtain this additional financing, we may be required to reduce the
scope of our planned product development and marketing efforts, which could
seriously harm our business.
VALUATION OF IN-PROCESS RESEARCH AND DEVELOPMENT
OVERALL VALUATION METHODOLOGY. We performed a valuation of Navio which was
used as an aid in determining the fair value of the identifiable assets and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to in-process research and
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development. Assets identified generally included in-process research and
development, developed technology, assembled workforce, installed customer base
and goodwill.
The valuation technique employed in the appraisal was designed to properly
reflect all intellectual property rights in the intangible assets, including
core technology. The value of the developed technology was derived from direct
sales of existing products including their contribution to in-process research
and development. In this way, value was properly attributed to the engineering
know-how embedded in the existing product that will be used in developmental
products. The appraisal also considered the fact that the existing know-how
diminishes in value over time as new technologies are developed and changes in
market conditions render current products and methodologies obsolete.
Assets were identified through on-site interviews with management and a
review of data provided by Navio's and our management concerning the acquired
assets, technologies in development, costs necessary to complete the in-process
research and development, market potential, historical financial performance,
estimates of future performance and the assumptions underlying these estimates.
Purchased incomplete research and development projects were identified
through extensive interviews and detailed analysis of development plans provided
by management concerning the following:
- Uniqueness of developmental work and the costs incurred;
- Critical tasks required to complete the project;
- Opportunities which were expected to arise from the project;
- Degree of leverage of the new technology on legacy technology;
- Risks associated with project completion;
- Assessment of types of efforts involved, for example software development;
- Length of time project was expected to be useful; and
- Timing related to completion of projects and resources allocated to
completion, including associated expenses.
None of the in-process research and development value was associated with
routine on-going efforts to enhance or otherwise improve on the qualities of the
existing products. Navio's engineers were developing advanced, next generation
technologies that involved creating product designs and disparate technologies
to form superior products. The in-process research and development value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects and discounting the net cash flows back to their
present value. The discount rate of 37.5% considers the uncertainty surrounding
the successful development of the purchased in-process technology, the useful
life of such technology, the profitability levels of such technology, and the
uncertainty of technological advances that were indeterminable at that time.
NATURE AND DESCRIPTION. The purchased in-process research and development
consisted of three projects: NC Navigator, TV Navigator and DTV Navigator. The
fair value assigned to each of these projects is as follows:
<TABLE>
<CAPTION>
NC Navigator................................................... $13,700,000
<S> <C>
TV Navigator................................................... $32,600,000
DTV Navigator.................................................. $11,800,000
</TABLE>
The NC Navigator project was aimed at the development of Internet client
software for network computers targeted at the corporate marketplace. NC
Navigator was intended to allow network computers to access the Internet with
the same look and feel of a Netscape web browser for personal
33
<PAGE>
computers. TV Navigator was focused on the development of a software product
that was to enable the integration of the Internet with devices such as
television set-top boxes, satellite systems and game consoles. DTV Navigator was
intended to develop a software server that would allow television networks to
provide Internet software and applications to consumers. This system also would
enable television networks to broadcast Internet content. Each of these research
and development projects was dependent on the development of unproven Internet
technologies.
STAGE OF COMPLETION. The appraisal included the valuation of each specific
research and development project underway at the acquisition date. In the months
leading up to the purchase, Navio had made significant progress in their
research and development programs. However, due to the substantial time and
effort necessary to produce these products in accordance with functional
specifications, technological feasibility of the research and development
projects had not yet been achieved. The acquired projects included Navio's
Internet browser software. The efforts required to develop the purchased
in-process technology of Navio into commercially viable products principally
related to the completion of planning, designing, prototyping, verification and
testing activities that were necessary to establish that the software could be
produced to meet its design specifications, including functions, features and
technical performance requirements. Anticipated completion dates for the
projects in-process was approximately three to 36 months, at which time Navio
expected to begin selling the developed software products. The primary risks of
the research and development projects involved functionality, scalability and
compatibility with software standards. The costs to complete NC Navigator, TV
Navigator and DTV Navigator were estimated at $8 million, $19 million and $7
million, respectively.
The resulting net cash flows from such projects were based on management's
estimates of product revenues, operating expenses, research and development
costs, and income taxes from such projects. The revenue projections used to
value the in-process research and development were based on estimates of
relevant market sizes and growth factors, expected trends in technology and the
nature and expected timing of new product introductions by us and our
competitors. Our projections may ultimately prove to be incomplete or
inaccurate, and unanticipated events and circumstances are likely to occur. As a
result, the underlying assumptions used to forecast revenues and costs to
develop such projects may not transpire as estimated.
Navio's development team had made significant technological and creative
strides in the development of its experimental Internet technologies as of
August 1997. Since its inception in February 1996, Navio incurred research and
development costs of $2 million for NC Navigator, $5 million for TV Navigator
and $2 million for DTV Navigator. As of the acquisition date, Navio was a
development stage company with minimal product revenues and large net losses.
Navio was entering the testing phase for two of its developmental products, NC
Navigator 3.0 and TV Navigator 1.1. Historical revenues represented services and
limited sales of a Netscape product sold as a test network computer browser on
an experimental basis. This product was superseded by NC Navigator 3.0.
ALTERNATIVE FUTURE USE. Before we made the decision not to capitalize the
value ascribed to in-process research and development, the projects were
evaluated individually to determine if technological feasibility had been
achieved and if there were any alternative future uses. Such evaluation
consisted of a specific review of the efforts, including the overall objectives
of the project, progress toward the objectives and uniqueness of the development
efforts.
Navio's technical activities were concentrated on the development of new
product knowledge having specific commercial objectives, and efforts were
focused on translating those applied research findings and other scientific
know-how into commercially viable software products. The acquired research and
development was related to developing experimental Internet technologies for
which no market existed at the time of the acquisition. Due to its specialized
nature, the in-process research and development project had no alternative
future use, either for re-deployment elsewhere in the business or in
liquidation, in the event the project failed.
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<PAGE>
CONTINUING EFFORTS. We expect that the remaining acquired in-process
research and development will be successfully developed. However, we cannot
guarantee that commercial viability of this project will be achieved. If this
project is not successfully developed, our future revenues and profitability may
be seriously harmed and the value of the intangible assets relating to the
acquisition may become impaired. Commercial results will also be subject to
uncertain market events and risks that are beyond our control, such as trends in
technology, government regulations, market size and growth, and product
introduction or other actions by competitors. Since acquiring Navio, we do not
believe there have been significant departures from the planned efforts of the
in-process research and development.
RECENT ACCOUNTING PRONOUNCEMENTS
In fiscal year 1998 we adopted Statement of Position, or SOP 97-2, "Software
Revenue Recognition", and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition". SOP 97-2 and SOP 98-4
provide guidance for recognizing revenue on software transactions and supercede
SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not have a material impact
on our financial results.
In fiscal 1999, we adopted Statement of Financial Accounting Standards, or
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires
disclosures of total non-stockholder changes in equity in interim periods and
additional disclosures of components of non-stockholder changes in equity on an
annual basis. The adoption of SFAS No. 130 did not have a material effect on our
financial disclosures.
In fiscal 1999, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of SFAS No. 131 did not have a
material effect on our financial disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
us to value derivative financial instruments, including those used for hedging
foreign currency exposures, at current market value with the impact of any
change in market value being charged against earnings in each period. SFAS No.
133 will be effective for and adopted by us in the first quarter of the fiscal
year ending May 31, 2001. We anticipate that SFAS No. 133 will not have a
material impact on our consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended May 31, 2000. The adoption of SOP 98-5 is not expected to
have a material impact on our consolidated financial statements.
MARKET RISK DISCLOSURE
INTEREST RATE RISK. As of May 31, 1999, our investments consisted of $27.3
million of short-term money market securities and $19.8 million of debt
securities (see Note 2 of Notes to Consolidated Financial Statements). 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% from levels as of May
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
35
<PAGE>
instruments to hedge these operating expenses. We intend to assess the need to
utilize financial instruments to hedge currency exposures on an ongoing basis.
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 21(st) century dates from 20(th) 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 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 expect to have completed the
delivery of all of our customer inquiries by July 31, 1999. 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
36
<PAGE>
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. In addition, 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 customer's 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 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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BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS."
OVERVIEW
Liberate is a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to a broad range of
information appliances. Information appliances, which include television set-top
boxes, game consoles, smart phones and personal digital assistants, are devices
that are enhanced by Internet capability. Network operators, such as
telecommunications companies, cable and satellite television operators and
Internet service providers, or ISPs, can use our server software to deliver
Internet-enhanced services to numerous information appliances and millions of
consumers. Information appliance manufacturers can use our client software to
Internet-enable their products. Our open platform also provides a uniform
environment for developers to enhance existing content and create new Internet
applications and services for delivery on multiple platforms. Our software
platform is designed to enable network operators to provide consumers with
universal access to these Internet-enhanced applications and services. To extend
the functionality of our software platform, we have also developed strategic
alliances with leading technology vendors such as Cisco Systems, Inktomi, Lucent
Technologies, Netscape, Oracle and Sun Microsystems.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
The Internet is a global network of interconnected public and private
networks that enables millions of people to communicate, collaborate, access
information and conduct business electronically. International Data Corporation,
or IDC, estimates that there were approximately 159 million worldwide users of
the Internet at the end of 1998 and that the number of users will grow to
approximately 410 million by the end of 2002. This growth encourages development
of information and content on the Internet. Furthermore, additional users on the
Internet increase the number of network connections. This increased connection
among parties creates a more robust communications environment that enables new
ways of interaction. Networked applications for information access and
entertainment, such as e-mail and e-commerce, have already become an integral
part of the daily lives of millions of consumers. The Internet has the potential
to become even more pervasive among consumers and businesses worldwide, as new
infrastructure technologies emerge to enable more universally available and
higher speed communications and richer, more interactive services.
NETWORK OPERATORS SEEK TO LEVERAGE THE GROWTH OF THE INTERNET
Network operators seek to capitalize on revenue opportunities offered by
rapidly growing Internet traffic across worldwide communications networks. To
date, a limiting factor in consumer Internet usage has been the low transmission
speeds associated with analog modems and standard phone lines. With the
increasing availability of high speed technologies such as cable modems, high
speed telecommunications networks and digital broadcast satellite, network
operators can now offer transmission speeds over 50 times faster than standard
analog modems. As the Internet challenges traditional channels of communications
and media, network operators are investing billions of dollars to construct high
speed network infrastructures. According to Paul Kagan Associates, the number of
U.S. households with access to high speed delivery will grow from 19 million in
1998 to 51 million in 2002. Network operators intend to attract consumers by
offering new voice, video and data services over these high speed networks. The
richer Internet content and range of additional services that can be
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offered by network operators are expected to significantly improve user
experiences and accelerate the adoption of the Internet among casual consumers.
THE NEED FOR INCREASED ACCESSIBILITY TO THE INTERNET
Since its inception, the Internet has been accessed primarily through
personal computers, which are relatively complex and expensive. While the
personal computer remains an important access device, Liberate believes users
are increasingly looking to access the Internet from multiple, alternative
devices. At the same time, network operators are seeking to provide greater
Internet access to increase the value of traditional phone, satellite and
cable-based services. In response to these needs, information appliances, a new
category of low-cost devices designed to combine everyday user activities with
Internet access, have been developed. These devices are characterized by their
ease of use and flexible form factors, such as size, weight, shape, portability
or mobility. Specific examples of information appliances include television
set-top boxes, game consoles, smart phones and personal digital assistants.
Liberate believes that in the short term, information appliances will be
extensions of common consumer electronics products such as television sets and
game consoles. Liberate expects that over the longer term, many new information
appliances will be introduced, some of which will be derivatives of existing
products while others may represent radically new designs. IDC estimates that
the worldwide market for information appliances will grow at a compound annual
growth rate of approximately 62% to become a $15 billion market by 2002.
EMERGENCE OF THE TELEVISION AS A PLATFORM FOR INTERNET-ENABLED SERVICES
Television provides one of the most attractive devices for network operators
to deliver new Internet-enabled services. The television set has become a
ubiquitous consumer product that people are comfortable using for entertainment
and information. According to IDC, at the end of 1998, over 99 million out of
101 million households in the United States had at least one television set and
many had multiple television sets. The display and sound capabilities of the
television also make it ideally suited for Internet-enhanced, rich media
services such as interactive program guides, e-commerce, communications,
including e-mail and online discussion groups, and multi-user gaming. Cable,
satellite and telecommunications operators are already aggressively expanding
their high-speed digital networks to provide many new services to their
subscribers through the television. IDC estimated that 15 million U.S.
households had digital television service in 1998, and IDC expects that number
to rise to over 37 million in 2002.
MARKET OPPORTUNITY FOR A COMPREHENSIVE SOFTWARE PLATFORM THAT ADHERES TO
INDUSTRY STANDARDS
Just as the development of the Internet required an infrastructure built
upon a commonly accepted set of technology standards that linked personal
computers to Web servers and other personal computers, the emerging convergence
of voice, data, the Internet and related enhanced services requires a similar
open infrastructure. A server software platform that adheres to industry
standards will enable network operators to expand their service offerings to a
greater number of people and will enable information appliance manufacturers to
deliver a wide range of devices to network operators and consumers. Both network
operators and information appliance manufacturers require a software platform
that manages the delivery of Internet content and services to a large number of
users employing many different devices. This software platform must consist of
server software that is deployed throughout the network infrastructure and
client software that can effectively operate over a wide range of low-cost
devices that may be optimized for size, weight and power consumption. The
software platform's ability to deliver new kinds of Internet-enabled services to
any type of information appliance increases the value of the subscriber to the
network operator.
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THE LIBERATE SOLUTION
Liberate provides a comprehensive software platform that enables the
delivery of Internet-enhanced content and applications to a broad range of
information appliances. Using the Liberate software platform, network operators
can deliver a new generation of interactive digital content and applications to
their subscribers. Manufacturers of information appliances use our software to
add Internet capability to their products. In addition, network operators and
information appliance manufacturers use the Liberate open platform cooperatively
to create a uniform environment for developers to enhance existing content and
create new Internet applications and services for delivery on multiple
information appliances. Subscribers will be able to access these
Internet-enhanced applications and services from anywhere at anytime.
Our open software platform includes server and client products. Our software
is designed to manage delivery of Internet content and applications to millions
of users and allows the network operators to support a broad range of appliances
using a single server software platform. Liberate's open server architecture can
seamlessly integrate into major databases and existing billing systems,
facilitating the deployment and maintenance of Internet services for a range of
information appliances. Our client software is based on the Netscape Navigator
source code and has been designed to run Internet applications on information
appliances. Our client software can be implemented in many access devices, even
ones that have limited memory and computing resources. In addition, it is highly
portable, which enables it to run on many devices with differing capabilities.
Also embedded in the client software is proprietary technology that enables
information appliance manufacturers to deliver a high quality picture on a wide
range of displays.
The graphic shows four icons of information appliances: an "Analog TV
Set-top Box" with "TV Navigator," a "Digital Cable TV Set-top Box" with "TV
Navigator," a "Game Console" with "eNavigator" and a "PDA" with "eNavigator."
These icons are connected to a picture of the Connect Server by four lines.
These lines are labeled "POTs," "Cable/Satellite," "xDSL" and "Wireless." The
other side of the Connect Server is attached to a circle with "Internet" inside.
The circle is connected by lines to three computer icons labeled: "Additional
Content (news, ATVEF)," "Network Operator and third-party applications (program
guide, VOD, e-commerce)" and "Liberate Applications (TV Mail, TV Chat)."
Key benefits of our platform for network operators include the following:
OPPORTUNITY FOR INCREASED REVENUE AND PROFITABILITY PER
SUBSCRIBER. Liberate's platform allows network operators to maintain direct
contact with their subscribers, giving network operators control over the value
of their brand, the look and feel of their user interface and identity of their
service. Network operators can generate additional revenues by offering enhanced
voice and video services over their existing infrastructure. The deployment and
maintenance of information appliances can generate incremental revenue from new
services such as Internet-enhanced television, e-commerce, multi-user gaming and
others yet to be developed. These differentiated services help reduce subscriber
turnover and create a competitive advantage over other operators.
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ACCELERATED TIME TO REVENUE. Using the Liberate platform, network operators
can quickly deploy Internet-enhanced services. Our products easily integrate
into the network operators' existing subscriber management systems allowing for
rapid installation. Liberate has developed several applications that network
operators can use to rapidly introduce new services. In addition, Liberate
provides comprehensive systems integration and implementation services and
customer support to complement the flexible architecture of our server software.
Key benefits of our platform for information appliance manufacturers include
the following:
POTENTIAL FOR LOWER COST DEVICES. Liberate's client software is designed to
work efficiently in many types of information appliances. Our source code has
been optimized to reduce the system resources required to run the client
software. As a result, information appliance manufacturers can lower the cost of
producing information appliances by using less powerful microprocessors, less
memory and other more cost-effective components.
MORE DESIGN FLEXIBILITY. Our client software is a highly flexible solution
for the information appliance manufacturer. It is portable and currently
supports five microprocessor architectures, seven operating systems and a wide
variety of display technologies. In addition, our software can operate with
multiple transport software protocols and run across multiple high and low speed
networks. By using our client software, manufacturers can create new information
appliances or turn existing devices into information appliances.
STRATEGY
Our objective is to be the leading provider of a comprehensive software
platform that enables the delivery of Internet content and applications to
information appliances. In order to achieve this goal, Liberate must:
EXTEND MARKET LEADERSHIP. We intend to continue targeting network operators
that have large subscriber bases and information appliance manufacturers that
are leaders in their markets. Our initial efforts have focused on achieving
early design wins with operators of multiple cable and satellite television
systems, ISPs, telecommunications companies and information appliance
manufacturers in the television marketplace. We believe that these early design
wins have helped to establish us as a market leader and will allow us to extend
the platform to other markets.
INVEST AGGRESSIVELY IN TECHNOLOGY. To date, we have spent more than $65.4
million on research and development to create our current software platform. Our
software products are designed to be highly scalable, are portable and support a
wide range of devices. We have built extensive expertise in technology for
devices with limited memory and computing resources, Internet content display
algorithms, scalable and server software components and multi-platform
development. We intend to continue investing heavily in research and development
to meet the network operators' and information appliance manufacturers' needs
for more devices, and additional features and functionality.
LEVERAGE AND EXPAND STRATEGIC ALLIANCES. We believe that forging
relationships with key vendors is critical to promoting open standards and
delivering a comprehensive solution to network operators and information
appliance manufacturers. We work closely with major technology companies such as
Netscape, Oracle and Sun Microsystems for the integration of core Internet
browser and server components. In addition, we work with companies such as Cisco
Systems, Inktomi and Lucent Technologies to ensure compatibility within the
network operator's current and future network infrastructure. We are also
working with companies such as General Instrument, Intel and Scientific Atlanta
on integrating our software with digital set-top boxes, Web boxes and digital
satellite architectures. We intend to seek additional relationships to expand
the scope of our customer reach and functionality.
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PROMOTE THE DEVELOPMENT OF INTERNET-ENHANCED SERVICES. We intend to
continue developing additional core applications and are actively encouraging
developers to build new content and applications using our software platform. In
connection with this activity, we provide our content and applications
development kit to developers free of charge. Companies currently using our
tools to develop content and applications include America Online, At Home and
Yahoo.
DEVELOP, MAINTAIN AND ADHERE TO INDUSTRY STANDARDS. We are a recognized
leader in developing and setting the next generation of standards for the
information appliance infrastructure. We adhere to industry standards throughout
our product line and we believe that support for standards strengthens our
market position. In addition to incorporating existing standards such as Java,
hypertext mark-up language, or HTML, and JavaScript, we have led industry
consortiums to develop standards for information appliance services such as
enhanced television, home networking and smartcards. Our active participation in
setting these and other standards allows us to play an important role in
defining and supporting standards for new market opportunities as they develop.
PRODUCTS AND TECHNOLOGY
Liberate's information appliance software platform includes a full range of
client and server products, tools and applications. Liberate offers network
operators a suite of server solutions tailored to the cable, satellite,
telecommunications and ISP markets. Liberate delivers three client products
targeted for the needs of information appliance manufacturers in the television
and embedded markets. Our tools and pre-configured applications allow network
operators and information appliance manufacturers to offer a fully customizable
client and server platform.
The Liberate client and server software platform incorporates proprietary
technology that we have developed to address the needs of network operators and
information appliance manufacturers. This technology includes:
- OPTIMIZED CLIENT TECHNOLOGY. Starting at 700Kb, Liberate offers one of the
smallest, most efficient HTML and JavaScript engines available, which
allows it to be used in a wide variety of information appliances.
- PORTABLE CLIENT ARCHITECTURE. We have developed our client software with
the flexibility to operate on a wide variety of information appliances.
Our client software currently supports processors from, among others, ARM,
Hitachi, IBM, Intel, MIPS and Sun Microsystems, and runs on multiple
operating systems from, among others, Integrated Systems, Microsoft,
Scientific Atlanta and Wind River Systems.
- INNOVATIVE DISPLAY TECHNOLOGY. Liberate has developed a proprietary
display software called IQView. IQView optimizes Internet content for
delivery on virtually any display device, without specialized graphics
hardware.
- EXPERTISE IN INTERNET TECHNOLOGY. Liberate has spent over two years
developing fundamental expertise in working with Internet browser and
server software. This enables Liberate to easily modify and enhance its
client software with critical third-party technologies such as Java and
Real Audio while maintaining compatibility with Internet standards.
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The following table provides a list of our principal products and a brief
description of the features and benefits to our customers of each.
<TABLE>
<S> <C> <C>
- ------------------------------
PRODUCT FEATURES BENEFITS
- -----------------------------------------------------------------------------------------------------------------
LIBERATE SERVER PRODUCTS
LIBERATE CONNECT Subscriber and application management Network operators can control subscriber
access to applications and services and
can access subscriber data for efficient
customer support
Internet standard security Network operators can offer subscribers
and external e-commerce providers highly
secure transactions
Open standards integration interfaces Network operators can seamlessly
integrate Liberate servers with existing
subscriber management systems
Device management tools Network operators can distribute software
updates automatically and efficiently to
all network devices and restore services
rapidly in case of client or network
failure
Highly scalable architecture Network operators can scale networks to
support millions of subscribers by simply
installing more servers on the system
LIBERATE MEDIACAST Content and application broadcasting Network operators can utilize existing
network infrastructure to broadcast
Internet content and interactive
applications
Multiple transport stream capability Network operators can more fully utilize
infrastructure assets by transmitting
data over different networks
LIBERATE TRANSCODER Reduced processing and memory load Network operators can deliver rich
Internet content and applications to a
broad range of information appliances
Internet content error checking Network operators can ensure accurate
rendering of HTML, image and audio
content
LIBERATE SYSTEM MANAGER Server and applications management Network operators can manage and monitor
all Liberate client and server systems
throughout their network from a
centralized workstation
Internet browser-based interface Network operators can manage their
complete network from any Internet
connected workstation
- -----------------------------------------------------------------------------------------------------------------
LIBERATE APPLICATIONS
LIBERATE TV INFO XML-based architecture receives, Network operators can combine and deliver
integrates and exports multiple TV and TV program data and Internet data to
Internet data sources to multiple various applications, including
clients and applications interactive program guides, channel bars
and pay-per-view applications
LIBERATE TV MAIL TV-based e-mail application Network operators can offer customized
e-mail services using existing
infrastructure
Picture and video e-mail Network operators are able to offer rich
multimedia content which enhances the
e-mail experience
LIBERATE TV CHAT Online discussion application Network operators can promote subscriber
integrated with TV programming communities by supplementing existing TV
programming with interactive online
discussion capabilities
</TABLE>
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<TABLE>
<S> <C> <C>
- ------------------------------
PRODUCT FEATURES BENEFITS
- -----------------------------------------------------------------------------------------------------------------
LIBERATE CLIENT PRODUCTS
LIBERATE TV NAVIGATOR FOR DTV Small memory requirement, 700Kb Information appliance manufacturers can
reduce costs by reducing memory and
processing component costs. Software runs
on memory-constrained devices, including
digital set-top boxes
Integrated video and data path Network operators can use existing high
speed video delivery systems to deliver
Internet-based interactive television
content and applications, such as
TV-based browsers and e-mail
HTML and JavaScript support Network operators can deliver standard
Internet applications, content and
services to their customer base
Highly portable Information appliance manufacturers can
easily add the Liberate software platform
to a variety of existing and
next-generation information appliances
Customizable user interface Network operators and information
appliance manufacturers can brand and
control the user interface associated
with the service and of applications
offered
LIBERATE TV NAVIGATOR FOR ISP INCLUDES ALL OF THE FEATURES FOR TV
NAVIGATOR FOR DTV LISTED ABOVE PLUS
THESE FEATURES:
Transport independent Network operators can deliver services
through, among others, standard
telephone, cable television and other
telecommunications networks
Broad language localization Network operators can deliver services to
a number of international markets
including the Japanese and Chinese
markets
LIBERATE ENAVIGATOR Small memory requirements Information appliance manufacturers can
add a feature-rich Internet-based
communications platform to highly
memory-constrained information
appliances, such as smart phones and
personal digital assistants
Rich development environment Developers can rapidly integrate modular
components to develop Internet
applications for numerous devices
HTML and JavaScript support, rich Information appliance manufacturers can
graphics engines and extensive font enhance the interactivity of embedded
libraries systems by utilizing proprietary
hardware-independent graphics display
capabilities
- -----------------------------------------------------------------------------------------------------------------
LIBERATE TOOLS
LIBERATE CONTENT DEVELOPMENT Tools and tutorials for creating Developers can rapidly develop Internet
KIT applications content and applications targeted to a
television audience
TV NAVIGATOR FOR DTV SET-TOP Real time emulator running on Windows Developers can avoid investing in
EMULATOR 98 expensive prototypes during the design
and testing of applications
Suite of integrated debugging tools Developers can debug JavaScript and
HTML-based code in an easy-to-use
development environment
</TABLE>
SERVICES
Liberate provides a comprehensive set of consulting and engineering services
to its customers. The deployment by network operators of Internet-enhanced
services and the development by information appliance manufacturers of new
products require a high level of customer service and support. We believe that
our consulting and engineering services organizations are critical to the
successful sale and
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deployment of our products. We typically charge customers on a time and
materials basis for our services.
CONSULTING SERVICES. Liberate's consulting services organization consists
of nine full-time employees. This organization provides project management
support, which includes service implementation guidance, product customization
and product configuration support. To help ensure seamless product deployments,
this organization works closely, often on site, with network operators to
integrate, install and maintain our software.
ENGINEERING SERVICES. Liberate's engineering services organization consists
of 38 full-time engineers. This organization provides project management and
engineering assistance to information appliance manufacturers. In addition, this
organization provides assistance with custom application development. We
typically retain the rights to intellectual property developed by our
engineering services organization.
CUSTOMER SERVICE, SUPPORT AND TRAINING. Liberate's service and support
organization consists of 12 full-time employees that provide worldwide support
and services. Outside of the United States, we often work with Oracle to augment
our service capability. Liberate runs a worldwide technical training program for
customers and developers. Curriculum and training classes are available for most
Liberate products. See "Certain Transactions--Transactions with Oracle."
SALES AND MARKETING
Liberate sells products through its direct sales force and indirectly
through Oracle and Wind River Systems. We intend to increase the number of
indirect distribution partners. Our sales force, which consists of 26
individuals, is organized into teams consisting of sales representatives and
systems engineers. Currently, direct sales professionals are located in North
America, Europe and Asia/Pacific. Liberate uses its direct sales force to target
the customers that it believes provide the highest potential for service
deployment and revenues.
More specifically, Liberate sells its server products either directly to
network operators or to system integrators who then resell to the network
operators. Liberate sells its client products directly to information appliance
manufacturers or to embedded operating system vendors who resell the client
software to information appliance manufacturers. Information appliances
containing our software platform are then distributed by the manufacturer to the
end user either through a retail channel or through network operators.
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To complement the direct sales and distribution efforts, Liberate utilizes
an integrated marketing approach focused on identifying customer needs, defining
products and stimulating demand. Liberate participates in trade shows worldwide,
arranges speaking engagements for key personnel, sponsors conferences and runs a
developers program. An internal creative production group supports the marketing
effort by helping to define the next generation of interfaces for Liberate
products. Market research is used to test Liberate prototypes and products to
help ensure ease-of-use and a high degree of customer satisfaction.
The graphic shows a box with "Liberate" inside. The box has arrows pointing
left to a box with "Embedded OS Vendors" inside and another box with "Info.
Appliance Manufacturers" inside. This box has arrows pointing right to a box
with "Network Operators" inside and down to a box with "Channel" inside. This
box has an arrow pointing down to a box with "End User" inside. The box with
"Liberate" also has arrows pointing right to a box with "System Integrators"
inside and the box with "Network Operators" inside. This box has an arrow
pointing down to the box with "End User" in it.
CUSTOMERS
As of May 31, 1999, information appliance manufacturers have shipped over
314,000 units that incorporate Liberate software. Liberate software is localized
for a number of international markets and languages, including the recent
deployment of Japanese language TV Navigator. Over 50% of our
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current customers are located outside the United States. The following is a
partial list of our customers, grouped according to industry, that we believe is
representative of our overall customer base:
<TABLE>
<S> <C>
NETWORK OPERATORS INFORMATION APPLIANCE MANUFACTURERS
CABLE AND SATELLITE WEB BOXES
Cable & Wireless Acer
Pacific Convergence Boca Research
HOTEL INTERACTIVE SERVICES DIGITAL SET-TOP BOXES
Guestlink International General Instrument
LodgeNet Entertainment Hughes Network Systems
MagiNet Philips Electronics
INTERNET SERVICE PROVIDERS INTERNET TELEVISIONS
America Online NEC
Dream Train Internet
PERSONAL DIGITAL ASSISTANTS
TELECOMMUNICATIONS Fujitsu
Belgacom
NTL
NTT
U S WEST
</TABLE>
SELECTED CASE STUDIES
The following case studies illustrate how some of our customers have used
Liberate's products.
NETWORK OPERATORS
AMERICA ONLINE. With more than 14 million subscribers, America Online is
the world's leader in interactive services. America Online has licensed
Liberate's TV Navigator and the Liberate Connect ISP Suite in connection with
offering Internet-based information appliance services. AOL-TV is part of the
AOL Anywhere initiative, which extends interactive services to devices beyond
the personal computer. It will combine enhanced television services with America
Online's world-class ease-of-use and community, commerce and communication
features. America Online has made a major commitment of internal resources to
the design and launch of AOL-TV. Currently the AOL-TV service using our software
is under development.
CABLE & WIRELESS PLC. Cable & Wireless, the leading provider of integrated
telecommunications and television entertainment services in the United Kingdom,
has chosen Liberate's DTV Navigator platform technology for its digital and
interactive television services. Cable & Wireless intends to roll out
multichannel television in July 1999 and interactive services based on Internet
standards in October 1999. Cable & Wireless will distribute Liberate's TV
Navigator on set-top boxes manufactured by Pace Micro Technology.
GUESTLINK. Guestlink is an affiliate of Akai Electric, a leading Japanese
consumer electronics manufacturer. Akai is a subsidiary of Semi-Tech (Global)
Company. Guestlink brings in-room interactive entertainment, communications and
management services to the world's premier hotel properties. The Guestlink
system is currently in more than 200,000 rooms in 1,000 hotels in Europe and
Asia. Guestlink recently introduced its Guestlink Global system, which
incorporates Liberate technology. The new system leverages Liberate's technology
to offer fully integrated interactive services to both guests and management,
including simple and attractive Internet access and e-mail. Currently the
Guestlink service using our software is in trial deployment.
NTL. NTL is one of the United Kingdom's top three telecommunications
companies and supplies integrated cable and telephony service to more than one
million homes. NTL has integrated Liberate's technology into its advanced
fiber-optic network infrastructure to deliver an easy-to-use interactive
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service. Liberate's software platform serves as the foundation of this service,
enabling NTL's customers to view television and Internet content simultaneously
on their television screens. NTL uses Liberate Connect ISP Suite server software
to manage the analog set-top boxes, provide security and administer the network.
The NTL service was launched in January 1999 and is currently in commercial
deployment.
U S WEST. U S WEST provides a full range of telecommunications services
including wireline, wireless PCS and data networking services to more than 25
million customers. U S WEST is utilizing its advanced network and Liberate's
software to offer a service that will merge television, the Internet and
telephony features. The U S WEST television service, which is currently in test
phase, allows subscribers to watch television programs, surf the web and make
telephone calls, all through a television set-top box equipped with a
speakerphone. TV Navigator for ISP and Liberate Connect Server furnish a
complete platform, which further affords U S WEST the flexibility to brand its
television service and provide network access via both dial-up and xDSL
connections.
INFORMATION APPLIANCE MANUFACTURERS
ACER. Acer is one of the world's largest computer manufacturers and has
leveraged that experience into the information appliance marketplace with TV
Navigator software. Acer has already obtained several design wins with network
operators and has shipped more than 65,000 units of its CyberTV product, which
incorporates TV Navigator as the software platform. CyberTV customers include
Belgacom and NTL.
FUJITSU. Fujitsu is one of the world's largest suppliers of computers and
information systems solutions, telecommunications and semiconductor products,
software and services. Fujitsu is the first hardware manufacturer to offer the
Liberate eNavigator product embedded within a consumer electronic device.
Fujitsu is using the Liberate eNavigator product running on top of the Wind
River Systems operating system to incorporate Internet connectivity and
functionality into its INTERTop personal digital assistant. With Liberate
eNavigator technology, Fujitsu's INTERTop now features e-mail and Web browsing
and is currently available in retail outlets in Japan. Fujitsu has shipped over
25,000 of these units.
GENERAL INSTRUMENT. General Instrument is a leading worldwide provider of
integrated and interactive high speed access solutions and is teaming with its
business partners to lead the convergence of the Internet, telecommunications
and video entertainment industries. General Instrument and Liberate have entered
into a multiyear joint development effort to produce integrated software on
General Instrument's DCT line of digital cable set-top boxes including the
DCT-5000. This development effort was started in May 1999.
PHILIPS ELECTRONICS. Philips is the largest consumer electronics maker in
Europe, and the third largest in the world. The company markets under the names
Philips, Marantz and Magnavox. It is a major supplier of communications
infrastructure equipment and semiconductors for consumer electronics. Philips is
licensing both TV Navigator for ISP and TV Navigator for DTV for worldwide
usage. The first customer for the Philips television set-top box, which is
currently under development, will be America Online.
COMPETITION
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 also
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. We
believe that the principal competitive factors in our industry are the quality
and breadth of product and service offerings, the ease and speed with which a
product can be integrated into network operators' existing internal systems and
deployed to network operators' customers, whether the software platform operates
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efficiently with numerous information appliances, financial resources, price,
time-to-market and the effectiveness of sales and marketing efforts. We believe
that we presently compete favorably with our competitors in these areas.
However, the market for information appliances is evolving and we cannot be
certain that we will compete successfully in the future. See "Risk
Factors--Competition from Bigger, Better Capitalized Competitors Could Result in
Price Reductions, Reduced Gross Margins and Loss of Market Share."
INTELLECTUAL PROPERTY
Liberate seeks to protect its proprietary rights and its other intellectual
property through a combination of copyrights, trademarks, patents and trade
secret protection, as well as through contractual protections such as
proprietary information agreements and nondisclosure agreements. However, we
cannot guarantee that the steps we have taken to protect our proprietary rights
will be adequate to deter misappropriation of our proprietary information, and
we may not be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. See "Risk Factors--Our Limited Ability
to Protect Our Intellectual Property and Proprietary Rights May Harm Our
Competitiveness."
EMPLOYEES
As of May 31, 1999, we had 228 employees, including 103 in engineering, 46
in sales and marketing, 59 in services and 20 in administration. None of our
employees is represented by a collective bargaining agreement. We have never
experienced a work stoppage, and we consider our relations with our employees to
be good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel, none of
whom, except Mitchell E. Kertzman, are party to an employment agreement. Our
future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and senior management personnel. Competition
for these personnel is intense, and we may not be able to retain the key members
of our technical, sales and senior management staff or attract these personnel
in the future. We have experienced difficulty in recruiting qualified technical,
sales and senior management personnel, and we expect to experience these
difficulties in the future. If we are unable to hire and retain qualified
personnel in the future, our business could be seriously harmed.
FACILITIES
Liberate leases approximately 48,000 square feet of office space for our
headquarters in Redwood Shores, California, approximately 5,000 square feet of
office space in Salt Lake City, Utah, an office suite in a business center in
Bellevue, Washington and in Placerville, California. In addition, Liberate
leases approximately 1,100 square feet in London for its United Kingdom sales
office. Liberate also leases approximately 45,000 square feet in Sunnyvale,
California, which it subleases.
In April 1999, we entered into a 10-year lease for approximately 78,000
square feet of office space in San Carlos, California. We intend to relocate our
headquarters to this facility in the second quarter of fiscal 2000.
LITIGATION
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 $1,482,000, constructive
employment termination, intentional misrepresentation and negligent
misrepresentation. We believe that we have strong defenses against this lawsuit.
Accordingly, we intend to vigorously defend this action. However, we might not
prevail in this litigation, as litigation is inherently uncertain. A failure to
prevail in this litigation could result in our paying substantial monetary
damages, which would seriously harm our business.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors and other key employees of Liberate,
and their ages as of May 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Mitchell E. Kertzman...................... 50 President, Chief Executive Officer and Director
Nancy J. Hilker........................... 41 Vice President and Chief Financial Officer
David A. Limp............................. 33 Senior Vice President of Corporate Development
Charles G. Tritschler..................... 34 Vice President of Marketing
Philip A. Vachon.......................... 42 Senior Vice President of Worldwide Sales
Steven Weinstein.......................... 44 Senior Vice President of Product Development
Gordon T. Yamate.......................... 44 Vice President, General Counsel and Secretary
David J. Roux (1)(2)...................... 42 Chairman of the Board of Directors
James L. Barksdale(3)..................... 56 Director
Charles Corfield(3)....................... 40 Director
Lawrence J. Ellison....................... 54 Director
Jeffrey O. Henley (1)(2).................. 54 Director
</TABLE>
- ------------------------
(1) Member of finance and audit committee.
(2) Member of compensation committee.
(3) Member of independent directors committee.
- --------------------------------------------------------------------------------
MITCHELL E. KERTZMAN has been President, Chief Executive Officer and a
director of Liberate since November 1998. Prior to joining Liberate, Mr.
Kertzman was a member of the board of directors of Sybase, a database company,
from February 1995 until he joined Liberate. He served as Chairman of Sybase's
board of directors since July 1997. Between February 1998 and August 1998, he
also served as Co-Chief Executive Officer of Sybase. From July 1996 until
February 1997 Mr. Kertzman served as Chief Executive Officer of Sybase and from
July 1996 until July 1997 he also served as President of Sybase. Between
February 1995 and July 1996, he served as an Executive Vice President of Sybase.
In February 1995, Sybase merged with Powersoft Corporation, a provider of
application development tools. Mr. Kertzman had served as Chief Executive
Officer and a director of Powersoft since he founded it in 1974. He also served
as President of Powersoft from April 1974 to June 1992. Mr. Kertzman also serves
as a director of CNET.
NANCY J. HILKER has been Vice President and Chief Financial Officer of
Liberate since its merger with Navio in August 1997. Prior to the merger, she
had served as Vice President and Secretary of Navio since July 1996. Prior to
joining Navio, Ms. Hilker served in various capacities at IntelliCorp, a
software company, from June 1991 to July 1996, most recently as Chief Financial
Officer and Secretary. From October 1979 to June 1991, Ms. Hilker held various
positions at Deloitte & Touche, an accounting firm, as a manufacturing and high
technology specialist in the emerging business services group. Ms. Hilker is a
Certified Public Accountant.
DAVID A. LIMP has been Senior Vice President of Corporate Development since
January 1999. Mr. Limp was our Vice President of Marketing from August 1997 to
January 1999. From December 1996 to August 1997, Mr. Limp was Vice President of
Marketing of Navio. Prior to joining Navio, Mr. Limp served in various
capacities at Apple Computer from July 1987 to November 1996, most recently as
director of its North and South American PowerBook division.
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<PAGE>
CHARLES G. TRITSCHLER has been Vice President of Marketing since January
1999. Mr. Tritschler was our Director of Product Marketing from August 1997 to
January 1999. From April 1997 to August 1997, Mr. Tritschler was Director of
Product Marketing of Navio. Prior to joining Navio, Mr. Tritschler served in
various capacities at Apple Computer from July 1988 to April 1997, most recently
as Product Line Manager.
PHILIP A. VACHON has been Senior Vice President of Worldwide Sales since
January 1999. Before that he served as our Senior Vice President of Americas
Sales from June 1997 to January 1999. Prior to joining Liberate, Mr. Vachon
served in various capacities at Oracle, from March 1987 to June 1997, most
recently as Vice President of Alliances. Prior to joining Oracle, Mr. Vachon
worked at Applied Data Research, a database software company, from February 1984
to December 1986 in various sales and technical positions.
STEVEN WEINSTEIN has been Senior Vice President of Product Development since
March 1999. From August 1997 to March 1999, Mr. Weinstein was our Vice President
of Product Development. From September 1996 to August 1997, Mr. Weinstein was
Vice President of Product Development of Navio. Prior to joining Navio, Mr.
Weinstein was the General Manager and Vice President of Production at Spectrum
HoloByte/MicroProse, a computer game manufacturer, from July 1992 to September
1996. Prior to that, Mr. Weinstein served as Vice President of Software
Engineering at Electronics for Imaging, a hardware and software company, from
August 1991 to August 1992.
GORDON T. YAMATE has been Vice President and General Counsel since March
1999. Prior to joining Liberate, Mr. Yamate was associated with the law firm of
McCutchen, Doyle, Brown & Enersen, LLP since September 1983, and had been a
partner since June 1988.
DAVID J. ROUX has been a director of Liberate since May 1996 and Chairman of
the Board of Directors since October 1998. He previously served as our Chairman
from October 1996 to September 1997. From February 1998 to November 1998, he
served as the Chief Executive Officer and President of Liberate. Mr. Roux is
currently a partner of Silver Lake Partners, a private equity firm. Mr. Roux
held various management positions with Oracle from September 1994 until December
1998, most recently as Executive Vice President of Corporate Development. Before
joining Oracle, Mr. Roux served as Senior Vice President, Marketing and Business
Development at Central Point Software from April 1992 to July 1994. From October
1987 to April 1992, Mr. Roux served in various capacities at Lotus, a software
company, most recently as Senior Vice President of the Portable Computing Group.
Before joining Lotus, Mr. Roux co-founded and served as the Chief Executive
Officer of Datext, a CD ROM publishing company, from June 1984 to October 1987.
JAMES L. BARKSDALE has been a director of Liberate since August 1997, when
Liberate acquired Navio. Mr. Barksdale served as a director of Navio from July
1996 until the merger with Liberate. Mr. Barksdale is currently a partner at The
Barksdale Group. Mr. Barksdale served at Netscape from January 1995 to March
1999 as President and Chief Executive Officer. From January 1992 to January
1995, Mr. Barksdale served as President and Chief Operating Officer, and, as of
September 1994, Chief Executive Officer, of AT&T Wireless Services, formerly,
McCaw Cellular Communications, a cellular telecommunications company. From April
1983 to January 1992, Mr. Barksdale served as Executive Vice President and Chief
Operating Officer of Federal Express. Mr. Barksdale also serves as a director of
3Com, America Online, Robert Mondavi and Sun Microsystems.
CHARLES CORFIELD has been a director of Liberate since December 1998. Mr.
Corfield has been a partner at both Whitman Capital and Mercury Capital, each a
venture capital firm, since 1996. Mr. Corfield co-founded Frame Technology, a
software company, in 1986 and served as a member of its board of directors and
as its Chief Technology Officer until it was acquired by Adobe Systems in 1995.
LAWRENCE J. ELLISON has been a director of Liberate since August 1997. Mr.
Ellison previously served as Liberate's Chairman from September 1997 to October
1998. Mr. Ellison has been Chief
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<PAGE>
Executive Officer and a director of Oracle since he co-founded it in May 1977,
and was President of Oracle until June 1996. Mr. Ellison has been Chairman of
the Board of Oracle since June 1995 and was previously Chairman of the Board of
Oracle from April 1990 until September 1992. Mr. Ellison also serves as a
director of Apple Computer, SuperGen and Spring Group.
JEFFREY O. HENLEY has been a director of Liberate since May 1996. Mr. Henley
has been Executive Vice President and Chief Financial Officer of Oracle since
March 1991 and has been a director of Oracle since June 1995. Prior to joining
Oracle, he served as Executive Vice President and Chief Financial Officer of
Pacific Holding Company, a privately-held company with diversified interests in
manufacturing and real estate, from August 1986 to February 1991.
BOARD OF DIRECTORS
Liberate currently has authorized seven directors. The officers serve at the
discretion of the Board. There are no family relationships among the directors
and officers of Liberate.
BOARD COMMITTEES
The finance and audit committee consists of Messrs. Henley and Roux. The
finance and audit committee makes recommendations to the board of directors
regarding the selection of independent accountants, reviews the results and
scope of audit and other services provided by our independent accountants and
reviews and evaluates our audit and control functions. The compensation
committee consists of Messrs. Henley and Roux. The compensation committee
administers our stock plans and makes decisions concerning salaries and
incentive compensation for our employees. The independent directors committee
consists of Messrs. Barksdale and Corfield. The independent committee considers
and reviews all agreements between us and Oracle.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee is currently an officer or employee
of Liberate. Mr. Henley has not, at any time since the formation of Liberate,
been an officer or employee of Liberate. Although Mr. Roux was formerly an
officer of Liberate, he has not served as an officer or employee of Liberate at
any time while serving on our compensation committee. Except for Mr. Henley, no
member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
On December 11, 1998, we granted Messrs. Barksdale and Corfield each an option
to purchase 41,666 shares of our common stock at an exercise price of $5.10 per
share. At each annual stockholders' meeting, non-employee directors will receive
automatic option grants under our 1999 equity incentive plan. See "Employee
Stock Plans--1999 Equity Incentive Plan."
INDEMNIFICATION
In May 1999, the board of directors authorized Liberate to enter into
indemnification agreements with each of our directors and executive officers.
The form of indemnity agreement provides that we will indemnify against any and
all expenses of the director or executive officer who incurred such expenses
because of his or her status as a director or executive officer, to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
bylaws.
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<PAGE>
Our certificate of incorporation and bylaws contain certain provisions
relating to the limitation of liability and indemnification of directors and
officers. The certificate of incorporation provides that our directors shall not
be personally liable to Liberate or its stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability:
- For any breach of the director's duty of loyalty to us or our
stockholders;
- For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- In respect of certain unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
- For any transaction from which the director derives any improper personal
benefit.
The certificate of incorporation also provides that if Delaware law is
amended after the approval by our stockholders of the certificate of
incorporation to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by Delaware law. The
foregoing provisions of the certificate of incorporation are not intended to
limit the liability of directors or officers for any violation of applicable
federal securities laws. In addition, as permitted by Section 145 of the
Delaware General Corporation Law, our bylaws provide that:
- We are required to indemnify our directors and executive officers to the
fullest extent permitted by Delaware law;
- We may, in our discretion, indemnify other officers, employees and agents
as provided by Delaware law;
- To the fullest extent permitted by Delaware law but subject to various
exceptions, we are required to advance all expenses incurred by our
directors and executive officers in connection with a legal proceeding;
- The rights conferred in the bylaws are not exclusive;
- We are authorized to enter into indemnification agreements with our
directors, officers, employees and agents; and
- We may not retroactively amend the bylaw provisions relating to indemnity.
Our bylaws provide that we shall indemnify our directors to the fullest
extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for the
fiscal year ended May 31, 1999 that we paid for services rendered by our current
Chief Executive Officer, our four other executive officers who earned more than
$100,000 during the fiscal year ended May 31, 1999 and a former executive
officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS
ANNUAL COMPENSATION -----------------------
---------------------------- SECURITIES ALL OTHER
SALARY ($) BONUS ($) UNDERLYING OPTIONS (#) COMPENSATION ($)
------------- --------- ----------------------- ----------------
<S> <C> <C> <C> <C>
Mitchell E. Kertzman(1)................. $ 162,611 -- 1,666,666 --
President and Chief Executive Officer
Nancy J. Hilker......................... 187,600 $30,000 58,332 --
Vice President and Chief Financial
Officer
David A. Limp........................... 189,683 30,000 83,333 --
Senior Vice President of Corporate
Development
Philip A. Vachon........................ 512,282(2) -- 99,999 --
Senior Vice President of Worldwide Sales
Steven Weinstein........................ 190,517 10,000 25,000 --
Senior Vice President of Product
Development
David J. Roux(3)........................ 210,417 58,437 833,333 2,600(4)
Former Chief Executive Officer
</TABLE>
- ------------------------
(1) Mr. Kertzman became our President and Chief Executive Officer on November
16, 1998. His current annual salary is $300,000.
(2) Includes $313,537 in commissions.
(3) Mr. Roux was our Chief Executive Officer from February 1998 to November
1998, and all compensation in this table represents payments made by Oracle
to Mr. Roux for this period for his services as an officer of Oracle and
Liberate.
(4) Represents matching contributions to Mr. Roux's 401(k) plan account.
54
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the fiscal
year ended May 31, 1999, to each of the executive officers named in the Summary
Compensation Table. No stock appreciation rights were granted during this
period.
The exercise price of each option was equal to the fair market value of our
common stock as valued by the board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at fair
market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state income tax
liability incurred by the optionee in connection with such exercise. The fair
market value of our common stock was estimated by the board of directors on the
basis of the purchase price paid by investors for shares of our preferred stock,
the liquidation preferences and other rights, privileges and preferences
associated with the preferred stock and an evaluation by the board of our
revenues, operating history and prospects.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed in accordance with rules promulgated by the SEC and does not represent
our prediction of our stock price performance. The potential realizable values
at 5% and 10% appreciation are calculated by assuming that the estimated fair
market value on the date of grant appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price. The initial
public offering price may be higher than the estimated fair market value on the
date of grant, and the potential realizable value of the option grants could be
significantly higher than the numbers shown in the table if future stock prices
were projected to the end of the option term by applying the same annual rates
of stock price appreciation to the initial public offering price.
The shares listed in the following table under "Number of Securities
Underlying Options Granted" are subject to vesting. Upon completion of 12 months
of service from the vesting start date, 25% of the option shares vest and the
balance vest in a series of equal monthly installments over the next three years
of service. Each of the options has a ten-year term, subject to earlier
termination if the optionee's service with us ceases.
Percentages shown under "Percent of Total Options Granted to Employees in
the Last Fiscal Year" are based on an aggregate of 4,651,728 options granted to
employees of Liberate under its 1996 Stock Option Plan and outside of this plan
during the fiscal year ended May 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN THE LAST PRICE EXPIRATION ---------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ------------------------- -------------- --------------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell E. Kertzman..... 1,666,666 35.8% $ 5.10 11/16/08 $ 5,345,062 $ 13,546,805
Nancy J. Hilker.......... 16,666 0.4 4.50 07/09/08 47,165 119,526
41,666 0.9 7.50 04/02/09 196,526 498,037
David A. Limp............ 83,333 1.8 7.50 04/02/09 393,058 996,085
Philip A. Vachon......... 58,333 1.3 5.10 01/04/09 187,075 474,136
41,666 0.9 7.50 04/02/09 196,526 498,037
Steven Weinstein......... 25,000 0.5 7.50 04/02/09 117,918 298,827
David J. Roux............ 833,333 17.9 5.10 10/15/08 2,672,801 6,773,403
</TABLE>
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth options exercised by each of the executive
officers named in the Summary Compensation Table during the fiscal year ended
May 31, 1999, and the number and value of securities underlying unexercised
options that are held by these executive officers as of May 31, 1999.
Amounts shown under the column "Value Realized" are equal to the fair market
value of the purchased shares on the option exercise date, less the exercise
price paid for such shares.
Amounts shown under the column "Value of Unexercised In-the-Money Options at
Fiscal Year End" are based on the fair market value of our common stock at May
31, 1999 as determined by our board of directors, $9.00 per share, less the
exercise price payable for such shares. The fair market value of our common
stock at May 31, 1999 was estimated by the board of directors on the basis of
the purchase price paid by investors for shares of our preferred stock, taking
into account the liquidation preferences and other rights, privileges and
preferences associated with the preferred stock, and an evaluation by the board
of our revenues, operating history and prospects. The initial public offering
price may be higher than the estimated fair market value on May 31, 1999, and
the value of unexercised options may be higher than the numbers shown in the
table if the value were calculated by subtracting the exercise price from the
initial public offering price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- ----------------------------- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mitchell E. Kertzman......... -- -- -- 1,666,666 -- $ 6,499,997
Nancy J. Hilker.............. 2,200 $ 13,948 33,897 110,022 $ 250,057 500,685
David A. Limp................ 41,666 264,162 15,625 144,724 79,688 533,730
Philip A. Vachon............. 9,375 50,063 14,928 134,028 93,047 502,817
Steven Weinstein............. 9,968 63,086 47,357 101,245 301,063 590,279
David J. Roux................ 225,694 135,446 -- 607,639 -- 2,369,792
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We entered into an employment agreement, dated October 12, 1998, with
Mitchell E. Kertzman, our President and Chief Executive Officer. Mr. Kertzman's
annual salary is $300,000 and he is eligible for an annual bonus of up to
$200,000. His bonus for the first year of employment is guaranteed to be
$200,000. We granted him an option to purchase 1,666,666 shares of our common
stock. Upon his completion of 12 months of service, 25% of the option shares
will vest and the balance of the option shares will vest in a series of equal
monthly installments upon his completion of each of the following 36 months. If
we experience a change in control, 50% of any unvested option shares will become
vested upon the effective date of the change in control.
EMPLOYEE STOCK PLANS
1999 EQUITY INCENTIVE PLAN
SHARE RESERVE. Our board of directors adopted our 1999 equity incentive
plan on May 17, 1999. Our stockholders will also approve this plan. We have
reserved that number of shares of our common stock equal to the number of shares
then available for grant of stock options under our 1996 stock option plan at
the time of this offering of its capital stock, for issuance under the 1999
equity incentive plan. On June 1 of each year, starting in 2000, the number of
shares in the reserve will automatically increase by 5% of the total number of
shares of common stock that are outstanding at that time or, if less, by
3,000,000 shares. In general, if options or shares awarded under the 1999 equity
incentive plan are forfeited, then those options or shares will again become
available for awards. We have not yet granted any options under the 1999 equity
incentive plan.
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<PAGE>
ADMINISTRATION. A committee appointed by our board of directors will
administer the 1999 equity incentive plan. The committee has complete discretion
to make all decisions relating to the interpretation and operation of our 1999
equity incentive plan. The committee has discretion to determine who will
receive an award, what type of award it will be, how many shares will be covered
by the award, what the vesting requirements will be, if any, and what the other
features and conditions of each award will be. The committee may also reprice
outstanding options and modify outstanding awards in other ways.
ELIGIBILITY. The following groups of individuals are eligible to
participate in the 1999 equity incentive plan:
- Employees;
- Members of our board of directors who are not employees; and
- Consultants.
TYPES OF AWARDS. The 1999 equity incentive plan provides for the following
types of awards:
- Options to purchase shares of our common stock;
- Stock appreciation rights;
- Restricted shares of our common stock; and
- Stock units, sometimes called phantom shares.
OPTIONS AND STOCK APPRECIATION RIGHTS. Options may be incentive stock
options or nonstatutory stock options. An optionee who exercises an incentive
stock option may qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price for all
incentive stock options and nonstatutory stock options granted under the 1999
equity incentive plan may not be less than 100% and 85%, respectively, of the
fair market value of our common stock on the option grant date. At the
discretion of the committee, optionees may pay the exercise price by using:
- Cash;
- Shares of common stock that the optionee already owns;
- A full-recourse promissory note, except that the par value of newly issued
shares must be paid in cash;
- An immediate sale of the option shares through a broker designated by us;
or
- A loan from a broker designated by us, secured by the option shares.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier. The 1999
equity incentive plan provides that no participant may receive options or stock
appreciation rights covering more than 750,000 shares in the same year, except
that a newly hired employee may receive options or stock appreciation rights
covering up to 1,500,000 shares in the first year of employment.
RESTRICTED SHARES. Restricted shares may be awarded under the 1999 equity
incentive plan in return for:
- Cash;
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<PAGE>
- A full-recourse promissory note, except that the par value of newly issued
shares must be paid in cash;
- Services already provided to us; and
- In the case of treasury shares only, services to be provided to us in the
future.
Restricted shares and stock units vest at the time or times determined by
the compensation committee.
AUTOMATIC OPTION GRANTS. The non-employee members of our board of directors
will be eligible for option grants under the automatic option grant program. At
the time of each of our annual stockholders' meetings, beginning in 2000, each
non-employee director who will continue to serve as a board member following the
meeting will automatically be granted a fully vested option for 5,000 shares of
our common stock. The exercise price of each option will be equal to the fair
market value of our common stock on the option grant date. A director may pay
the exercise price by using cash, shares of common stock that the director
already owns, an immediate sale of the option shares through a broker designated
by us or a loan from a broker designated by us, secured by the option shares.
The options have a 10-year term, except that they expire 12 months after a
director leaves the board, if earlier.
CHANGE IN CONTROL. If a change in control of Liberate occurs, the board or
the compensation committee has discretion to accelerate vesting of options and
other awards. A change in control includes:
- A merger of Liberate after which our own stockholders own 50% or less of
the surviving corporation, or its parent company, and a stockholder who
did not own any shares of Liberate immediately before the change in
control owns 50% or more of Liberate after the change in control;
- A sale of all or substantially all of our assets;
- A proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to Liberate, such as a holding company
owned by our stockholders.
However, Oracle's disposition of its securities, such that it holds less
than 50% of Liberate, and/or its later increase in ownership to at least 50% of
Liberate, will not in itself be deemed a change in control.
AMENDMENTS OR TERMINATION. Our board of directors may amend or terminate
the 1999 equity incentive plan at any time. If our board of directors amends the
plan, stockholder approval will only be sought if required by an applicable law.
The 1999 equity incentive plan will continue in effect indefinitely unless the
board of directors decides to terminate the plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
SHARE RESERVE AND ADMINISTRATION. Our board of directors adopted our 1999
employee stock purchase plan on May 17, 1999. Our stockholders will also approve
this plan. Our 1999 employee stock purchase plan is intended to qualify under
Section 423 of the Internal Revenue Code. We have reserved 833,333 shares of our
common stock for issuance under the plan. On June 1 of each year, starting in
2000, the number of shares in the reserve will automatically increase by 2% of
the total number of shares of common stock then outstanding or, if less, 833,333
shares. The compensation committee of our board of directors will administer the
plan.
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<PAGE>
ELIGIBILITY. All of our employees are eligible to participate, if they are
employed by us for more than 20 hours per week and for more than five months per
year. Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of any offering period. Each offering period lasts
six months. Overlapping offering periods start on April 1 and October 1 of each
year. However, the first offering period will start on the effective date of
this offering and end on March 31, 2000.
AMOUNT OF CONTRIBUTIONS. Our 1999 employee stock purchase plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on March 31 and September
30 of each year. Each participant may purchase up to 750 shares on any purchase
date (1,500 shares per year). But the value of the shares purchased in any
calendar year, measured as of the beginning of the offering period, may not
exceed $25,000.
PURCHASE PRICE. The price of each share of common stock purchased under our
1999 employee stock purchase plan will be 85% of the lower of:
- The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- The fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the plan
will be 85% of the lower of:
- The price per share to the public in this offering; or
- The fair market value per share of common stock on the purchase date.
OTHER PROVISIONS. Employees may end their participation in the 1999
employee stock purchase plan at any time. Participation ends automatically upon
termination of employment with Liberate. If a change in control of Liberate
occurs, our 1999 employee stock purchase plan will end and shares will be
purchased with the payroll deductions accumulated to date by participating
employees, unless the plan is assumed by the surviving corporation or its
parent. Our board of directors may amend or terminate the 1999 employee stock
purchase plan at any time. If our board of directors increases the number of
shares of common stock reserved for issuance under the plan, except for the
automatic increases described above, it must seek the approval of our
stockholders.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH ORACLE
From our inception until our acquisition of Navio Communications in August
1997, we were a wholly-owned subsidiary of Oracle. Following the Navio
acquisition, Oracle remained our majority stockholder. After the offering and
the private placement, Oracle will beneficially own approximately 48.0% of our
outstanding stock. In addition, two of our directors, Messrs. Ellison and
Henley, are executive officers and directors of Oracle. We have entered into
numerous transactions and arrangements with Oracle, including the following:
FINANCINGS, LOANS AND INTER-COMPANY ARRANGEMENTS
In May 1996, we sold 16 shares of our common stock to Oracle and in October
1996, we sold 14,166,650 shares of our Series A preferred stock to Oracle. In
exchange, we received an inter-company transfer of approximately $10.0 million
and all of the tangible assets and some of the intangible assets of Oracle's
network computer division, including the right to hire the employees of the
division, intellectual property rights associated with the division and
contractual relationships with suppliers, customers and contractors of the
division. The aggregate value of the transfer, including cash, was estimated by
our board of directors to be approximately $85 million.
In May 1996, Oracle forgave an inter-company payable balance of
approximately $5 million.
In November 1996, Oracle transferred the assets, liabilities and personnel
of a corporate division to us. At the time of this assignment, the assets and
liabilities had a net book value of approximately $79,000. In July 1997, we
transferred the assets, liabilities and personnel of this corporate division
back to Oracle. At the time of this transfer, the assets and liabilities had a
net book value of approximately $90,000.
In July 1997, we entered into a convertible note purchase agreement with
Oracle. Under this agreement, Oracle agreed to provide up to $10.0 million to us
for general working capital purposes, as needed, in the form of convertible
notes, and up to $19.2 million to fund our obligations under the put/ call and
voting agreement, as discussed below. The convertible notes bear annual interest
at 8% and are convertible, at Oracle's option, into shares of our stock. As of
May 31, 1999, we had borrowed approximately $10.0 million under this arrangement
and Oracle had converted $5.0 million of the indebtedness into 757,575 shares of
our Series A-1 preferred stock. In May 1999, we repaid the outstanding portion
of the indebtedness, totalling approximately $5.0 million. We do not currently
intend to borrow additional funds under this arrangement.
From our inception until August 1997, Oracle funded our operations through
an intercompany payable account. In connection with our acquisition of Navio in
August 1997, Oracle converted approximately $18 million of outstanding
inter-company payables into 2,727,272 shares of our Series A-1 preferred stock.
From inception until June 1, 1998, from time to time in the ordinary course of
business, we and Oracle entered into inter-company transactions. As of May 31,
1999, we had approximately $482,000 of net intercompany receivables outstanding.
The amount is comprised of intercompany accounts payable of approximately $1.1
million and the combined 1998 and 1999 tax credit receivable of approximately
$1.6 million. Additionally, in fiscal 1998, Oracle contributed capital of
approximately $8.1 million to us.
In August 1997, we entered into a tax allocation and indemnity agreement
with Oracle. This agreement provides for our consolidation into Oracle's tax
group for income tax payment purposes. Under the agreement, our tax liability is
computed as if we had filed a separate return for amounts due in certain state
and local jurisdictions. As a member of Oracle's tax group, we are allocated our
share of the aggregate tax liability of the group. The agreement provides that
Oracle will indemnify us for penalties or other damages attributed to the
failure of Oracle to make timely filings or to make timely
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or full payments, provided that we pay our allocated share and provide necessary
information on a timely basis. Under the agreement, Oracle owes us approximately
$788,000 for use of tax losses related to fiscal 1998 and approximately $781,000
for use of tax losses related to fiscal 1999.
In August 1997, in connection with our acquisition of Navio, we entered into
a put/call and voting agreement with Oracle and these former Navio stockholders,
including Netscape. Among other things, this agreement granted the former Navio
stockholders the right, for a period of 60 days following the closing of the
acquisition, to compel Oracle to purchase up to 50% of the shares received by
them in the acquisition or 50% of the shares issuable under stock options
assumed by us in the acquisition. As a result of the exercise of these put
rights, Oracle purchased a total of 1,835,569 shares of our Series C preferred
stock. Oracle subsequently converted these shares into shares of our Series C-1
preferred stock.
In May 1999, Wei Yen, our former president, sold 757,575 shares of our
Series C preferred stock to Oracle for $6.60 per share, or an aggregate of
approximately $5.0 million. Immediately after purchasing these shares from Dr.
Yen, Oracle sold the shares to General Instrument for $6.60 per share, or an
aggregate of approximately $5.0 million, under a purchase agreement among us,
Oracle and General Instrument.
SERVICE ARRANGEMENTS
From our inception until September 1997, Oracle performed various tax,
treasury, risk management, employee benefits, legal, accounting and other
general corporate services for us. The costs of these services were allocated to
us, and had a value of approximately $1.3 million. We ceased obtaining these
services from Oracle in September 1997.
In December 1997, Oracle provided services to us in connection with
development of our products. We paid Oracle approximately $62,000 for services
provided under this arrangement.
From December 1997 through May 1999, we have incurred expenses payable to
Oracle of approximately $246,000 for services provided to us by a salesperson in
Taiwan.
From November 1997 to March 1998, we paid Oracle approximately $127,000 for
services provided to us by two members of the Oracle North American sales force.
In March 1998, we entered into a services agreement with Oracle. Under this
agreement, Oracle provides professional services to some of our customers. To
date, we have made payments to Oracle amounting to approximately $96,000 under
this agreement.
In connection with the services agreement discussed in the previous
paragraph, we entered into a time and materials agreement with Oracle. The
agreement provides for Oracle to assist us with management and testing in
connection with the deployment of our products to Cable & Wireless, one of our
customers. The agreement provides for us to pay for services on a time and
materials basis. We have incurred expenses totalling approximately $306,000 for
services provided under the agreement.
In August 1998, we entered into a technical support services agreement with
Oracle and amended this agreement in January 1999. Under this agreement, we and
Oracle provide each other worldwide technical support services. We have made no
payments to Oracle under the agreement, and have received $42,000 from Oracle
for services rendered pursuant to the agreement.
Since inception, we have paid Oracle approximately $157,000 for services
performed by Oracle to localize our products for the Japanese market.
In a joint representation and defense agreement, we agreed with Oracle to
jointly defend ourselves in a trademark infringement and unfair competition
lawsuit brought by Network Computers against
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Oracle and us. In April 1998, our motion for summary judgment was granted and
the case was dismissed. We paid Oracle approximately $105,000 for legal services
in connection with our defense.
TECHNOLOGY AGREEMENTS
In September 1998, we entered into a technology license agreement with
Oracle. Pursuant to the agreement, Oracle may promote, market and distribute
sublicenses of our products through its worldwide distribution channels for a
period of three years. We have been paid license fees totalling approximately
$325,000 under the agreement.
In fiscal 1999, we paid $243,000 for commissions due to Oracle Japan in
conjunction with a sale of our software to Fujitsu. In addition, we incurred a
commission expense of $107,000 due to Oracle Belgium relating to a trial
deployment agreement with Belgacom, one of our network operator customers.
We have an agreement with Oracle pursuant to which we distribute our
products under an OEM license agreement between Oracle and Netscape discussed
below in "Transactions with Netscape and America Online."
LEASES
We lease office space in Redwood Shores, California from Oracle under a
lease that provides for monthly payments of approximately $124,000. The lease
terminates in September 2002. We also lease furniture and equipment for our
Redwood Shores office from Oracle under a lease entered into in September 1997,
as amended, that obligates us to make monthly payments to Oracle of
approximately $57,000. The furniture and equipment lease terminates
simultaneously with the office lease. In addition, we have contracted for Oracle
to perform maintenance and repair services at our Redwood Shores office. We have
incurred expenses totalling $318,000 for maintenance and repair services for
fiscal 1998 and $375,000 for maintenance and repair services in fiscal 1999. The
maintenance and repair services agreement will terminate simultaneously with our
Redwood Shores office lease. Under the terms of a letter from Oracle to us in
April 1999, Oracle agreed to terminate our Redwood Shores office lease, as well
as the furniture and equipment lease and the maintenance and repair services
agreement for our Redwood Shores office, upon 30 days notice from us to Oracle.
We previously leased office space in Salt Lake City, Utah from Oracle under
a lease that provided for monthly payments of approximately $4,000. The lease
terminated in February 1999. In April 1999, we entered into a new 36-month lease
for office space in Salt Lake City, Utah. We will continue to lease furniture
and equipment for our Salt Lake City office from Oracle under a new furniture
lease, dated March 1999, that provides for monthly payments of approximately
$750.
We lease office space in London, England from Oracle under a lease that
provides for monthly payments of approximately $4,200. The lease terminates in
October 1999, with an option to extend through October 2000.
We recently entered into a lease for office space in San Carlos, California.
The lease provides for initial monthly payments of approximately $202,000 and
terminates in April 2009. Oracle provided a $10 million guaranty to our
landlord. The guaranty can be terminated if we receive at least $40 million in
this offering and provide an irrevocable letter of credit covering 10 months
rent and operating costs. We intend to relocate our headquarters from the
Redwood Shores facility to these offices in the second quarter of fiscal 2000.
TRANSACTIONS WITH NETSCAPE AND AMERICA ONLINE
After the offering and the private placement, Netscape will beneficially own
approximately 9.22% of our outstanding stock. Netscape became a wholly-owned
subsidiary of America Online, one of our
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customers, in March 1999. In connection with this merger, one of our directors,
Mr. Barksdale, became a director of America Online.
Prior to our acquisition of Navio, Navio's predecessor, TVsoft, sold shares
of its common stock to Netscape in July 1996. In exchange for these shares of
common stock, TVsoft entered into a source code license agreement with Netscape.
We amended this agreement in April 1998 and September 1998. Under this
agreement, Netscape granted a worldwide, nonexclusive, fully paid-up and
nontransferable license to TVsoft for certain Netscape software, including
Netscape Navigator. In connection with our acquisition of Navio, and under a
letter agreement entered into in May 1997, Netscape consented to the assignment
of this license from Navio to us. As a result of our acquisition of Navio in
August 1997, Netscape's shares of Navio common stock converted into 3,812,675
shares of our Series C preferred stock.
Under the letter agreement described in the preceding paragraph, Netscape
and Oracle also agreed that our products would be distributed pursuant to an OEM
license agreement between Netscape and Oracle. Under an amendment to the letter
agreement, we have the right to use approximately $1.0 million in prepaid
royalties with Netscape. As of May 31, 1999, we have used approximately $42,000
of these royalties.
Under a letter agreement executed in December 1997 in connection with the
source code license agreement with Netscape and the April 1998 amendment to the
source code license agreement, we have paid Netscape approximately $200,000 for
the purchase of rights and licenses.
We are co-sublessors of office space located in Sunnyvale, California with
Netscape. Netscape and Navio originally leased the space in November 1996.
Navio's rights and duties under the lease were assigned to us in connection with
our acquisition of Navio. Subsequently, the property was subleased to a third
party. The monthly lease payments are approximately $68,000 and we receive
approximately $72,000 from our subtenant each month. The lease and sublease
terminate in November 2001.
We entered into a trial license and support agreement with America Online in
July 1998, which terminated upon the execution of a technology license and
support agreement entered into in August 1998. We also entered into a source
code access agreement in August 1998, which also terminated upon the execution
of the technology license and support agreement. In addition, we entered into a
consulting services agreement in February 1999 with America Online, under which
we are developing new features for our products. As of May 31, 1999, we have
received payments from America Online under all of these agreements aggregating
approximately $6.5 million.
OTHER TRANSACTIONS
In May 1999, we sold 5,208,326 shares of our Series E preferred stock for
$47.5 million, net of expenses, to several investors, including Comcast, Cox and
MediaOne. In connection with this sale of stock, we entered into a voting
agreement with Comcast, Cox, MediaOne and Oracle. Pursuant to the voting
agreement, Comcast, Cox, MediaOne and Oracle agreed to vote the shares of our
common stock held by them to elect a representative designated by Oracle and a
single representative designated by Comcast, Cox and MediaOne to our board of
directors. In the voting agreement, we also agreed to create a three member
advisory board to our board of directors consisting of one representative of
each of Comcast, Cox and MediaOne. The voting agreement will terminate on the
earlier of:
- A change in control of us;
- Three years following the date of this prospectus; or
- The date on which Comcast, Cox and MediaOne own less than 50% of the
common stock issuable upon conversion of the Series E preferred stock
originally sold to each of them.
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In connection with the sale of our Series E preferred stock described above,
we entered into letter agreements with Comcast, Cox and MediaOne. The letter
agreements provide that we and each of these network operators will use
commercially reasonable efforts to execute definitive license agreements within
120 days of these letter agreements. The letter agreements further provide that
these network operators will have the right to test our software free of charge
and without any commitment to deploy services using our technology for an
evaluation period. In addition, the letter agreements provide that, if certain
commercial milestones are satisfied, we will issue each of these network
operators warrants to purchase up to 466,666 shares of our common stock. As of
May 31, 1999, we issued warrants to purchase up to 83,333 shares of common stock
to Comcast for achieving commercial milestones. In addition, under these letter
agreements, these network operators are entitled to receive the benefits of any
more favorable terms and conditions that we may grant to any other North
American network operator in the future.
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
We entered into an employment agreement, dated October 12, 1998, with
Mitchell E. Kertzman, our President and Chief Executive Officer. Mr. Kertzman's
annual salary is $300,000 and he is eligible for an annual bonus of up to
$200,000. His bonus for the first year of employment is guaranteed to be
$200,000. We granted him an option to purchase 1,666,666 shares of our common
stock. Upon his completion of 12 months of service, 25% of the option shares
will vest, and the balance of the option shares will vest in a series of equal
monthly installments upon his completion of each of the following 36 months. If
we experience a change in control, 50% of any unvested option shares will become
vested.
We entered into an employment offer letter, dated March 12, 1999, with
Gordon Yamate, our Vice President, General Counsel and Secretary, that provides
for the acceleration of vesting of 25% of his unvested options if we experience
a change in control before March 15, 2000.
We entered into a settlement agreement, dated March 16, 1998, with Jerry W.
Baker, our former Chief Executive Officer. Under this agreement, we paid Mr.
Baker a severance amount of $180,000, which represented six months of his base
salary. In consideration for the severance payment, Mr. Baker agreed to release
all claims against us.
In October 1997, we entered into an employment agreement, as amended in
February 1998, with Wei Yen, our former President. The amendment provided for
the resignation of Dr. Yen from Liberate. Pursuant to the agreement, we agreed
to terminate our right of repurchase as to his shares of Series C preferred
stock. In addition, Dr. Yen received a severance payment of $820,000, payable in
24 equal monthly installments, beginning on February 27, 1998, and the
forgiveness of indebtedness amounting to $576,000. In consideration for the
severance payment and the loan forgiveness, Dr. Yen agreed to release all claims
that he may have against us.
We have granted options to our executive officers and directors. See
"Management--Option Grants in Last Fiscal Year" and "Principal Stockholders."
We have entered into an Indemnification Agreement with each of our executive
officers and directors described in the "Management" section.
------------------------
We believe that the terms of all of the agreements and transactions
discussed in this section were at least as favorable to us as those that could
have been obtained or secured in arm's-length transactions.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of May 31, 1999, with respect
to shares beneficially owned by:
- Each person who we know to be the beneficial owner of more than five
percent of our outstanding shares of common stock;
- Each of the executive officers named in the Summary Compensation Table;
- Each of our directors; and
- All current directors and executive officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person, if, for example, persons share the
power to vote or the power to dispose of the shares. In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire shares, for example, upon exercise of an option or warrant, within sixty
days of the date as of which the information is provided; in computing the
percentage ownership of any person, the amount of shares is deemed to include
the amount of shares beneficially owned by such person, and only such person, by
reason of such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person's actual voting power at any particular date.
The percentage of beneficial ownership for the following table is based on
34,016,811 shares of common stock outstanding as of May 31, 1999 and 41,351,880
shares of common stock outstanding after the completion of this offering and the
private placement.
Unless otherwise indicated, the address for each listed stockholder is: c/o
Liberate Technologies, 1000 Bridge Parkway, Redwood Shores, California, 94065.
To our knowledge, except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect to
the shares of common stock indicated.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
------------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS SHARES OFFERING OFFERING
- -------------------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Oracle Corporation(1)........................................................... 19,851,249 58.30% 47.97%
Lawrence J. Ellison
Jeffrey O. Henley
500 Oracle Parkway
Redwood Shores, California 94065
James L. Barksdale(2)........................................................... 3,818,751 11.22% 9.23%
Netscape Communications Corporation............................................. 3,812,675 11.21% 9.22%
501 E. Middlefield Road
Mountain View, California 94043
David J. Roux(3)................................................................ 295,138 * *
Steven Weinstein(4)............................................................. 109,789 * *
David A. Limp(5)................................................................ 86,390 * *
Nancy J. Hilker(6).............................................................. 75,804 * *
Philip A. Vachon(7)............................................................. 26,734 * *
Charles G. Tritschler(8)........................................................ 21,458 * *
Charles Corfield(9)............................................................. 6,076 * *
Mitchell E. Kertzman(10)........................................................ -- * *
Gordon T. Yamate(11)............................................................ -- * *
All executive officers and directors as a group (12 persons).................... 24,291,389 70.64% 58.22%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.
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(1) Includes 32,646 shares that Oracle has the right to acquire under the
put/call and voting agreement. Mr. Ellison, one of our directors, is the
chief executive officer and chairman of the board of directors of Oracle.
Mr. Henley, one of our directors, is an executive officer and a director of
Oracle. Messrs. Ellison and Henley disclaim beneficial ownership of Oracle's
shares.
(2) Represents 6,076 shares issuable upon the exercise of stock options held by
Mr. Barksdale exercisable within 60 days of May 31, 1999 and 3,812,675
shares held of record by Netscape. In March 1999, Netscape became a
wholly-owned subsidiary of America Online, one of our customers. In
connection with the merger, Mr. Barksdale was elected to the board of
directors of America Online. Mr. Barksdale disclaims beneficial ownership of
the 3,812,675 shares held of record by Netscape.
(3) Includes 69,444 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1999.
(4) Consists of shares issuable upon the exercise of stock options exercisable
within 60 days of May 31, 1999. Mr. Weinstein has transferred 2,000 shares
to certain of his immediate family and other relatives and disclaims
beneficial ownership of these shares.
(5) Includes 44,724 shares issuable upon exercise of stock options exercisable
within 60 days of May 31, 1999.
(6) Consists of shares issuable upon exercise of stock options exercisable
within 60 days of May 31, 1999. Ms. Hilker has transferred 2,197 shares to
certain of her immediate family members and disclaims beneficial ownership
of these shares.
(7) Includes 17,359 shares issuable upon the exercise of stock options
exercisable within 60 days of May 31, 1999. Mr. Vachon has transferred 9,375
shares to certain of his immediate family and other relatives and disclaims
beneficial ownership of these shares.
(8) Consists of shares issuable upon exercise of stock options exercisable
within 60 days of May 31, 1999.
(9) Consists of shares issuable upon exercise of stock options exercisable
within 60 days of May 31, 1999.
(10) On November 16, 1998, Mr. Kertzman was granted an option to purchase
1,666,666 shares. This option is not yet exercisable.
(11) On April 2, 1999, Mr. Yamate was granted an option to purchase 62,500
shares. This option is not yet exercisable.
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DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.01 par value, and 20,000,000 shares of
preferred stock, $0.01 par value. The following description is intended to be a
summary and does not describe all provisions of our certificate of incorporation
or bylaws or Delaware law applicable to Liberate. For a more thorough
understanding of the terms of our capital stock, you should refer to our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is part.
COMMON STOCK
As of May 31, 1999, there were 34,016,811 shares of common stock outstanding
that were held of record by approximately 190 stockholders. As of May 31, 1999,
there are 6,403,505 shares of common stock subject to outstanding options,
1,417,859 of which were then exercisable. There will be 41,351,880 shares of
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and assuming no exercise after May 31, 1999, of
outstanding options or warrants, after giving effect to the private placement,
and the sale of the shares of common stock to the public offered hereby. The
holders of common stock are entitled to one vote per share on all matters to be
voted on by the stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available therefor. In the event of
the liquidation, dissolution, or winding up of Liberate, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued on
completion of this offering will be fully paid and nonassessable. See "Dividend
Policy."
PREFERRED STOCK
On the closing of this offering, 20,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The board of directors has the
authority to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Liberate without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of common stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We
currently do not plan to issue any of the preferred stock.
REGISTRATION RIGHTS
After this offering and the private placement scheduled to close immediately
following the consummation of this offering, the holders of approximately
34,484,708 shares of common stock and rights to acquire common stock will be
entitled to rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreement between us and the holders of
these registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of such registration and are entitled to include shares of common stock
in the registration. Additionally, if we are meeting certain revenue and income
milestones, some of these
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holders are also entitled to demand registration rights, which allow them to
require us on one occasion to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock, and we are
required to use all reasonable efforts to effect such registration. In addition,
if the holders of at least 40% our Series E preferred stock so request, they
will have two rights to demand registration, provided that such offering is for
an aggregate offering of at least $20 million. Further, holders may require us
to file an unlimited number of additional registration statements on Form S-3 at
our expense. All of these registration rights terminate no later than five years
following the consummation of this offering and are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and our
right not to effect a requested registration within 180 days following an
offering of our securities, including this offering.
WARRANTS
In April and May 1999, we entered into letter agreements with several
network operators that require us to issue warrants to purchase up to an
aggregate of 2,299,996 shares of our common stock if the network operators
satisfy commercial milestones. Warrants to purchase up to 208,333 shares of our
common stock, if issued, will have an exercise price of $9.60 per share,
warrants to purchase up to 2,041,663 shares of our common stock, if issued, will
have an exercise price of $13.80 per share and warrants to purchase up to 50,000
shares of our common stock, if issued, will have an exercise price of either
$9.60 or $13.80 per share, depending on whether commitments are made to us by
the warrant holders. The warrants, if issued, will terminate on various dates,
between May 31, 2000, for the earliest warrants, and a date five years from the
vesting date of the warrants for the latest warrants, which vesting date is
contingent upon different prepayment or deployment milestones. As of May 31,
1999, we issued warrants to purchase up to 208,333 shares of common stock to two
network operators for achieving commercial milestones.
CONVERTIBLE PROMISSORY NOTE
In November 1997, we entered into a cooperation agreement and a convertible
promissory note purchase agreement with Middlefield Ventures, an affiliate of
Intel. Pursuant to this agreement, we issued a promissory note to Middlefield in
the amount of $4.0 million in November 1997. The note bears interest at 5% per
year. Interest is due, together with principal, in November 2002, unless the
note is previously converted. This note will automatically convert into 421,940
shares of our common stock upon the closing of this offering. If we meet
specific development milestones in connection with the cooperation agreement,
Middlefield will fund two additional notes under the agreement, each with
principal of $4.0 million.
PRIVATE PLACEMENT WITH LUCENT TECHNOLOGIES INC.
In June 1999, we entered into a stock purchase agreement with Lucent
Technologies Inc. under which, contingent upon and immediately following
consummation of the sale of shares in this offering, Lucent agreed to invest
$12,500,000 in a private placement of shares of our common stock at a price per
share equal to 96% of the price of this offering. Lucent has agreed not to sell,
transfer, encumber or otherwise dispose of any of the shares of common stock
acquired in the private placement in a public or private sale for a period of
180 days following the closing of this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of incorporation
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. The vote of at least 75% of the voting power of
our capital stock is required to amend certain of the provisions of our
certificate of incorporation. In addition, the bylaws provide that our
stockholders may call a special
68
<PAGE>
meeting of stockholders only upon a request of stockholders owning at least 50%
of our capital stock. These provisions of the certificate of incorporation and
bylaws may have the effect of deterring hostile takeovers or delaying changes in
our management.
DELAWARE TAKEOVER STATUTE. We are subject to Section 203 of the Delaware
General Corporation Law, which regulates corporate acquisitions. Section 203
prevents Delaware corporations, such as us, whose securities are listed on the
Nasdaq National Market from engaging in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an "interested stockholder." For purposes of Section 203, a
"business combination" includes a merger or consolidation involving Liberate and
the interested stockholder and the sale of 10% or more of Liberate's assets. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of Liberate and
any entity or person affiliated with or controlling or controlled by such entity
or person. A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the corporation's outstanding voting
shares. We have not "opted out" of the provisions of Section 203.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is BankBoston, N.A.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares issued
upon exercise of outstanding options and warrants, in the public market
following this offering and the private placement could adversely affect market
prices prevailing from time to time and could impair our ability to raise
capital through the sale of our equity securities. As described below, none of
the shares currently outstanding will be available for sale immediately after
this offering due to the existing contractual and legal restrictions on resale
described below. Sales of substantial amounts of our common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price of our stock and our ability to raise equity capital in the future.
Upon completion of this offering and the private placement, we will have
outstanding 41,351,880 shares of common stock based upon shares outstanding as
of May 31, 1999, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants prior to completion of this
offering and the private placement. Of these shares, the 6,250,000 shares sold
in this offering will be freely tradable without restriction under the
Securities Act except for any shares purchased by our "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 35,101,880 shares
of common stock held by existing stockholders and the purchaser in the private
placement are restricted shares as that term is defined in Rule 144. These
restricted shares are subject to lock-up agreements providing that, with certain
limited exceptions, the stockholder will not offer, sell, contract to sell or
otherwise dispose of any common stock or any securities that are convertible
into common stock for a period of 180 days after the date of this prospectus
without the prior written consent of Credit Suisse First Boston Corporation. As
a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rule 144, 144(k) and 701, none of
these shares will be resellable until 181 days after the date of this
prospectus. Credit Suisse First Boston Corporation may, in their sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements.
A private placement of 1,085,069 shares will occur immediately following the
closing of this offering. These shares will become eligible for sale in the
public market one year from the date of this prospectus.
The following table shows approximately when the 35,101,880 shares of our
common stock that are not being sold in this offering, but which will be
outstanding when this offering and the private placement are complete, will be
eligible for sale in the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At the effective date........................................................... --
180 days after the effective date............................................... 27,612,298
More than 180 days.............................................................. 1,196,187
May 12, 2000.................................................................... 5,208,326
One year after the effective date............................................... 1,085,069
</TABLE>
Resale of 23,918,562 of the restricted shares that will become available for
sale in the public market starting 180 days after the effective date will be
limited by volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the
70
<PAGE>
holding period of any prior owner except an affiliate would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 413,518 shares immediately after this offering and the
private placement; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of us at any time during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for a least two years
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
RULE 701
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirement, of Rule 144. Any employee, officer or director of or
consultant to us who purchased shares under a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that nonaffiliates may sell such shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares are required to
wait until 90 days after the date of this prospectus before selling such shares.
However, all Rule 701 shares are subject to lock-up agreements and will only
become eligible for sale at the earlier of the expiration of the 180-day lock-up
agreements. Credit Suisse First Boston may, in their sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
Within 90 days following the effectiveness of this offering, we will file a
Registration Statement on Form S-8 registering 9,584,386 shares of common stock
subject to outstanding options or reserved for future issuance under our stock
plans. As of May 31, 1999, options to purchase a total of 3,076,478 shares were
outstanding and 2,365,393 shares were reserved for future issuance under our
stock plans. Common stock issued upon exercise of outstanding vested options or
issued under our purchase plan, other than common stock issued to our
affiliates, is available for immediate resale in the open market.
REGISTRATION RIGHTS
Also beginning 180 days after the date of this offering, holders of
34,484,708 restricted shares will be entitled to certain registration rights for
sale in the public market. See "Description of Capital Stock--Registration
Rights." Registration of such shares under the Securities Act would result in
such shares becoming freely tradable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of such registration.
71
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC and Charles Schwab & Co., Inc. are acting as representatives, the following
respective number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation...............................................................
Hambrecht & Quist LLC................................................................................
Charles Schwab & Co., Inc............................................................................
----------
Total............................................................................................ 6,250,000
----------
----------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 937,500 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------ ------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions paid by
us.............................................. $ $ $ $
Expenses payable by us............................ $ $ $ $
</TABLE>
In addition, Credit Suisse First Boston Corporation and Hambrecht & Quist
LLC will receive from us an aggregate fee equal to 3% of the gross proceeds from
the common stock offered to Lucent Technologies in a private placement, which is
scheduled to close immediately following the consummation of this offering.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and several other stockholders have agreed
not to offer, transfer, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock without the prior
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus. These
72
<PAGE>
restrictions do not prohibit us from issuing employee stock options and common
stock issuable upon the exercise of employee stock options outstanding on the
date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 312,500 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have made application to list our shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "LBRT."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information set forth in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
The representatives on behalf of the underwriters may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
Individuals and entities affiliated with Hambrecht & Quist LLC purchased an
aggregate of 21,872 shares of our Series E preferred stock for a total purchase
price of approximately $210,000, or $9.60 per share. In addition, a venture
capital fund managed by an entity affiliated with Hambrecht & Quist LLC
purchased an aggregate of 82,291 shares of our Series E preferred stock for a
total purchase price of approximately $790,000, or $9.60 per share.
73
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (2) where
required by law, that the purchaser is purchasing as principal and not as agent,
and (3) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named in this
prospectus, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
us or these people. All or a substantial portion of our assets and the assets of
these people may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or these people in Canada or to
enforce a judgment obtained in Canadian courts against us or these people
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that a purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
74
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. Various legal matters in connection with this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of Liberate Technologies
and subsidiaries included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing. Reference is made to the report of said
firm, which includes an explanatory paragraph with respect to the change in
accounting for the acquisition of Navio as discussed in note 3 of the notes to
the consolidated financial statements.
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1996, and for the period from inception, February 12,
1996, to December 31, 1996, as set forth in their report, which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the Company's ability to continue as a going concern as described in Note 1 to
the financial statements. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules to the
registration statement. For further information with respect to us and such
common stock offered hereby, reference is made to the registration statement and
the exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any contract
or any other document referred to are not necessarily complete; reference is
made in each instance to the copy of such contract or document filed as an
exhibit to the registration statement. Each such statement is qualified in all
respects by such reference to such exhibit. The registration statement,
including exhibits and schedules thereto, may be inspected without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, NY 10048, and at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661. Copies of all or any part thereof may be obtained from such office after
payment of fees prescribed by the Commission. These reports and other
information may also be without charge at a Web site maintained by the
Commission. The address of the site is http://www.sec.gov.
75
<PAGE>
LIBERATE TECHNOLOGIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS OF LIBERATE TECHNOLOGIES
Report of Independent Public Accountants..................................... F-2
Consolidated Balance Sheets.................................................. F-3
Consolidated Statements of Operations and Comprehensive Loss................. F-4
Consolidated Statements of Stockholders' Equity (Deficit).................... F-5
Consolidated Statements of Cash Flows........................................ F-6
Notes to Consolidated Financial Statements................................... F-7
AUDITED FINANCIAL STATEMENTS OF NAVIO COMMUNICATIONS, INC. AS OF DECEMBER 31,
1996
Report of Independent Auditors............................................... F-27
Balance Sheets............................................................... F-28
Statement of Operations...................................................... F-29
Statement of Shareholders' Equity............................................ F-30
Statement of Cash Flows...................................................... F-31
Notes to Financial Statements................................................ F-32
UNAUDITED INTERIM FINANCIAL STATEMENTS OF NAVIO COMMUNICATIONS, INC. AS OF
JUNE 30, 1997................................................................ F-41
UNAUDITED PROFORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF LIBERATE
TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC................................... F-45
</TABLE>
F-1
<PAGE>
AFTER THE REVERSE STOCK SPLIT DISCUSSED IN NOTE 13 TO LIBERATE TECHNOLOGIES'
CONSOLIDATED FINANCIAL STATEMENTS, WE EXPECT TO BE IN A POSITION TO RENDER THE
FOLLOWING AUDIT REPORT:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Liberate Technologies:
We have audited the accompanying consolidated balance sheets of Liberate
Technologies (a Delaware corporation, formerly known as Network Computer, Inc.)
and subsidiaries as of May 31, 1998 and 1999, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended May 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Liberate Technologies and
subsidiaries as of May 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended May 31,
1999 in conformity with generally accepted accounting principles.
As explained in Note 3 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for its acquisition of
Navio Communications, Inc.
ARTHUR ANDERSEN LLP
San Jose, California
June 24, 1999 (except with
respect to the matters
discussed in Note 13, as to
which the date is , 1999)
F-2
<PAGE>
LIBERATE TECHNOLOGIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
MAY 31, LIABILITIES AND
----------------------- STOCKHOLDERS'
1998 1999 EQUITY AT MAY
---------- ---------- 31, 1999 (NOTE
7)
---------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................... $ 12,138 $ 33,657
Short-term investments.......................... -- 19,751
Accounts receivable, net of allowance for
doubtful accounts of $278 in 1998 and $247 in
1999.......................................... 820 644
Receivable from affiliate....................... -- 482
Prepaid expenses and other current assets....... 1,600 3,415
---------- ----------
Total current assets.......................... 14,558 57,949
PROPERTY AND EQUIPMENT, net....................... 1,915 2,269
OTHER ASSETS:
Advanced royalties.............................. 570 279
Purchased intangibles, net...................... 13,691 7,606
Other........................................... 78 79
---------- ----------
Total assets.................................. $ 30,812 $ 68,182
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................ $ 1,455 $ 1,643
Accounts payable to affiliate................... 1,252 --
Accrued liabilities............................. 4,411 8,911
Accrued payroll and related expenses............ 1,795 2,248
Deferred revenues............................... 23,868 38,787
Note payable to affiliate....................... 52 52
---------- ----------
Total current liabilities..................... 32,833 51,641 $ 51,641
LONG-TERM DEBT.................................... 4,115 4,315 --
---------- ---------- ---------------
Total liabilities............................. 36,948 55,956 51,641
---------- ---------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $0.01 par value,
aggregate liquidation preferences of $186,182
at May 31, 1999
Authorized--259,749,900 shares
Outstanding--26,998,823 shares and 32,977,699
shares at May 31, 1998 and 1999,
respectively; no shares outstanding pro
forma....................................... 270 330 --
Common stock, $0.01 par value
Authorized--407,500,000 shares
Outstanding--213,328 shares and 617,172 shares
at May 31, 1998 and 1999, respectively;
34,016,811 shares outstanding pro forma..... 2 6 340
Contributed and paid-in-capital................. 110,262 166,979 171,290
Deferred stock compensation..................... -- (6,579) (6,579)
Warrants........................................ -- 1,522 1,522
Stockholder notes receivable.................... (26) (348) (348)
Accumulated other comprehensive income.......... 15 28 28
Accumulated deficit............................. (116,659) (149,712) (149,712)
---------- ---------- ---------------
Total stockholders' equity (deficit).......... (6,136) 12,226 16,541
---------- ---------- ---------------
Total liabilities and stockholders' equity
(deficit)................................... $ 30,812 $ 68,182 $ 68,182
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
LIBERATE TECHNOLOGIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
License and royalty...................................................... $ 231 $ 4,162 $ 5,281
Service.................................................................. 44 6,110 12,032
---------- ----------- -----------
Total revenues....................................................... 275 10,272 17,313
---------- ----------- -----------
COST OF REVENUES:
License and royalty...................................................... -- 3,779 2,279
Service.................................................................. -- 2,230 8,247
---------- ----------- -----------
Total cost of revenues............................................... -- 6,009 10,526
---------- ----------- -----------
Gross margin......................................................... 275 4,263 6,787
---------- ----------- -----------
OPERATING EXPENSES:
Research and development................................................. 21,721 19,981 18,171
Sales and marketing...................................................... 7,805 14,407 11,730
General and administrative............................................... 1,023 2,453 3,975
Amortization of purchased intangibles.................................... -- 4,563 6,084
Amortization of warrants................................................. -- -- 18
Amortization of deferred stock compensation.............................. -- -- 507
Restructuring charge..................................................... -- 1,175 --
Acquired in-process research and development............................. -- 58,100 --
---------- ----------- -----------
Total operating expenses............................................. 30,549 100,679 40,485
---------- ----------- -----------
Loss from operations................................................. (30,274) (96,416) (33,698)
INTEREST AND OTHER INCOME (EXPENSE), net................................. (465) 10 59
---------- ----------- -----------
Loss before income tax benefit....................................... (30,739) (96,406) (33,639)
INCOME TAX BENEFIT....................................................... (11,750) (2,015) (586)
---------- ----------- -----------
Net loss............................................................. (18,989) (94,391) (33,053)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT.................................. (4) 19 13
---------- ----------- -----------
Comprehensive loss................................................... $ (18,993) $ (94,372) $ (33,040)
---------- ----------- -----------
---------- ----------- -----------
BASIC NET LOSS PER SHARE................................................. $ -- $ (1,780.96) $ (113.23)
---------- ----------- -----------
---------- ----------- -----------
SHARES USED IN COMPUTING BASIC NET LOSS PER SHARE........................ -- 53 292
---------- ----------- -----------
---------- ----------- -----------
PRO FORMA BASIC NET LOSS PER SHARE....................................... $ (1.17)
-----------
-----------
SHARES USED IN COMPUTING PRO FORMA BASIC NET LOSS PER SHARE.............. 28,293
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LIBERATE TECHNOLOGIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK CONTRIBUTED
------------------------ ---------------------- AND PAID-IN DEFERRED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1996..................... -- $ -- 16 $ -- $ 3,354 $ --
Issuance of convertible preferred stock
to affiliate.......................... 14,166,650 142 -- -- 11,270 --
Translation loss........................ -- -- -- -- -- --
Refund of contributed capital........... -- -- -- -- (11,750) --
Net loss................................ -- -- -- -- -- --
----------- ----------- --------- ----------- ------------ -------
BALANCE, MAY 31, 1997..................... 14,166,650 142 16 -- 2,874 --
Value of options assumed in
acquisition........................... -- -- -- -- 18,234 --
Issuance of convertible preferred
stock................................. 12,205,510 122 -- -- 81,613 --
Contribution of capital from
affiliate............................. -- -- -- -- 8,080 --
Stock options exercised................. 626,663 6 213,312 2 598 --
Acceleration of option vesting.......... -- -- -- -- 365 --
Stockholder note repayment.............. -- -- -- -- -- --
Translation gain........................ -- -- -- -- -- --
Refund of contributed capital........... -- -- -- -- (1,502) --
Net loss................................ -- -- -- -- -- --
----------- ----------- --------- ----------- ------------ -------
BALANCE, MAY 31, 1998..................... 26,998,823 270 213,328 2 110,262 --
Stock options exercised................. 770,550 8 403,844 4 2,193 --
Issuance of convertible preferred stock,
net of issuance costs of $2,510....... 5,208,326 52 -- -- 47,438 --
Deferred stock compensation related to
stock options......................... -- -- -- -- 7,086 (7,086)
Amortization of deferred stock
compensation.......................... -- -- -- -- -- 507
Issuance of warrants.................... -- -- -- -- -- --
Translation gain........................ -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
----------- ----------- --------- ----------- ------------ -------
BALANCE, MAY 31, 1999..................... 32,977,699 $ 330 617,172 $ 6 $ 166,979 $ (6,579)
----------- ----------- --------- ----------- ------------ -------
----------- ----------- --------- ----------- ------------ -------
<CAPTION>
TOTAL
STOCKHOLDER ACCUMULATED OTHER STOCKHOLDERS'
NOTES COMPREHENSIVE ACCUMULATED EQUITY
WARRANTS RECEIVABLE INCOME (LOSS) DEFICIT (DEFICIT)
----------- ------------ ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1996..................... $ -- $ -- $ -- $ (3,279) $ 75
Issuance of convertible preferred stock
to affiliate.......................... -- -- -- -- 11,412
Translation loss........................ -- -- (4) -- (4)
Refund of contributed capital........... -- -- -- -- (11,750)
Net loss................................ -- -- -- (18,989) (18,989)
----------- ------------ ---------- ------------- -------------
BALANCE, MAY 31, 1997..................... -- -- (4) (22,268) (19,256)
Value of options assumed in
acquisition........................... -- -- -- -- 18,234
Issuance of convertible preferred
stock................................. -- (34) -- -- 81,701
Contribution of capital from
affiliate............................. -- -- -- -- 8,080
Stock options exercised................. -- (2) -- -- 604
Acceleration of option vesting.......... -- -- -- -- 365
Stockholder note repayment.............. -- 10 -- -- 10
Translation gain........................ -- -- 19 -- 19
Refund of contributed capital........... -- -- -- -- (1,502)
Net loss................................ -- -- -- (94,391) (94,391)
----------- ------------ ---------- ------------- -------------
BALANCE, MAY 31, 1998..................... -- (26) 15 (116,659) (6,136)
Stock options exercised................. -- (322) -- -- 1,883
Issuance of convertible preferred stock,
net of issuance costs of $2,510....... -- -- -- -- 47,490
Deferred stock compensation related to
stock options......................... -- -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- -- 507
Issuance of warrants.................... 1,522 -- -- -- 1,522
Translation gain........................ -- -- 13 -- 13
Net loss................................ -- -- -- (33,053) (33,053)
----------- ------------ ---------- ------------- -------------
BALANCE, MAY 31, 1999..................... $ 1,522 $ (348) $ 28 $ (149,712) $ 12,226
----------- ------------ ---------- ------------- -------------
----------- ------------ ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LIBERATE TECHNOLOGIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss................................... $ (18,989) $ (94,391) $ (33,053)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of acquired in-process
research and development............. -- 58,100 --
Depreciation and amortization.......... 470 6,070 7,367
Amortization of warrants............... -- -- 18
Provision for doubtful accounts........ 1 329 220
Loss on disposal of fixed assets....... -- 71 --
Non-cash compensation expense.......... -- 365 507
Non-cash tax benefit................... (11,750) (1,502) --
Changes in operating assets and
liabilities, net of acquisition:
(Increase) decrease in accounts
receivable....................... (255) 9 (45)
Increase in prepaid expenses and
other current assets............. (18) (957) (311)
(Increase) decrease in other
assets........................... (2,168) 1,601 290
Increase in accounts payable....... 1,040 141 188
Increase (decrease) in accounts
payable to affiliate............. 18,723 5,529 (1,734)
Increase in accrued liabilities.... 2,591 961 4,500
Increase in accrued payroll and
related expenses................. 886 586 453
Increase in deferred revenues...... 45 20,786 14,919
Increase in interest payable....... -- 115 200
----------- ----------- -----------
Net cash used in operating
activities..................... (9,424) (2,187) (6,481)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (1,739) (923) (1,635)
Purchase of short-term investments......... -- -- (19,751)
Proceeds from sale of fixed assets......... -- 170 --
Cash acquired in Navio acquisition......... -- 1,970 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities........... (1,739) 1,217 (21,386)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net...................................... -- 161 1,535
Proceeds from issuance of convertible
preferred stock, net..................... 11,000 603 47,838
Contribution of capital.................... 412 8,080 --
Proceeds from notes payable................ -- 4,000 5,000
Repayment of note payable.................. -- -- (5,000)
----------- ----------- -----------
Net cash provided by financing
activities..................... 11,412 12,844 49,373
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH............. (4) 19 13
NET INCREASE IN CASH AND CASH EQUIVALENTS.... 245 11,893 21,519
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD..................................... -- 245 12,138
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 245 $ 12,138 $ 33,657
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL NON-CASH ACTIVITIES:
Conversion of intercompany payable to
convertible preferred stock.............. $ -- $ 23,000 $ --
----------- ----------- -----------
----------- ----------- -----------
Deferred stock compensation................ $ -- $ -- $ 7,086
----------- ----------- -----------
----------- ----------- -----------
Stockholder notes receivable............... $ -- $ 36 $ 322
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Liberate Technologies (the "Company"), formerly known as Network Computer,
Inc., was incorporated on April 24, 1996, and is a provider of a comprehensive
software platform for delivering internet-enhanced content and applications to a
broad range of information appliances, such as television set-top boxes, game
consoles, smart phones and personal digital assistants. In December 1995, the
Company began operations as a division of Oracle Corporation ("Oracle")
developing technology for use in the network computer. On May 31, 1999, Oracle
owned 58% of the outstanding shares of the Company and the Company was a
consolidated entity of Oracle.
On August 11, 1997, the Company completed the acquisition of Navio
Communications, Inc. ("Navio"), a development stage entity which was in the
process of developing consumer Internet applications software (the
"acquisition"). The acquisition was recorded under the purchase method of
accounting and, therefore, the results of operations of Navio and the fair value
of the acquired assets and liabilities were included in the Company's
consolidated financial statements beginning on the acquisition date (see Note
3).
During fiscal 1998, the Company commenced shipment of its principal products
and emerged from the development stage. Although the Company is no longer in the
development stage, the Company continues to be subject to the risks and
challenges associated with companies in a comparable stage of development,
including: dependence on key individuals; key suppliers and customers;
competition from substitute products and from larger companies; successful
marketing of its products and acceptance of its technology; successful
development of product enhancements on a continuing basis; and the need for
adequate financing to support future growth.
In May 1999, the Company entered into an agreement with Sun Microsystems
("Sun") to transfer their NC Navigator and NC Administration Server software to
Sun while retaining the right to ship, support and maintain these products for
existing customers using this technology. Although the Company does not intend
to actively pursue new sales opportunities in the corporate network computer
market, outside of this market they intend to continue developing new products
based on this technology. For the year ended May 31, 1999, sales of these
products and related services accounted for $2.5 million of total revenues. Sun
has also agreed to co-develop television set-top box technology with the
Company, which will be distributed pursuant to a non-exclusive license with Sun.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents consist principally of money market
accounts.
SHORT-TERM INVESTMENTS
The Company classifies its short-term investments as "held-to-maturity"
given the Company's positive intent and ability to hold the investments to
maturity. Held-to-maturity securities are carried at amortized cost, which
approximates the fair market value. As of May 31, 1999, short-term investments
consisted entirely of commercial paper, maturing at various dates through August
1999.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. As of
May 31, 1998 and 1999, approximately 85% and 80% of accounts receivable were
concentrated with four and two customers, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition, and the risk
of loss with respect to its accounts receivables is further mitigated by the
fact that the Company's customer base is comprised of well established
companies. The Company provides reserves for credit losses which, to date, have
been insignificant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of three
to five years. Leasehold improvements are amortized over the shorter of the
remaining lease term or the estimated useful lives of the improvements using the
straight-line method.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at the
current exchange rate as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in other income
(expense) and have not been material.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," capitalization of software development costs
begins upon the establishment of technological feasibility of the product, which
the Company has defined as the completion of beta testing of a working product.
The establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including,
F-8
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
but not limited to, anticipated future gross product revenues, estimated
economic life and changes in software and hardware technology. Amounts that
could have been capitalized under this statement after consideration of the
above factors were immaterial and, therefore, no software development costs have
been capitalized by the Company to date.
REVENUE RECOGNITION
Effective June 1, 1998, the Company adopted Statement of Position ("SOP")
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles for recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's financial position, results of operations or cash flows. In December
1998, the American Institute of Certified Public Accountants issued SOP 98-9
"Modification of SOP 97-2. Software Revenue Recognition With Respect to Certain
Transactions." SOP 98-9 is effective for fiscal years beginning on or before
March 15, 1999. The Company believes that the adoption of SOP 98-9 will not have
a material effect on the Company's results of operations or financial condition.
License revenues consist principally of up front license fees earned from
the licensing of the Company's software and royalty fees earned upon the
shipment of, or activation of products which incorporate, the Company's
software. Revenues from up front software license agreements are recognized when
delivery has occurred, collection of the receivable is probable, the fee is
fixed or determinable and vendor-specific objective evidence exists to allocate
the total fee to all delivered and undelivered elements of the arrangement.
Revenue is deferred in cases where the license arrangement calls for the future
delivery of products or services for which the Company does not have vendor-
specific objective evidence to allocate a portion of the total fee to the
undelivered element. In such cases, revenue is recognized when the undelivered
elements are delivered or vendor-specific objective evidence of the undelivered
elements becomes available. If license arrangements include the rights to
unspecified future products, revenue is recognized over the contractual or
estimated economic term of the arrangement. Royalty revenues are recognized when
reported to the Company after shipment of or activation of the related products.
Prepaid royalties are deferred and recognized when reported.
Service revenues consist of consulting services, training and maintenance,
which includes updates and technical support. Consulting service and training
revenues are generally recognized as services are performed. Maintenance revenue
is recognized ratably over the term of the agreement. In instances where
software license agreements include a combination of consulting services,
training, and maintenance, these separate elements are unbundled from the
arrangement based on the element's relative fair value.
F-9
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The percentage of sales to significant customers is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Customer A.......................................... * 16% 23%
Customer B.......................................... * * 10%
Customer C.......................................... * 10% *
Customer D.......................................... 16% * *
</TABLE>
* Less than 10%
DEFERRED REVENUES
Deferred revenues consists principally of payments received from customers
for future services, prepaid royalties and license fees for undelivered product.
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to report a new, additional measure of
income on the income statement or to create a new financial statement that shows
the new measure of income. Comprehensive income includes foreign currency
translation gains and losses and unrealized gains and losses on equity
securities that have been previously excluded from net income and reflected
instead in equity. The Company has reported the components of comprehensive
income on its statement of operations.
SEGMENT REPORTING
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 is effective
for Liberate's year ending May 31, 1999. Liberate operates solely in one
segment, the development, manufacturing and sale of information appliance
software for consumer, corporate and educational marketplaces. As of May 31,
1998 and 1999, the Company's long-term assets are located primarily in the
United States. The Company's revenues by geographic area are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
United States................................................... $ 62 $ 5,137 $ 8,542
Japan........................................................... 17 3,280 4,393
England......................................................... 10 682 2,517
Canada.......................................................... 82 346 587
Other........................................................... 104 827 1,274
--------- --------- ---------
Consolidated.................................................... $ 275 $ 10,272 $ 17,313
--------- --------- ---------
--------- --------- ---------
</TABLE>
Export sales consist of sales to customers in foreign countries. During the
years ended May 31, 1997, 1998 and 1999, export sales were 77%, 50% and 51% of
total revenues, respectively.
F-10
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMPUTATION OF BASIC NET LOSS PER SHARE AND PRO FORMA BASIC NET LOSS PER SHARE
Historical net loss per share has been calculated under SFAS No. 128
"Earnings per Share." Basic net loss per share on a historical basis is computed
using the weighted average number of shares of common stock outstanding. No
diluted loss per share information has been presented in the accompanying
consolidated statements of operations since potential common shares from
conversion of preferred stock, stock options, and warrants are antidilutive.
Pro forma basic net loss per share has been calculated assuming the
conversion of preferred stock into an equivalent number of common shares, as if
the shares had converted on the dates of their issuance. It also assumes the
conversion of the outstanding convertible long-term debt (see Note 11) into
common stock, as if the debt had converted upon its original issuance date.
RESTRUCTURING CHARGE
A restructuring charge of $1.2 million was recorded in the fiscal year ended
May 31, 1998. Approximately $1 million of this charge related to severance
payments associated with the termination of two executive officers. The
remaining charge of approximately $200,000 was for severance payments and the
acceleration of stock option vesting related to the termination of 20 employees,
primarily in the sales group. All terminations and termination benefits were
communicated to the affected employees prior to period end. At May 31, 1999,
$266,000 was remaining in accrued liabilities in the accompanying balance sheet
which will be paid out in fiscal 2000. All other severance payments have been
made and actual payments made approximated the original estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 for the year ended May 31, 2000. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. SFAS
No. 133 will be effective for and adopted by the Company in the first quarter of
the fiscal year ending May 31, 2001. The Company anticipates that SFAS No. 133
will not have a material impact on its consolidated financial statements.
3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.:
Effective August 11, 1997, the Company acquired Navio. In connection with
the acquisition, the Company issued 8,720,661 shares Series B and C convertible
preferred stock and stock options to acquire 3,157,890 shares Series C
convertible preferred stock in exchange for all of the outstanding common stock,
preferred stock and options to purchase shares of Navio common stock. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Navio have been
F-11
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.: (CONTINUED)
included in the consolidated financial statements commencing on the date of
acquisition. The fair market value of the equity securities issued in the
acquisition was approximately $77.1 million.
In connection with the acquisition, the Company originally wrote off
approximately $75.6 million of acquired in-process research and development
(IPR&D) which, in the opinion of management, had not reached technological
feasibility and had no alternative future use. Subsequent to the Securities and
Exchange Commission's letter to the American Institute of Certified Public
Accountants, dated September 9, 1998, regarding its views on IPR&D, the Company
has revised the purchase price allocations and restated its financial
statements. As a result, the Company has made adjustments to decrease the
amounts previously expensed as IPR&D in fiscal 1998 and increase purchased
intangibles by a similar amount.
The effect of this adjustment on the previously reported May 31, 1998
consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Amortization of purchased intangibles.............................. $ 200 $ 4,563
Acquired in-process research and development....................... $ 75,554 $ 58,100
Loss before income tax benefit..................................... $ 109,772 $ 96,406
</TABLE>
The adjustment had no impact on the reported income tax benefit.
After the adjustment discussed above, the Company wrote off approximately
$58.1 million of acquired in-process research and development which, in the
opinion of management, had not reached technological feasibility and had no
alternative future use. Purchased intangibles, representing purchase price in
excess of identified tangible and intangible assets, of approximately $18.3
million were recorded and are being amortized on a straight-line basis over a
useful life of three years. Accumulated amortization was approximately $4.6
million and $10.7 million at May 31, 1998 and 1999, respectively.
The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility has not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. If these projects
are not successfully developed, future revenue and profitability of the Company
may be adversely affected. Additionally, the value of the other purchased
intangible assets may be impaired.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
<TABLE>
<S> <C>
Purchased intangibles, including in-process technology............. $ 76,354
Property, plant and equipment and other noncurrent assets.......... 1,752
Cash, receivables and other current assets......................... 3,715
Current liabilities assumed........................................ (4,133)
---------
Net assets acquired.............................................. $ 77,688
---------
---------
</TABLE>
F-12
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF NAVIO COMMUNICATIONS, INC.: (CONTINUED)
In connection with the acquisition, for up to 60 days after the closing
date, certain former common stockholders of Navio had the right to put to Oracle
up to 50% of the preferred shares they received, and shares issuable under stock
options assumed by the Company in the acquisition, for a price of $6.70 per
share. A total of 1,909,248 shares of Series C convertible preferred stock for
approximately $12.8 million in proceeds were put to Oracle under this
arrangement.
Additionally, there is a call option held by Oracle to purchase all of the
Series B and Series C convertible preferred stock at a to-be-determined buy-out
price. The buy-out price is determined as follows: (1) if exercised prior to
December 31, 1999, the price would be 120% of the per share price determined by
an independent third party valuation of the Company's shares, or (2) if
exercised after December 31, 1999, the per share price determined by an
independent third party valuation of the Company's shares. The option must be
exercised in whole for all shares of Series B and Series C preferred stock
subject to such call option.
The call option will terminate upon a change in control of the Company or
upon an initial public offering of at least $20.0 million.
The following table presents the unaudited pro forma results assuming that
the Company had merged with Navio at the beginning of fiscal year 1997. Net
income has been adjusted to exclude the write-off of acquired in-process
research and development of $58.1 million and includes amortization of purchased
intangibles of approximately $6.1 million for both of the years ended May 31,
1997 and 1998. This information may not necessarily be indicative of the future
combined results of operations of the Company.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................ $ 1,090 $ 11,065
Net loss............................................ $ (35,300) $ (42,227)
Basic net loss per share............................ $ -- $ (796.38)
</TABLE>
4. PROPERTY AND EQUIPMENT:
At May 31, 1998 and 1999, property and equipment consisted of the following
(in thousands):
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment................................................ $ 2,881 $ 4,060
Software.......................................................... 561 816
Furniture and equipment........................................... 209 225
Leasehold improvements............................................ 280 465
------------ ------------
3,931 5,566
Less: Accumulated depreciation and amortization................... (2,016) (3,297)
------------ ------------
$ 1,915 $ 2,269
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has various operating leases (including building, furniture and
equipment and maintenance agreements) that expire at various times through 2009.
Future minimum lease payments relating to these agreements as of May 31, 1999,
are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- ------------------------------------------------------------
<S> <C>
2000........................................................ $ 4,260
2001........................................................ 4,699
2002........................................................ 4,784
2003........................................................ 3,377
2004........................................................ 2,733
Thereafter.................................................. 15,487
------------
$ 35,340
------------
------------
</TABLE>
Rent expense under the Company's operating leases for the years ended May
31, 1997, 1998 and 1999 were approximately $582,000, $2,010,000 and $2,240,000
respectively. The above future minimum lease payments include a commitment of
approximately $72,000 per month expiring on November 30, 2001, which has been
sub-leased at an amount greater than the monthly commitment and is offset
against rent expenses in the consolidated statements of operations.
On April 27, 1999, the Company entered into a ten-year facility lease for
its new corporate headquarters. Total commitments over the 10-year operating
lease life are approximately $28.0 million. Oracle has provided a $10.0 million
guarantee to the landlord. The guarantee can be terminated upon the Company
completing an IPO with net proceeds of at least $40.0 million and providing an
Irrevocable Letter of Credit covering ten months rent and operating costs. Also,
the Company can eliminate the Irrevocable Letter of Credit by achieving certain
financial benchmarks. The Company has also entered into an agreement for
non-penalty, early termination of the Company's current facility and equipment
leases with Oracle Corporation, due to expire on September 17, 2002. Commitments
under the Oracle leases, subsequent to May 31, 1999, total approximately $7.2
million.
GENERAL INSTRUMENT CORPORATION
In April 1999, the Company entered into a Manufacturer's Representative
Agreement and a Development Agreement with General Instrument Corporation
("GI"). Under the developer's agreement, the Company committed to pay GI $10.0
million in development fees for certain services to be performed by GI. These
fees will be paid out in quarterly installments over a three-year period. Under
the manufacturer's agreement, the Company agreed to pay to GI a "commission" on
all GI terminals deployed by network operators with the Company's products on
them. However, the commissions only become effective after specific sales
thresholds are met. Prior to attaining those thresholds, no commissions are due
to GI on these sales. In connection with this commission, GI has committed to
the Company that certain volumes of GI terminals will be sold. After the three
year period is over, GI may be required to pay the Company for any shortfall of
terminal sales below committed volume levels. In addition to this arrangement,
the Company has also entered into a Series C Preferred Stock Purchase Agreement
dated by and between the Company, GI and Oracle pursuant to which Oracle sold GI
757,575 shares of the Company's Series C Preferred Stock.
F-14
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEGAL MATTERS
The Company is a defendant in various legal matters arising in the normal
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate resolution of these matters is not expected to have a
material effect on these consolidated financial statements.
6. CONVERTIBLE PREFERRED STOCK:
On October 1, 1996, the Company issued 14,166,650 shares of Series A
convertible preferred stock to Oracle in exchange for a cash payment of $10.0
million, a contribution of tangible assets and certain intangible assets
including intellectual property rights and contractual relationships with
suppliers, customers and contractors. The issuance of these shares was recorded
at the carryover basis of the contributed assets plus the cash received.
In connection with the acquisition of Navio (see Note 3), the Company issued
Series B and C convertible preferred stock and authorized the issuance of Series
A-1 and C-1 convertible preferred stock. In addition, on November 12, 1997, the
Company obtained financing from a third party investor of $4 million. The
financing was obtained through issuance of convertible notes which are
convertible, at the option of the holder, into Series D preferred stock at $9.48
per share (see Note 11).
In May 1999, the Company issued 5,208,326 shares of Series E convertible
preferred stock at $9.60 per share for net proceeds to the Company of
approximately $47.5 million.
The Company has authorized the total number of shares of each series of
convertible preferred stock with rights, preferences and restrictions described
below:
DESIGNATED AND OUTSTANDING SHARES OF PREFERRED STOCK
<TABLE>
<CAPTION>
OUTSTANDING AT MAY 31, 1999
SHARES ----------------------------
DESIGNATED SHARES AMOUNT
------------ ------------ --------------
<S> <C> <C> <C>
Series A preferred stock......................... 84,999,900 14,166,650 $ 11,412,000
Series A-1 preferred stock....................... 25,500,000 3,484,847 23,000,000
Series B preferred stock......................... 14,000,000 2,320,758 15,663,000
Series C/C-1 preferred stock..................... 96,000,000 7,797,118 44,156,000
Series D preferred stock......................... 8,000,000 -- --
Series E preferred stock......................... 31,250,000 5,208,326 47,490,000
------------ --------------
32,977,699 $ 141,721,000
------------ --------------
------------ --------------
</TABLE>
RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK
(a) Series A, A-1, B, C, C-1, D and E convertible preferred stock have a
liquidation preference of $6.00, $6.60, $6.60, $1.65, $1.65, $9.48 and
$9.60 per share plus declared but unpaid dividends on each such share,
respectively. Additionally, Series A, A-1, B, D and E convertible
preferred stock are senior in liquidation to Series C and C-1 convertible
preferred stock and common stock. Series C and C-1 convertible preferred
stock are senior in liquidation to common stock.
(b) Each holder of Series A, A-1, B, D and E convertible preferred stock is
entitled to receive non-cumulative dividends at the rate of $0.60, $0.66,
$0.66, $0.948 and $0.96 per share,
F-15
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK: (CONTINUED)
respectively, per annum, payable quarterly, when and as declared by the
Board of Directors, prior to payment of dividends on common stock, Series
C preferred stock or Series C-1 preferred stock. Holders of Series C and
C-1 convertible preferred stock do not have stated dividends.
(c) The holder of each share of Series A, A-1, B, C-1, D and E convertible
preferred stock is entitled to the full voting rights and powers and
shall have the right to one vote for each share of common stock into
which such convertible preferred stock could be converted. The holders of
Series C convertible preferred stock do not have the right to vote for
the election or removal of directors of the Company, but may vote on all
other matters.
(d) Each share of Series A, A-1, B, C-1, D and E preferred stock will be
convertible, at the option of the holder, into one share of Series A
common stock. Each share of Series C preferred stock will be convertible,
at the option of the holder, into (i) one share of Series C-1 preferred
stock or (ii) one share of Series A or B common stock. The conversion
ratio is determined by dividing $6.60 for each share of Series A, A-1, B,
C and C-1 preferred stock, $9.48 for each share of Series D preferred
stock and $9.60 for each share of Series E preferred stock by the
conversion price. The initial conversion price for Series A, A-1, B, C
and C-1 preferred stock is $6.60 per share. The initial conversion price
for Series D preferred stock is $9.48 per share, and Series E preferred
stock is $9.60 per share. The conversion rate is subject to adjustment
upon the occurrence of certain events.
(e) Each share of Series A, A-1, B, C-1, D and E preferred stock will be
automatically converted into one share of Series A common stock upon the
sale of Series A common stock in a public offering pursuant to a
registration statement under the Securities Act of 1933, as amended with
net proceeds of greater than $20.0 million and a price to the public of
at least $12.00 per share (as adjusted for stock splits, stock dividends,
combinations and similar events). Each share of Series C preferred stock
will also be automatically converted into one share of Series A common
stock in the same public offering provided that, if the conversion of
such shares would result in a filing requirement on behalf of a holder of
Series C preferred stock pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976 (the "HSR Act"), as amended, all shares of Series
C preferred stock held by such holder shall automatically be converted
into shares of Series B common stock. Each share of Series A and A-1
preferred stock shall automatically be converted into shares of Series A
common stock at the conversion price at the time in effect for each such
share of preferred stock on the date specified by written consent or
agreement of the holders of a majority of the then outstanding shares of
Series A and A-1 preferred stock, voting together as a class. Each share
of Series B, C, C-1, D and E preferred stock shall automatically be
converted into shares of Series A common stock at the conversion price at
the time in effect for each such share of preferred stock on the date
specified by written consent or agreement of the holders of a majority of
the then outstanding shares of Series B, C, C-1, D and E preferred stock,
voting together as a class, provided, that no shares of Series B
preferred stock or of Series E preferred stock shall be so converted
without the prior written consent or agreement of eighty-one percent
(81%) of the outstanding shares of the Series B preferred stock or Series
E preferred stock (excluding shares of Series B preferred stock or Series
E preferred stock held by Oracle Corporation or its affiliates), as the
case may be, voting as separate classes, and provided, further that if
the conversion of such shares of Series C preferred stock would result in
a filing requirement on
F-16
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK: (CONTINUED)
behalf of a holder of Series C preferred stock pursuant to the HSR Act,
all shares of Series C preferred stock held by such holder shall
automatically be converted into shares of Series B common stock.
(f) Holders of a certain number of each class of the preferred stock are
required to consent to any action that: (i) alters or changes the rights,
preferences or privileges of that class of Preferred Stock; (ii)
increases the authorized number of shares of preferred stock; (iii)
creates any class of stock with preferences or priorities superior to or
on a parity with the preferences and priority of the preferred stock; or
(iv) affects the sale of all or substantially all of the assets of the
Company, or any consolidation or merger, or any sale of more than 50% of
the Company's capital stock.
7. COMMON STOCK:
The Company has authorized the total number of shares of common stock with
rights, preferences and restrictions described below:
DESIGNATED SHARES OF COMMON STOCK
<TABLE>
<S> <C> <C>
Series A common stock.................... 365,000,000 shares
Series B common stock.................... 42,500,000 shares
----------
407,500,000
----------
----------
</TABLE>
At May 31, 1999, the Company has reserved the following shares of authorized
but unissued shares of common stock for future issuance:
<TABLE>
<S> <C>
Conversion of Series A preferred stock......... 14,166,650
Conversion of Series A-1 preferred stock....... 3,484,847
Conversion of Series B preferred stock......... 2,320,758
Conversion of Series C/C-1 preferred stock..... 7,797,118
Notes convertible into Series D preferred
stock........................................ 1,255,273
Conversion of Series E preferred stock......... 5,208,326
Employee stock purchase plan................... 833,333
Warrants....................................... 2,299,996
Stock options.................................. 8,768,898
----------
46,135,199
----------
----------
</TABLE>
RIGHTS, PREFERENCES AND RESTRICTIONS OF COMMON STOCK
(a) Each share of Series B common stock shall be convertible, at the option
of the holder, into one share of Series A common stock, at any time after
issuance.
(b) Each share of Series B common stock will automatically be converted into
one share of Series A common stock upon the sale of Series A common stock
in a public offering pursuant to a registration statement under the
Securities Act of 1933, with net proceeds of greater than $20.0 million;
provided, that if the conversion of such shares would result in a filing
F-17
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK: (CONTINUED)
requirement on behalf of a holder of Series B common stock pursuant to
the HSR Act, such conversion shall not occur unless and until the
expiration or termination of all waiting and review periods (and any
extensions thereof) applicable thereto under the HSR Act at which time
such conversion shall occur.
(c) The holders of each share of Series A and B common stock are entitled to
the full voting rights and powers equal to one vote for each share of
Series A or B common stock held. The holders of Series B common stock do
not have the right to vote for the election or removal of directors of
the Company, but may vote on all other matters.
WARRANT AGREEMENTS
In April and May of 1999, the Company entered into letter agreements with
several network operators that require the Company to issue warrants to purchase
up to an aggregate of approximately 2,299,996 shares of common stock if the
network operators satisfy commercial milestones. Warrants to purchase up to
208,333 shares of common stock, if issued, will have an exercise price of $9.60
per share, warrants to purchase up to 2,041,663 shares of common stock, if
issued, will have an exercise price of $13.80 per share and warrants to purchase
up to 50,000 shares of common stock, if issued, will have an exercise price of
either $9.60 or $13.80 per share, depending on whether commitments are made by
the warrant holders. In the event the milestones are met, the Company would be
required to record a significant non-cash expense based upon the value of the
warrants at the time the milestones are satisfied. The value of the warrants
will be estimated using the Black-Scholes model as of the earlier of the grant
date or the date that it becomes probable that the warrants will be earned.
Pursuant to the requirements of 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.
As of May 31, 1999, warrants to purchase 208,333 shares of common stock at
$9.60 per share have been issued under the terms of these agreements, all of
which are fully vested. The fair value of the warrants recorded as of May 31,
1999, was approximately $1,522,000, of which $18,000 was charged to operations
and the remaining balance of $1,504,000 was recorded as an intangible asset and
is included in other current assets in the accompanying consolidated balance
sheet. The asset will be amortized over the greater of the warrants' respective
performance period or as royalties are earned under the respective software
license agreements with the network operators.
PRO FORMA STOCKHOLDERS' DEFICIT (UNAUDITED)
In May 1999, the board of directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering ("IPO"). If
the offering is consummated under the terms presently anticipated, all of the
currently outstanding convertible preferred stock will convert to 32,977,699
shares of common stock upon the closing of the IPO. Additionally, the Company
has $4.3 million of outstanding debt (see Note 11) which will automatically
convert to 421,940 shares of common stock upon the closing of the IPO. The
effect of these conversions has been reflected as unaudited pro forma
stockholders' equity (deficit) in the accompanying consolidated balance sheet as
of May 31, 1999.
F-18
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS:
OPTIONS ASSUMED FROM NAVIO
In connection with the Company's acquisition of Navio, each outstanding
option to purchase shares of Navio common stock was automatically converted into
an option to purchase Series C convertible preferred stock of the Company based
upon the conversion ratio.
Options assumed are immediately exercisable, and the shares of stock issued
upon exercise are subject to repurchase, at the original purchase price, by the
Company, upon the termination of the option holders service to the Company. The
Company's repurchase right expires generally at the rate of 25% of the original
grant, commencing 12 months after the date of grant or employment, and in
monthly increments over the following 36 months.
At May 31, 1999, 1,052,722 options were outstanding at a weighted average
exercise price of $1.14, of which 450,702 options were vested.
NETWORK COMPUTER, INC. 1996 STOCK OPTION PLAN
On October 1, 1996, the Company adopted the Network Computer, Inc. 1996
Stock Option Plan (the "Plan"). The Plan, as amended, provides for the grant of
both incentive and non-qualified stock options to employees, consultants and
directors for the purchase of up to 5,833,333 shares of Series A common stock.
Incentive stock options may only be granted to employees.
The exercise price of incentive stock options cannot be less than the fair
market value of the common stock on the grant date, as determined by the board
of directors. The Plan also provides for holders of non-qualified options to
purchase shares at not less than 85% of the fair market value on the grant date.
The term of the incentive and non-qualified stock options is generally ten years
from the date of grant or a shorter term as provided in the option agreement.
Options generally vest over four years.
The Company accounts for outstanding stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). In accordance with APB No. 25, no compensation expense has been
recognized related to options granted to employees except as discussed below in
"Deferred Stock Compensation", as all employee options were granted with an
exercise price equal to the fair market value of the underlying stock. If
compensation cost had been determined consistent with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net loss would have been
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net loss--as reported.......................... $ (18,989) $ (94,391) $ (33,053)
--------- --------- ---------
--------- --------- ---------
Net loss--pro forma............................ $ (19,013) $ (94,415) $ (36,446)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS: (CONTINUED)
Pursuant to the provisions of SFAS No. 123, the fair value of options
granted was estimated on the grant date using the Black-Scholes option pricing
model and the following assumptions:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.98% 5.56% 4.75%
<CAPTION>
Average expected life of option...................... 2.83 years 2.83 years 3.97 years
<S> <C> <C> <C>
Dividend yield....................................... 0% 0% 0%
Volatility of common stock........................... 0% 0% 70%
Weighted average fair value of options granted....... $ 0.02 $ 0.08 $ 4.32
</TABLE>
Stock option activity under the Network Computer, Inc. 1996 Option Plan is
summarized below:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
------------ ------------ -----------------
<S> <C> <C> <C>
Balance at May 31, 1996......................... -- -- --
Authorized.................................... 2,500,000 -- --
Granted....................................... (1,166,632) 1,166,632 $ .60
Cancelled..................................... 33,331 (33,331) $ .60
------------ ------------ -----
Balance at May 31, 1997......................... 1,366,699 1,133,301 $ .60
Granted....................................... (1,315,962) 1,315,962 $ 3.38
Exercised..................................... -- (213,312) $ 0.76
Cancelled..................................... 805,246 (805,246) $ 1.21
------------ ------------ -----
Balance at May 31, 1998......................... 855,983 1,430,705 $ 2.80
Authorized.................................... 3,333,333 -- --
Granted....................................... (2,151,729) 2,151,729 $ 6.42
Exercised..................................... -- (178,150) $ 2.16
Cancelled..................................... 327,806 (327,806) $ 3.40
------------ ------------ -----
Balance at May 31, 1999......................... 2,365,393 3,076,478 $ 5.30
------------ ------------ -----
------------ ------------ -----
</TABLE>
Additionally, on October 15, 1998, the Company issued non-qualified stock
options outside of the Plan to an executive officer and to an outside director
for the purchase of 2,499,999 shares of the Company's common stock at a price of
$5.10 per share. As of May 31, 1999, options to purchase 225,694 shares had been
exercised and 2,274,305 shares were still outstanding. The options vest over
four years and have a term of ten years.
F-20
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS: (CONTINUED)
A summary of all outstanding options, including those assumed in connection
with the Navio acquisition, to purchase common stock and preferred stock at May
31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------------
RANGE OF NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AS OF MAY 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE AS OF MAY 31, 1999 EXERCISE PRICE
- --------------- ------------------- ------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.36 $0.60 646,434 7.52 $ 0.44 538,342 $ 0.40
$1.68 $2.16 786,019 7.91 $ 1.79 673,048 $ 1.72
$3.90 $4.50 1,028,571 9.41 $ 4.16 162,067 $ 5.10
$5.10 $5.70 2,786,201 9.33 $ 5.14 43,652 $ 4.50
$7.50 $9.00 1,156,280 9.85 $ 7.62 750 $ 7.50
---------- --- ----- ------------------ -----
6,403,505 9.08 $ 4.42 1,417,859 $ 2.40
---------- --- ----- ------------------ -----
---------- --- ----- ------------------ -----
</TABLE>
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees during
the year ended May 31, 1999, the Company recorded deferred compensation of $7.1
million, representing 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. Such amount is presented as a reduction of
stockholders' equity and amortized ratably over the vesting period of the
applicable options (generally four years). Approximately $507,000 was expensed
during the year ended May 31, 1999, and the balance will be expensed ratably
over the period the options vest. Compensation expense is decreased in the
period of forfeiture for any accrued but unvested compensation arising from the
early termination of an option holder's services. In addition, the Company will
record additional deferred stock compensation of approximately $1.6 million for
June 1999 stock option grants. This amount will be expensed over the option
vesting period of four years.
1999 EQUITY INCENTIVE PLAN
On May 17, 1999, the board of directors approved the adoption of the
Company's 1999 Equity Incentive Plan (the "1999 Plan"), subject to stockholder
approval. The types of awards that may be made under the 1999 Plan are options
to purchase shares of common stock, stock appreciation rights, restricted shares
and stock units. Any shares not yet issued under the Company's 1996 Stock Option
Plan as of the date of the Company's initial public offering will be available
for grant under the 1999 Plan. The exercise price for incentive stock options
may not be less than 100% of the fair market value of the Company's common stock
on the date of grant (85% for nonstatutory options). No options have been
granted under the 1999 Plan as of May 31, 1999.
1999 EMPLOYEE STOCK PURCHASE PLAN
On May 17, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase (the "1999 Purchase Plan"), subject to
stockholder approval. A total of 833,333 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, plus, commencing on June 1,
2000, annual increases equal to the lesser of 833,333 shares, 2% of the
outstanding common shares on such date or a lesser amount determined by the
board of directors. The 1999 Purchase Plan
F-21
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS: (CONTINUED)
permits eligible employees to acquire shares of the Company's common stock
through periodic payroll deductions of up to 15% of base cash compensation. No
more than 750 shares may be purchased by each employee on any purchase date.
Each offering period will have a maximum duration of 6 months. The price at
which the common stock may be purchased is 85% of the lesser of the fair market
value of the Company's common stock on the first day of the applicable offering
period or on the last day of the respective purchase period. The initial
offering period will commence on the effectiveness of the initial public
offering and will end on March 31, 2000.
9. INCOME TAXES:
The Company and Oracle have entered into a tax sharing agreement effective
August 12, 1997. Under the terms of the agreement, the Company is responsible
for its share of Oracle's consolidated tax liability, computed as if the Company
had filed a separate return. Further, if the Company would have no tax due on a
separate return basis and the inclusion of the Company's tax operating losses
reduces Oracle's consolidated tax liability, Oracle will pay to the Company the
tax savings generated by including the Company in its consolidated tax return.
Oracle is not required to reimburse the Company for the tax savings obtained by
Oracle prior to August 12, 1997. Oracle realized a tax savings of approximately
$11.8 million and $1.4 million for the year ended May 31, 1997, and the period
from June 1, 1997 to August 11, 1997, respectively. These amounts are reflected
as a tax benefit in the accompanying statement of operations and a corresponding
refund of contributed capital to Oracle in the accompanying consolidated
statement of stockholders' equity (deficit). Subsequent to the acquisition of
Navio on August 12, 1997, the Company is no longer included in Oracle's
consolidated Federal Tax Returns. For the period from August 12, 1997 to May 31,
1998, and for the fiscal year ended May 31, 1999, Oracle will realize state and
local tax savings of approximately $788,000 and $781,000, respectively. These
amounts are reflected as a receivable from affiliate in the accompanying
consolidated balance sheets.
Income taxes have been calculated on a separate company basis pursuant to
the provisions of SFAS No. 109, "Accounting for Income Taxes". The components of
the benefit for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................................... $ 10,100 $ 1,303 $ --
State..................................................... 1,650 987 781
Foreign................................................... -- (275) (195)
----------- ----------- -----------
Total benefit........................................... $ 11,750 $ 2,015 $ 586
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-22
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES: (CONTINUED)
The (provision) benefit for income taxes differs from the amounts which
would result by applying the applicable statutory Federal income tax rate to
income before taxes, as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Benefit at Federal statutory rate........................... $ 10,700 $ 33,755 $ 11,774
State income taxes, net of Federal benefit.................. 1,750 5,500 1,917
Change in valuation allowance............................... (198) (15,162) (10,926)
Nondeductible write-off of in-process research and
development............................................... -- (20,335) --
Nondeductible goodwill amortization......................... -- (1,610) (2,129)
Other....................................................... (502) (133) (50)
----------- ----------- -----------
Total benefit........................................... $ 11,750 $ 2,015 $ 586
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Net operating losses................................ $ -- $ 4,573 $ 8,546
Temporary differences............................... 198 9,998 16,306
Tax credits......................................... -- 789 1,434
----- ------------ ------------
Total deferred tax asset............................ 198 15,360 26,286
Valuation allowance................................. (198) (15,360) (26,286)
----- ------------ ------------
Total net deferred tax asset........................ $ -- $ -- $ --
----- ------------ ------------
----- ------------ ------------
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding realization of the asset including limited
operating history of the Company, the lack of profitability to date and the
uncertainty over future operating profitability.
At May 31, 1999, the Company had federal net operating loss carryforwards of
approximately $24.4 million and tax credits totaling $1.4 million. The federal
net operating loss carryforwards expire at various dates through 2003 and 2019.
Under current tax law, net operating loss carryforwards available to offset
future operating income in any given year may be limited upon the occurrence of
certain events, including significant changes in ownership interests.
10. RELATED PARTY TRANSACTIONS:
TRANSACTIONS WITH ORACLE
Prior to September 1997, the Company's parent, Oracle, performed certain
services and incurred certain costs for the benefit of the Company. Services
provided included tax, treasury, risk management, employee benefits, legal,
accounting and other general corporate services. The costs of the services
provided by Oracle have been allocated to the Company based upon the relative
headcount of the Company to the total consolidated headcount of Oracle. The
charges for these services totaled approximately $1,000,000 and $250,000 for the
years ended May 31, 1997 and 1998, respectively. In the
F-23
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
opinion of management, the method of allocating the costs is reasonable and the
cost of the services allocated to the Company is not significantly different
from the costs that would have been incurred had the Company performed these
functions. Commencing in September 1997, the Company ceased obtaining these
services from Oracle.
Prior to the Company's acquisition of Navio, Oracle had provided cash flow
to fund the Company's operations through an intercompany payable account. In
fiscal 1998, in connection with the acquisition of Navio, Oracle converted
approximately $18.0 million of outstanding intercompany payables into 2,727,272
shares of the Company's Series A-1 preferred stock. Additionally, in fiscal
1998, Oracle contributed capital of approximately $8.1 million to the Company.
The Company has entered into a Convertible Note Purchase Agreement dated
July 23, 1997 with Oracle. Pursuant to the Convertible Note Purchase Agreement,
Oracle agreed to provide up to $10.0 million to the Company for general working
capital purposes, as needed, in the form of convertible notes. The convertible
notes bear interest at 8% per annum and are convertible at Oracle's option into
shares of the Company's Series A-1 preferred stock, which is currently $6.60 per
share. As of May 31, 1999, the Company has drawn down approximately $10.0
million under such arrangement. During fiscal 1998, Oracle converted $5.0
million of such indebtedness into 757,575 shares of the Company's Series A-1
Convertible preferred stock. In May 1999, the Company paid the remaining $5
million to Oracle.
The Company has entered into real property leases with Oracle for its
corporate headquarters and for certain of its field offices pursuant to which
the Company is obliged to make monthly rental payments to Oracle of
approximately $124,000 and approximately $4,000, respectively. The Company also
leases furniture and equipment for its corporate headquarters and for its Salt
Lake City facilities from Oracle pursuant to leases that obligate the Company to
make monthly rental payments to Oracle of approximately $57,000 and
approximately $2,700, respectively. In addition, the Company has contracted for
Oracle to perform maintenance at its corporate headquarters. The Company has
also entered into another real property agreement with Oracle for its UK
operations pursuant to which the Company is obligated to make quarterly rental
payments to Oracle of approximately $12,000.
In connection with the Company's acquisition of Navio, the Company, Oracle
and certain of the former Navio stockholders entered into a Put/Call and Voting
Agreement dated August 11, 1997 (the "PCV Agreement"). The PCV Agreement, among
other things, (i) grants Oracle an irrevocable option to purchase all of the
shares of Series B preferred stock and Series C preferred stock of the Company
or securities issuable upon conversion thereof held by the former Navio
stockholders, including Netscape, who are parties to the PCV Agreement, (ii)
contains a tag-along provision that is triggered in certain change-of-control
situations and (iii) contains a voting agreement that provides for the election
of four Oracle designees to the Company's board of directors.
In connection with the acquisition of Navio, certain former Navio
stockholders had the right for a period of 60 days following the closing of the
acquisition to compel Oracle to purchase up to 50% of the shares received by
them in the acquisition or issuable under stock options assumed by the Company
in the acquisition (the "Put"). Pursuant to the Put, a total of 1,909,248 shares
of the Company's Series C preferred stock were put to Oracle for approximately
$12.8 million. Oracle subsequently converted such shares into shares of the
Company's Series C-1 preferred stock.
F-24
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
On November 19, 1997, the Company's Board of Directors waived the Company's
right of first offer with respect to 331,537 shares of Series B preferred stock
offered for sale by Sony Corporation. Subsequently, such shares were acquired by
Oracle.
The Company has entered into a Services Agreement dated March 5, 1998 with
Oracle. Pursuant to the Services Agreement, Oracle provides professional
services to certain of the Company's customers.
The Company has entered into a Technology License Agreement with Oracle in
fiscal 1998. Pursuant to the Technology License Agreement, Oracle may promote,
market and distribute sublicenses of the Company's products through its
worldwide distribution channels for a period of three years.
During fiscal 1999, the Company paid approximately $243,000 for commissions
to Oracle Japan related to license of software.
TRANSACTIONS WITH NETSCAPE
As a result of the acquisition of Navio in August 1997, Netscape became a
stockholder of the Company. As of May 31, 1999, Netscape owned approximately 11%
of the outstanding common and preferred stock of the Company.
Navio entered into a Source Code License Agreement with Netscape ("Netscape
Source Code License") dated July 9, 1996, as amended on April 6, 1998 and
September 28, 1998. In connection with the Company's acquisition of Navio and
pursuant to a letter agreement dated May 16, 1997, Netscape consented to the
assignment of the Netscape Source Code License from Navio to the Company.
Pursuant to such letter agreement, Netscape and Oracle also agreed that the
Company's products would be distributed pursuant to an OEM License Agreement by
and between Netscape and Oracle dated October 17, 1996.
Pursuant to this agreement, the Company has the right to use approximately
$1.0 million in prepaid royalties with Netscape. The Company has also paid
Netscape approximately $200,000 for the purchase of certain rights and licenses.
The Company and Netscape, which has merged with America Online ("AOL"), are
also co-sublessors of real property located in Sunnyvale, California. Netscape
and Navio originally leased the property in November 1996, and Navio's rights
and duties under the lease were assigned to the Company in connection with the
Company's acquisition of Navio. Subsequently, the property was subleased to a
third party. The lease terminates in November 2001.
The Company recognized 1% and 10%, or approximately $139,000 and $1.7
million of total revenues from revenue transactions with related parties during
the fiscal years ended May 31, 1998 and 1999, respectively. No amounts were
recognized in fiscal 1997.
11. THIRD PARTY FINANCING AGREEMENTS:
On November 12, 1997, the Company entered into a Convertible Promissory Note
(the "Notes") Purchase and Cooperation Agreement (the "Agreement") with a third
party investor (the "Investor").
The Agreement is for the sale of up to three $4.0 million Notes that are
convertible into Series D convertible preferred stock. The Notes bear interest
at the lesser of 5% or the maximum interest rate
F-25
<PAGE>
LIBERATE TECHNOLOGIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. THIRD PARTY FINANCING AGREEMENTS: (CONTINUED)
permitted under applicable Federal and state laws, which will be converted to
stock if the notes are converted. The principal amount and accrued interest
outstanding under each Note is due five years from the date of issuance unless
converted or accelerated in the event of an initial public offering, a merger or
an asset sale. During the year ended May 31, 1998, the Company sold the first
Note of $4.0 million which is convertible, at the option of the holder (or
automatically on the consummation of an initial public offering), into Series D
convertible preferred stock at $9.48 per share. Should the Company issue the
second and third Note, the conversion price will be the lower of $9.48 or the
price of subsequent preferred stock based on the preceding preferred round.
In the Agreement, the investor agreed to fund $3.0 million of the Company's
non-recurring engineering ("NRE") efforts through December 31, 1999. The Company
recognizes the NRE revenue as services are performed and recognized
approximately $72,000 and $871,000 of revenue during the years ended May 31,
1998 and 1999, respectively. In consideration of the funding, the Company agreed
to pay the investor a royalty for each license of the Company's software
incorporating that technology, up to a maximum of $3.9 million. The obligation
to pay the royalty terminates 4 years after the first commercial shipment of
hardware implementing the Company's software.
12. RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. Under the retirement plan, participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
13. SUBSEQUENT EVENT
REVERSE STOCK SPLIT
In May 1999, the Company's Board of Directors approved a one-for-six reverse
stock split of the Company's outstanding shares of common and preferred stock
which will become effective immediately prior to the Company's initial public
offering. All share and per share information included in the accompanying
consolidated financial statements and notes have been adjusted retroactively to
reflect this reverse stock split.
PRIVATE PLACEMENT WITH LUCENT TECHNOLOGIES
In June 1999, the Company entered into a stock purchase agreement with
Lucent Technologies ("Lucent") under which, contingent upon and immediately
following consummation of the sale of shares in the IPO, Lucent agreed to invest
$12.5 million in a private placement of shares of the Company's common stock at
a price per share equal to 96% of the IPO price. Lucent has agreed not to sell,
transfer, encumber or otherwise dispose of any of the shares of common stock
acquired in the private placement in a public or private sale for a period of
180 days following the closing of the IPO.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Navio Communications, Inc.
We have audited the accompanying balance sheet of Navio Communications, Inc.
(a development stage company) as of December 31, 1996, and the related
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 12, 1996) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Navio Communications, Inc.
(a development stage company) at December 31, 1996, and the results of its
operations and its cash flows for the period from inception (February 12, 1996)
to December 31, 1996, in conformity with generally accepted accounting
principles.
As more fully described in Note 1 to the financial statements, the Company
is in the development stage, has incurred losses since inception of
approximately $5.6 million and expects to incur substantial and increasing
operating losses in the next year. At December 31, 1996, the Company had working
capital of $8.3 million. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to these
matters are described in Note 1. The 1996 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Palo Alto, California /s/ ERNST & YOUNG LLP
March 6, 1997, except for
Note 8 as to which the date is
June 5, 1997
F-27
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 8,152
Short-term investments........................................................... 2,033
Other current assets............................................................. 174
---------
Total current assets............................................................... 10,359
Property and equipment, net........................................................ 1,290
Other assets....................................................................... 132
---------
$ 11,781
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 316
Accrued compensation and related liabilities..................................... 235
Other accrued liabilities........................................................ 746
Deferred revenues................................................................ 675
Short-term note payable, stockholder............................................. 51
---------
Total current liabilities.......................................................... 2,023
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value; issuable in series; 7,777,777 shares
authorized; 7,777,777 Series A shares outstanding; aggregate liquidation
preference of $15,556.......................................................... 15,392
Common stock, $0.0001 par value; 55,555,555 shares authorized; 21,111,112 shares
outstanding.................................................................... 154
Note receivable, stockholder..................................................... (150)
Deficit accumulated during the development stage................................. (5,638)
---------
Total stockholders' equity......................................................... 9,758
---------
$ 11,781
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-28
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating expenses:
Research and development......................................................... $ 4,559
Sales and marketing.............................................................. 839
General and administrative....................................................... 432
---------
Total operating expenses........................................................... 5,830
---------
Operating loss..................................................................... (5,830)
Interest income, net............................................................... 192
---------
Net loss........................................................................... $ (5,638)
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
SERIES A DURING THE TOTAL
PREFERRED COMMON NOTE DEVELOPMENT STOCKHOLDERS'
STOCK STOCK RECEIVABLE STAGE EQUITY
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of 21,111,112 shares of common stock to
founders for technology and a note in July
1996............................................. $ -- $ 150 $ (150) $ -- $ --
Issuance of 7,777,777 shares of Series A preferred
stock to investors at $2.00 per share, net of
issuance costs of $163 in July and October
1996............................................. 15,392 -- -- -- 15,392
Issuance of options to purchase 201,000 shares of
common stock for services valued at $0.02 per
share in November 1996........................... -- 4 -- -- 4
Net loss........................................... -- -- -- (5,638) (5,638)
----------- ----- ----- ------------ ------------
Balance at December 31, 1996....................... $ 15,392 $ 154 $ (150) $ (5,638) $ 9,758
----------- ----- ----- ------------ ------------
----------- ----- ----- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (FEBRUARY 12, 1996) TO DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................................... $ (5,638)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization.................................................... 153
Issuance of stock for services................................................... 4
Changes in assets and liabilities:
Other current assets........................................................... (174)
Accounts payable............................................................... 316
Accrued compensation and related liabilities................................... 235
Other accrued liabilities...................................................... 746
Deferred revenues.............................................................. 675
---------
Net cash used in operating activities.............................................. (3,683)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................... (1,443)
Increase in other assets........................................................... (132)
Purchase of short-term investments................................................. (4,008)
Maturities of short-term investments............................................... 1,975
---------
Net cash used in investing activities.............................................. (3,608)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred stock, net............................ 15,392
Short-term notes payable, stockholder.............................................. 551
Repayment of short-term notes payable, stockholder................................. (500)
---------
Net cash provided by financing activities.......................................... 15,443
---------
Net increase in cash and cash equivalents.......................................... 8,152
Cash and cash equivalents at beginning of period................................... --
---------
Cash and cash equivalents at end of period......................................... $ 8,152
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Navio Communications, Inc. ("Navio" or the "Company"), a development stage
company, was incorporated in the State of Delaware on February 12, 1996. The
Company was organized to develop and market Internet solutions to consumers on
non-PC devices.
DEVELOPMENT STAGE COMPANY
Since inception, the Company has been engaged primarily in research and
development activities in connection with the development of its products. Other
activities to date have included raising capital, recruiting managerial and
technical personnel, establishment of business development and marketing
organizations and execution of various license agreements. Accordingly, the
Company is classified as a development stage enterprise at December 31, 1996.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net operating losses of approximately $5.6 million and has
working capital of approximately $8.3 million as of December 31, 1996. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management expects the Company to incur substantial and
increasing operating losses in the next year and recognizes the need for an
infusion of cash during 1997. The Company is actively pursuing various options
which include securing additional equity financing and believes that sufficient
funding will be available to achieve its planned business objectives. However,
if the Company is unable to obtain necessary cash, other more substantial
restructuring options may be necessary, which would have a material adverse
effect on the Company's business, results of operations and prospects. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less. Short-term
investments, all of which are classified as available-for-sale, consist of high
quality debt securities with original maturities between 90 days and one year.
F-32
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table details the Company's investments at December 31, 1996
(in thousands):
<TABLE>
<S> <C>
U.S. Government agencies............................................ $ 4,624
Money market funds.................................................. 2,268
Corporate bonds and notes........................................... 3,025
---------
$ 9,917
---------
---------
Included in cash and cash equivalents............................... $ 7,884
Included in short-term investments.................................. 2,033
---------
$ 9,917
---------
---------
</TABLE>
The Company invests its excess cash in accordance with a short-term
investment policy set by the board of directors. The policy authorizes
investments in government securities, time deposits and certificates of deposit
in approved financial institutions, commercial paper rated A-1/P-1, and other
money market instruments of similar liquidity and credit quality.
The Company considers its investments in such instruments as
available-for-sale and, in accordance with Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115"), would record its investments at fair value. However, as the difference
between cost and fair value was immaterial, no adjustment was made to the
historical carrying value of the investments and no unrealized gains and losses
have been recorded as a separate component of stockholders' equity. Realized
gains or losses from available-for-sale investments have not been material.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash investments. The Company primarily
invests its excess cash in deposits with major banks, in U.S. Treasury and U.S.
Agency obligations and in money market securities issued by companies with
strong credit ratings and in a variety of industries. Those securities
classified as cash equivalents and short-term investments typically mature
within one year of their purchase date.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line method over
the estimated useful lives of the assets, generally two to five years. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the underlying asset.
DEFERRED REVENUE
Deferred revenue represents prepayments from customers for future consulting
services and product royalties.
F-33
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. To date, all
research and development costs have been expensed.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, and to adopt the "disclosure only" alternative described in FAS
123, in accounting for its employee stock option plans. Under APB 25, if the
exercise price of the Company's employee stock options equals or exceeds the
fair value of the underlying stock on the date of grant as determined by the
Company's board of directors, no compensation expense is recognized.
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at December 31,
1996 (in thousands):
<TABLE>
<S> <C>
Computer and office equipment....................................... $ 595
Purchased computer software......................................... 256
Furniture and fixtures.............................................. 249
Leasehold improvements.............................................. 343
---------
Total property and equipment........................................ 1,443
Accumulated depreciation and amortization........................... (153)
---------
Net property and equipment.......................................... $ 1,290
---------
---------
</TABLE>
3. SHORT-TERM NOTE PAYABLE, STOCKHOLDER
In July 1996, the Company entered into a note with a stockholder for the
purchase of equipment. The note is noninterest bearing, payable on demand and
secured by the equipment. The stockholder maintains the right, until the note is
repaid, to repurchase the equipment for the original purchase price paid by the
Company.
4. COMMITMENTS
The Company leases facilities, as cotenant with Netscape for its principal
office and research facilities under a noncancelable operating lease agreement
expiring in December 2001. Minimum payments are subject to annual increases
based in part on the consumer price index.
F-34
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
In addition, during 1996, the Company entered into various agreements with
third party vendors requiring minimum royalty and maintenance payments. Certain
third party agreements contain cancelation provisions whereby the Company will
be free of further liability upon cancelation. In addition, certain third party
agreements provide for an irrevocable, worldwide, perpetual license for use in
any application upon payment of the minimum royalty payments.
Future minimum payments as of December 31, 1996 under the lease, net of
sublease income, and under third party royalty and maintenance agreements are as
follows (in thousands):
<TABLE>
<CAPTION>
NONCANCELABLE THIRD-PARTY
OPERATING ROYALTY
LEASE AGREEMENTS
------------- -----------
<S> <C> <C>
1997.............................................................. $ 736 $ 300
1998.............................................................. 843 487
1999.............................................................. 873 200
2000.............................................................. 904 409
2001 and thereafter............................................... 937 409
------ -----------
$ 4,293 $ 1,805
------ -----------
------ -----------
</TABLE>
Rent expense for the period ending December 31, 1996 was $141,000.
Payments under third party agreements for the period ending December 31,
1996, which have been expensed to research and development, were $874,000.
In addition, in July 1996, the Company entered into an employment agreement
with a founder. The agreement is terminable by either party on 30 days' written
notice, and provides for a base salary, subject to adjustment at the discretion
of the board of directors, with bonuses payable on March 31, 1998, 1999 and
2000, respectively. The agreement obligates the Company to loan money to the
founder for the purchase of a residence, which loan will bear interest at 5% and
be payable 12 months following funding. The loan will be secured by a deed of
trust in favor of the Company in the underlying real property, or other
acceptable collateral. The agreement further provides that in the event that (i)
the Company terminates the employment of the founder other than for "cause," as
defined therein, (ii) the founder's employment is "constructively terminated,"
as defined therein, or (iii) a "Change in Control," as defined therein, occurs,
then the founder will be entitled to (w) a severance payment equal to 24 months'
base salary, payable in 24 equal monthly installments, (x) cancelation and
forgiveness of any outstanding loans from the Company, (y) termination of the
Company's repurchase rights in any common stock held by the founder and (z) a
24-month consultancy at $1,000 per month, during which period any options held
by the founder would continue to be exercisable. In the event that the Company
terminates the employment of the founder for "cause," then the founder will be
entitled to receive a severance payment equal to six months' base salary and in
certain circumstances, the benefits prescribed in (y) and (z) above. In the
event the founder voluntarily terminates his employment with the Company, the
founder will be entitled to receive a severance payment equal to six months'
base salary (see Note 8).
F-35
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1996, the Company issued 7,777,777 shares of Series A preferred stock
at $2.00 per share. In the event of a liquidation or winding up of the Company,
holders of Series A preferred stock are entitled to a liquidation preference of
$2.00 per share, together with any declared but unpaid dividends, prior and in
preference to the holders of common stock. Series A preferred stockholders are
entitled to noncumulative dividends at an annual rate of $0.0675 per share, when
and as declared by the board of directors, prior and in preference to dividends
on the common stock. No dividends have been declared by the Company.
The holders of Series A preferred stock are entitled to one vote for each
share of common stock into which such preferred stock is convertible. Each share
of Series A preferred stock is convertible, at an option of the holder, into
common stock on a one-for-one basis. Each share of Series A preferred stock
automatically converts into one share of common stock in the event of an
underwritten public offering of the Company's common stock with a price of at
least $4.00 per share and aggregate gross proceeds of at least $10,000,000 (a
"Qualified IPO") or upon the consent of the holders of a majority of the then
outstanding shares of Series A preferred stock. The conversion rate of the
Series A preferred stock is subject to adjustment in the event of, among other
things, certain dilutive issuances of stock, business combinations, stock splits
and stock dividends. The Company has reserved 7,777,777 shares of common stock
for conversion of preferred stock.
COMMON STOCK
In July 1996, 8,333,334 shares of common stock were issued to a founder in
exchange for technology and a $150,000 promissory note. The outstanding shares
are subject to certain transfer restrictions. Certain of these shares are
subject to repurchase, at $0.10 per share, upon the occurrence of certain
events, including termination of employment. The Company's repurchase option
expires as to 1,388,889 shares of common stock on each of February 12, 1997 and
1998. In addition, as to these 2,777,778 shares, the repurchase option will
expire immediately in the event of a Qualified IPO or upon acquisition of the
Company, subject to certain conditions, by a stockholder. As to an additional
2,777,778 shares of common stock, the Company's repurchase option expires based
on the achievement of specified performance objectives. Regardless of product
sold, the repurchase option shall expire on all such performance shares as of
February 12, 2003 (see Note 8).
As to the shares which are not subject to the repurchase option, the shares
are subject to the Company's right to first refusal on sale or transfer of the
shares. The Company's right of first refusal terminates upon the earliest to
occur of (i) a Qualified IPO, (ii) a merger or consolidation of the Company as a
result of which the Company is not the surviving entity, or any sale, conveyance
or other disposition of the assets of the Company as an entirety or
substantially as an entirety, or (iii) the achievement by the Company of
$100,000,000 in annual sales.
In addition, in July 1996, the Company issued to Netscape 12,777,778 shares
of common stock in exchange for the license of certain intellectual property
rights. Such shares are subject to the Company's right of first refusal on sale
or transfer of the shares. The Company's right of first refusal terminates upon
the earliest to occur of (i) the Company's underwritten initial public offering,
(ii) a merger or consolidation of the Company as a result of which the Company
is not the surviving entity or
F-36
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
any sale, covenance or other disposition of the assets of the Company as an
entirety or substantially as an entirety; (iii) the achievement by the Company
of $100,000,000 in annual sales or (iv) the expiration of the Company's right of
first refusal with respect to the founder's common stock.
STOCKHOLDER AND VOTING AGREEMENT
The Company has an agreement with Netscape, which along with certain
stockholder rights, provides Netscape with the right and option to acquire
substantially all of the outstanding stock, of the Company at fair market value,
if the Company has not completed an underwritten initial public offering of
shares on or before February 12, 2000, or if, prior to that date, the board of
directors of the Company approves the selection of an investment banking firm
for the purpose of serving as lead manager of the Company's initial public
offering, holders of Series A preferred stock may elect not to sell their shares
in connection with such a transaction (see Note 8).
NOTE RECEIVABLE, STOCKHOLDER
In July 1996, the Company issued a full recourse promissory note in the
original principal amount of $150,000 to a founder. The note bears interest at
6.36% per annum and is payable in installments of $50,000 in principal, plus any
accrued but unpaid interest, on each of July 9, 1998, 2000 and 2002.
WARRANTS
In July 1996, the Company issued a warrant to Netscape to purchase up to
50.5% of the total number of shares of authorized capital stock of the Company,
as amended from time to time. The exercise price for each warrant share is equal
to the fair market value of one share of the Company's common stock on the
exercise date, as determined by the Company's board of directors. The warrant
may be exercised by the holder, in whole or in part, at any time or from
time-to-time until the first to occur of (i) the acquisition by the warrant
holder of all of the outstanding equity securities of the Company pursuant to
the Stockholder and Voting Agreement or (ii) upon the closing of a firm
commitment underwritten initial public offering of the Company's common stock
with respect to which the stockholder has declined to exercise its right to
effect an IPO Buyout, as defined therein. The number of shares purchasable under
the warrant and the exercise price are subject to adjustment in the event, among
other things, of a capital reorganization of the Company or business
combination. The Company has reserved 15,277,778 shares for issuance pursuant to
this warrant (see Note 8).
STOCK OPTION PLAN
During 1996, the board of directors of the Company adopted, and the
stockholders approved, the 1996 Stock Option Plan (the "1996 Plan"), which
provides for the grant of incentive stock options and nonstatutory stock options
to employees and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant as determined by the board of directors. The vesting and
exercise provisions of the option grants are determined by the board of
directors. Options expire no later than 10 years from the date of grant.
Options granted are immediately exercisable, and the shares of common stock
issued to employees upon exercise are subject to repurchase, at the original
purchase price, by the Company, at the
F-37
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
discretion of the Company, upon the termination of the individual's employment
or consultancy with the Company. The Company's repurchase right expires
generally at the rate of 25% of the original grant, commencing 12 months after
the date of grant or employment, and in monthly increments over the following 36
months.
STOCK OPTION PLAN
A summary of activity under the 1996 Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -----------------------------------
AVAILABLE NUMBER OF EXERCISE AGGREGATE
FOR GRANT SHARES PRICE PRICE
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Shares reserved.............................. 10,965,000 -- -- $ --
Options granted.............................. (4,930,000) 4,930,000 $ 0.10 493,000
Options canceled............................. -- -- -- --
Options exercised............................ -- -- -- --
------------ ---------- ----- ----------
Balance at December 31, 1996................. 6,035,000 4,930,000 $ 0.10 $ 493,000
------------ ---------- ----- ----------
------------ ---------- ----- ----------
</TABLE>
The weighted-average per share fair value of options and common stock
granted to employees during 1996 was $0.01 and $0.08, respectively.
No options were exercised or repurchased during the period ended December
31, 1996. The Company has reserved 10,965,000 shares of common stock for
issuance under the Plan.
In the period ended December 31, 1996, the Company granted options, outside
of the 1996 Plan, to certain service providers to purchase 201,000 shares of
common stock at $0.10 per share. The options were recorded at the fair value of
the option at the date of grant ($4,020 in 1996). The options granted are
immediately exercisable and the resulting shares issued are subject to
repurchase by the Company, at the original purchase price, at the discretion of
the Company, upon the termination of the vendor's service with the Company. The
right expires generally at the rate of 25% of the original grant, commencing 12
months after the date of grant or first date of service, and in monthly
increments over the following 36 months.
No options outside of the 1996 Plan were exercised or repurchased during the
period ended December 31, 1996. At December 31, 1996, there were options to
purchase 201,000 shares outstanding outside of the 1996 Plan, of which none were
vested. The Company has reserved 423,888 shares of common stock for current and
future issuance to certain providers of technology and services.
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly,
recognizes no compensation expense for stock option grants to employees and
directors.
Companies that continue to apply APB 25 are required to disclose pro forma
results from operations as if the measurement provisions of SFAS 123 had been
adopted in their entirety. The pro forma disclosures include the effects of all
options to employees during the period ended December 31,
F-38
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
1996. In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
because such models were developed for traded options which have no vesting
provisions and are fully transferable. In addition, stock option pricing models
require the input of highly subjective assumptions, including the expected
future stock price volatility.
The fair value of options at the date of grant, estimated using the minimum
value method, contained the following weighted-average 10-year assumptions (in
thousands):
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Expected option term from vest date.............................................. 4 months
Interest rate.................................................................... 5.6%
Dividend yield................................................................... 0
</TABLE>
The remaining contractual life of options outstanding at December 31, 1996
was 9.89 years.
For purposes of pro forma disclosures, the estimated fair value of the
options and common stock awards is amortized to pro forma net loss over the
related vesting periods. Pro forma net loss for the period ended December 31,
1996 was $5,988,000.
6. INCOME TAXES
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $4,400,000. The Company also had federal research
and development tax credit carryforwards of approximately $100,000. The net
operating loss and credit carryforwards will expire at various dates in 2011, if
not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
As of December 31, 1996, the Company had deferred tax assets of
approximately $2,800,000 which have been fully offset by a valuation allowance.
Deferred tax assets relate primarily to net operating loss carryforwards,
research credits and capitalized research and development costs.
7. RELATED PARTY TRANSACTIONS
During 1996, the Company entered into short-term loan arrangements totaling
$500,000 with Netscape. The loans were due on demand, unsecured and bore
interest at 8%. The loans were repaid during 1996.
In addition, during 1996, the Company purchased equipment from two
stockholders totaling $76,000 (see Note 3).
8. SUBSEQUENT EVENTS
On March 19, 1997, the board of directors and stockholders approved an
amendment to the Amended and Restated Certificate of Incorporation (a) to reduce
the number of authorized shares of
F-39
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
preferred stock to 7,777,777, (b) to increase the number of shares of common
stock reserved for issuance under the Company's 1996 Stock Option Plan to
10,965,000, and (c) to reduce the number of shares reserved for issuance to
certain providers of technology and services to 423,888. These changes have been
reflected in the accompanying financial statements and notes.
In January and February 1997, the board of directors granted options to
purchase 1,405,000 shares of common stock at $0.10 per share. In March, the
board of directors granted options to purchase 4,490,000 shares of common stock
at $0.50 per share, pursuant to the 1996 Plan.
On May 16, 1997, the Company signed the Agreement and Plan of Merger (the
"Agreement") with Network Computer, Inc. ("NCI"). In accordance with the
Agreement, NCI proposes to acquire all of the outstanding shares of capital
stock of the Company. The merger will become effective immediately upon approval
by the stockholders of the Company and satisfaction or waiver of all other
conditions precedent in the Agreement. The closing is expected to occur no later
than August 15, 1997. In addition, upon the effective date of the merger, the
Netscape warrant and the Company's Stockholder and Voting Agreement as described
in Note 5 will terminate.
On June 5, 1997, the Company signed a new employment agreement with a
founder that supersedes the agreement described in Note 4 and a previous
agreement signed on May 16, 1997. The June 5, 1997 employment agreement will
become effective upon the earlier of the consummation of the Agreement or the
exercise by the Company of its option in accordance with the Stock Option
Agreement (the "Option") with the founder and Netscape (the "Stockholders"). In
accordance with the Option and upon certain conditions, NCI may elect to pay
either in cash at a price of $2.00 per share or pay in NCI Series C preferred
stock in accordance with the Agreement for the purchase of the Company's stock.
The Option also prevents Netscape from exercising its warrant without prior
consent from NCI. The Option shall expire at the earliest of the effective date
or the termination of the Agreement.
F-40
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 8,152 $ 3,650
Short-term cash investments........................................ 2,033 1,014
Accounts receivable, net........................................... -- 396
Other current assets............................................... 174 474
----------- -----------
Total Current Assets............................................. 10,359 5,534
----------- -----------
PROPERTY AND EQUIPMENT, net.......................................... 1,290 1,690
OTHER ASSETS......................................................... 132 89
----------- -----------
Total Assets..................................................... $ 11,781 $ 7,313
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term note payable to stockholder............................. $ 51 $ 51
Accounts payable................................................... 316 824
Accrued compensation and related liabilities....................... 235 433
Deferred revenues.................................................. 675 2,427
Other accrued liabilities.......................................... 746 698
----------- -----------
Total Current Liabilities........................................ 2,023 4,433
----------- -----------
STOCKHOLDERS' EQUITY:
Series A Preferred stock; $.0001 par value......................... 1 1
Common stock; $.0001 par value..................................... 2 2
Paid in capital.................................................... 15,543 15,577
Note receivable from stockholder................................... (150) (184)
Deficit accumulated during the development stage................... (5,638) (12,516)
----------- -----------
Total Stockholders' Equity....................................... $ 9,758 $ 2,880
----------- -----------
Total Liabilities and Stockholders' Equity....................... $ 11,781 $ 7,313
----------- -----------
----------- -----------
</TABLE>
See notes to condensed financial statements.
F-41
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
(FEBRUARY 12, 1996) SIX MONTHS ENDED
TO JUNE 30, 1996 JUNE 30, 1997
------------------- -----------------
<S> <C> <C>
REVENUES................................................................... $ -- $ 615
----- -------
OPERATING EXPENSES
Cost of revenues......................................................... -- 707
Sales and marketing...................................................... -- 1,757
Research and development................................................. 395 4,464
General and administrative............................................... 255 762
----- -------
Total Operating Expenses............................................... 650 7,690
----- -------
OPERATING LOSS............................................................. (650) (7,075)
Other income (expense), net.............................................. (4) 197
----- -------
NET LOSS................................................................... $ (654) $ (6,878)
----- -------
----- -------
</TABLE>
See notes to condensed financial statements.
F-42
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
(FEBRUARY 12, 1996) SIX MONTHS ENDED
TO JUNE 30, 1996 JUNE 30, 1997
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (654) $ (6,878)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... -- 320
Changes in assets and liabilities:
Accounts receivable.................................................. -- (396)
Other assets......................................................... (420) (257)
Accounts payable..................................................... 160 508
Deferred revenues.................................................... -- 1,752
Other accrued liabilities............................................ 1,456 150
------ -------
Net cash provided by (used in) operating activities...................... 542 (4,801)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments...................................... -- 2,093
Purchases of short-term investments.................................... -- (1,074)
Capital expenditures................................................... (425) (720)
------ -------
Net cash (used for) provided by investing activities..................... (425) 299
------ -------
Net increase in cash and cash equivalents................................ 117 (4,502)
CASH AND CASH EQUIVALENTS
Beginning of period...................................................... -- 8,152
------ -------
End of period............................................................ $ 117 $ 3,650
------ -------
------ -------
</TABLE>
See notes to condensed financial statements.
F-43
<PAGE>
NAVIO COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. For further information, refer to the December 31, 1996
audited financial statements and footnotes thereto included in this prospectus.
2. SUBSEQUENT EVENT
On August 11, 1997 the Company entered into an merger agreement (the
"agreement") with Liberate Technologies ("Liberate"), formally known as Network
Computer, Inc. Pursuant to the terms of the agreement, Liberate issued Series B
and C Preferred Stock and stock options to acquire all of the outstanding common
stock, preferred stock and stock options of the Company.
F-44
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC.
PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)
On August 11, 1997, Liberate Technologies (the "Company" or "Liberate")
formally known as Network Computer, Inc., completed the acquisition of Navio
Communications, Inc. ("Navio"), a development stage company in the process of
developing internet application software. The acquisition of Navio has been
accounted for as a purchase. Accordingly, the results of operations of Navio
have been included in the consolidated statement of operations of Liberate
commencing on the date of acquisition.
The accompanying pro forma condensed combined statement of operations for
Liberate's fiscal year ended May 31, 1998 assumes that the acquisition took
place as of the beginning of fiscal 1998 and combines Navio's statement of
operations for the period from June 1, 1997 to the date of acquisition (August
11, 1997) with Liberate's consolidated statements of operations for the year
ended May 31, 1998. The pro forma condensed combined statement of operations for
the fiscal year ended May 31, 1998 does not include the effect of any
nonrecurring charges directly attributed to the acquisition.
The accompanying pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements and related notes
thereto for both Liberate and Navio, which are included in this Prospectus.
F-45
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MAY 31, 1998 JUNE 1 - AUGUST 11, 1997 PRO FORMA PRO FORMA
LIBERATE NAVIO ADJUSTMENTS COMBINED
------------ ------------------------ -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
License and other................ $ 4,162 $ 55 $ -- $ 4,217
Service.......................... 6110 738 -- 6,848
------------ ------- -------------- ------------
Total revenue.................. 10,272 793 -- 11,065
------------ ------- -------------- ------------
COST OF REVENUES:
License and other................ 3,779 74 -- 3,853
Service.......................... 2,230 438 -- 2,668
------------ ------- -------------- ------------
Total cost of revenue.......... 6,009 512 -- 6,521
------------ ------- -------------- ------------
GROSS MARGIN....................... 4,263 281 -- 4,544
------------ ------- -------------- ------------
OPERATING EXPENSES:
Research and development......... 19,981 1,610 -- 21,591
Sales and marketing.............. 14,407 1,419 -- 15,826
General and administrative....... 2,453 380 -- 2,833
Amortization of purchased
intangible..................... 4,563 -- 1,517(b) 6,080
Restructuring charges............ 1,175 -- -- 1,175
Acquired in-process research and
development.................... 58,100 -- (58,100)(a) --
------------ ------- -------------- ------------
Total operating expenses....... 100,679 3,409 (56,583) 47,505
------------ ------- -------------- ------------
Loss from operations........... (96,416) (3,128) (42,961)
INTEREST AND OTHER INCOME
(EXPENSE), net................... 10 41 -- 51
------------ ------- -------------- ------------
LOSS BEFORE INCOME TAX BENEFIT..... (96,406) (3,087) (42,910)
INCOME TAX BENEFIT................. 2,015 -- (1,332)(c) 683
NET LOSS........................... $(94,391) $(3,087) $(42,227)
------------ ------- ------------
------------ ------- ------------
BASIC AND DILUTED NET LOSS PER
SHARE............................ ($1,780.96) $(796.74)(d)
------------ ------------
------------ ------------
SHARES USED TO IN COMPUTING BASIC
AND DILUTED NET LOSS PER SHARE... 53 53(d)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this condensed combined financial
statement.
F-46
<PAGE>
LIBERATE TECHNOLOGIES AND NAVIO COMMUNICATIONS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
condensed combined statements of operations as described below:
(a) Eliminates the acquired in-process research and development expense for
approximately $58.1 million associated with the acquisition of Navio.
(b) Reflects amortization for 3 months of the excess of the purchase price over
the fair value of net assets acquired, which is being amortized over 3
years.
(c) Reflects a reduction in the estimated assumed income tax benefit received
from Oracle as a result of inclusion of Liberate's tax operating loss in
Oracles consolidated tax return prior to the acquisition of Navio.
(d) The pro forma basic and diluted net loss per share excludes the preferred
shares of Liberate issued in the acquisition as their inclusion would be
antidilutive.
NOTE 2. PURCHASE PRICE ALLOCATION
In connection with the acquisition, the Company issued Series B and C
convertible preferred stock and stock options to acquire Series C convertible
preferred stock in exchange for all of the outstanding common stock, preferred
stock and options to purchase shares of Navio common stock. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of Navio
have been included in the consolidated financial statements commencing on the
date of acquisition. The fair market value of the equity securities issued in
the acquisition was approximately $77.1 million. In connection with the
acquisition, the Company wrote off approximately $58.1 million of acquired
in-process research and development which, in the opinion of management, had not
reached technological feasibility and had no alternative future use. The
purchased intangible of approximately $18.3 million was recorded and is being
amortized on a straight-line basis over a useful life of three years.
F-47
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 27,800
NASD fee........................................................ 10,500
Nasdaq National Market initial listing fee...................... 95,000
Printing and engraving.......................................... 300,000
Legal fees and expenses of the Company.......................... 500,000
Accounting fees and expenses.................................... 330,000
Directors and officers liability insurance...................... 400,000
Blue sky fees and expenses...................................... 10,000
Transfer agent fees............................................. 10,000
Miscellaneous................................................... 66,700
---------
Total....................................................... $1,750,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Sixth Amended and Restated Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Registrant and its stockholders. This provision in the Sixth
Amended and Restated Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. The Registrant maintains liability insurance
for its directors and officers. Reference is also made to Section of the
underwriting agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities, and Section 1.10 of
the Stockholders Agreement, as amended contained in Exhibit 10.21 hereto,
indemnifying certain of the Company's stockholders, including controlling
stockholders, against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since April 24, 1996 (inception), we have issued and sold the following
securities, all of which reflect the one-for-six reverse stock split to be
effected in July 1999:
1. On May 22, 1996, we issued and sold an aggregate of 16 shares of common
stock to Oracle in exchange for a $10 payment from Oracle.
2. On October 1, 1996, we issued and sold an aggregate of 14,166,650 shares
of our Series A preferred stock to Oracle in exchange for a $10 million
cash payment and the transfer of Oracle's network computer division to
us.
3. On July 23, 1997, we entered into a convertible note purchase agreement
with Oracle. During fiscal 1998, we issued 757,575 shares of Series A-1
preferred stock upon Oracle's conversion of $5 million outstanding under
this agreement.
4. On August 11, 1997, we issued an aggregate of 2,727,272 shares of our
Series A-1 preferred stock, 2,320,758 shares of our Series B preferred
stock and 6,399,902 shares of Series C preferred stock to Oracle and the
former stockholders of Navio pursuant to the agreement and plan of
merger.
5. On November 12, 1997, we issued a promissory note convertible into up to
an aggregate of 421,940 shares of our Series D preferred stock to
Middlefield Ventures for an aggregate consideration of $4 million.
6. On May 12, 1999 we issued an aggregate of 5,208,326 shares of our Series
E preferred stock to a total of 18 investors for $9.60 per share, or an
aggregate of $50 million.
7. On May 31, 1999 we issued warrants to purchase 208,333 shares of common
stock to Comcast and US WEST in connection with their satisfaction of
certain commercial milestones.
8. On June 30, 1999 we entered into an agreement with Lucent Technologies
to issue and sell shares of common stock at a per share price equal to
96% of the initial public offering price, for an aggregate purchase price
of $12.5 million.
9. We issued 1,385,614 shares of Series C preferred stock pursuant to
exercises of options, with exercise prices ranging from $.36 to $1.68,
granted under the Navio 1996 Stock Option Plan.
10. We issued 20,264 shares of Series C preferred stock pursuant to
exercises of options, with exercise prices of $.36, granted pursuant to
Navio non-qualified option grants.
11. We issued 391,462 shares of Series A common stock pursuant to exercises
of options, with exercise prices ranging from $.60 to $9.00, granted
under the Liberate 1996 Stock Plan.
12 We issued 225,694 shares of Series A common stock pursuant to an
exercise of an option, with an exercise price of $5.10 per share, granted
to David J. Roux, our Chairman.
The issuances of the securities described in Items 15(a)(1) through 15(a)(8)
and 15(a)(12) were deemed to be exempt from registration under the Act in
reliance on Section 4(2) of such Act as transactions by an issuer not involving
any public offering. The issuances described in Items 15(a)(9) through 15(a)(11)
were deemed exempt from registration under the Act in reliance upon Rule 701
promulgated under the Act. In addition, the recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
2.1+ Agreement and Plan of Merger, dated May 16, 1997, between Liberate and Navio.
3.1+ Fourth Amended and Restated Certificate of Incorporation of Liberate, as amended to date.
3.2 Form of Fifth Amended and Restated Certificate of Incorporation of Liberate to be filed prior to the
effectiveness of the offering made pursuant to this Registration Statement.
3.3 Bylaws of Liberate, as amended.
3.4 Form of Amended and Restated Bylaws of Liberate.
3.5 Form of Sixth Amended and Restated Certificate of Incorporation of Liberate to be filed upon the
closing of the offering made pursuant to this Registration Statement.
4.1* Specimen Certificate of Liberate's common stock.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to Liberate.
9.1 Voting Agreement, dated May 12, 1999, among Liberate, Oracle, Comcast Technology, Cox Communications
and MediaOne Interactive Services.
10.1 Form of Indemnification Agreement entered into between Liberate and its directors and executive
officers.
10.2+ Network Computer, Inc. 1996 Stock Option Plan, and form of Option Agreement.
10.3+ Navio Communications, Inc. 1996 Stock Option Plan and form of Option Agreement.
10.4+ Navio Communications, Inc. 1996 Non-Qualified Option Plan, and form of Option Agreement.
10.5+ 1999 Equity Incentive Plan.
10.6+ 1999 Employee Stock Purchase Plan.
10.7+ Employment Agreement between Liberate and Mitchell E. Kertzman, dated October 12, 1998.
10.8+ Employment Agreement, dated October 17, 1997, with Wei Yen, as amended.
10.9+ Settlement Agreement and Release of Claims, dated October 8, 1998, with Wei Yen.
10.10+ Settlement Agreement and General Release of All Claims, dated March 16, 1998 between Jerry Baker,
Oracle and Liberate.
10.11+ Employment letter between Liberate and Gordon Yamate, dated March 12, 1999.
10.12+ Employment letter between Liberate and Jim Peterson, dated April 6, 1999.
10.13**+ OEM License Agreement, dated December 31, 1997, between Liberate and Wind River Systems, as amended.
10.14+ Technology License Agreement, dated September 8, 1998, between Liberate and Oracle.
10.15+ Letter Agreement, dated May 16, 1997, among Liberate, Oracle and Navio.
10.16+ Source Code License Agreement, dated July 9, 1996, between Netscape and TVsoft, as amended.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.17+ OEM License Agreement, dated October 17, 1996, between Oracle and Netscape, as amended.
10.18* Cooperation Agreement, dated November 6, 1997, between Liberate and Intel, as amended.
10.19* Convertible Promissory Note, dated November 12, 1997, issued to Middlefield Ventures.
10.20* Convertible Promissory Note Purchase Agreement, dated November 12, 1997, entered into between
Liberate and Middlefield Ventures.
10.21+ Stockholders Agreement, dated August 11, 1997, among Liberate and the investors named therein.
10.22 Admission Agreement, dated November 12, 1997, among Liberate and the investors named therein.
10.23+ Sublease Agreement for Redwood Shores office space, dated September 17, 1997, between Liberate and
Oracle.
10.24+ Maintenance Agreement for Redwood Shores office space, dated September 17, 1997, between Liberate and
Oracle.
10.25+ Furniture and Equipment Lease for Redwood Shores office space, dated September 17, 1997, between
Liberate and Oracle.
10.26+ Sublease Agreement for Salt Lake City office space, dated September 17, 1997, between Liberate and
Oracle.
10.27+ Letter Agreement for London office space, dated December 1998, between Liberate and Oracle.
10.28+ Lease Agreement for Sunnyvale office space, dated November 4, 1996, between Navio and Netscape.
10.29+ Circle Star Lease Agreement for San Carlos office space, dated April 27, 1999.
10.30+ Guaranty of Lease for San Carlos office space, dated April 27, 1999, between Circle Star Center
Associates and Oracle.
10.31+ Tax Allocation and Indemnity Agreement, dated August 17, 1997, between Liberate and Oracle.
10.32 Network Computer, Inc. Stock Option Agreement, dated October 15, 1998, with David Roux.
10.33 Network Computer, Inc. Stock Option Agreement, dated October 15, 1998, with Mitchell Kertzman.
10.34 Series E Preferred Stock Purchase Agreement, dated May 12, 1999, among Liberate and the investors
named therein.
10.35 Stock Purchase Agreement, dated June 30, 1999, among Liberate and Lucent Technologies Inc.
21.1 Subsidiary of Liberate.
23.1 Consent of Independent Public Accountants, Arthur Andersen LLP (see page II-7).
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to Liberate.
Reference is made to Exhibit 5.1.
23.3 Consent of Ernst & Young LLP, Independent Auditors (see page II-8).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this exhibits.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuations and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to our directors, officers and controlling persons pursuant to the
Delaware General Corporation Law, our amended and restated certificate of
incorporation or our bylaws, indemnification agreements entered into between us
and our officers and directors, the underwriting agreement, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of ours in the successful defense of
any action, suit or proceeding, is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
we will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Redwood
Shores, State of California, on this 1st day of July, 1999.
<TABLE>
<S> <C> <C>
LIBERATE TECHNOLOGIES
By: /s/ MITCHELL E. KERTZMAN
-----------------------------------------
Mitchell E. Kertzman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ MITCHELL E. KERTZMAN President, Chief Executive
- ------------------------------ Officer and Director July 1, 1999
Mitchell E. Kertzman (Principal Executive Officer)
*
- ------------------------------ Chairman July 1, 1999
David J. Roux
Vice President and Chief
/s/ NANCY J. HILKER Financial Officer (Principal
- ------------------------------ Financial and Accounting July 1, 1999
Nancy J. Hilker Officer)
*
- ------------------------------ Director July 1, 1999
James L. Barksdale
*
- ------------------------------ Director July 1, 1999
Charles Corfield
*
- ------------------------------ Director July 1, 1999
Lawrence J. Ellison
*
- ------------------------------ Director July 1, 1999
Jeffrey O. Henley
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ MITCHELL E. KERTZMAN
------------------------------
Mitchell E. Kertzman
(ATTORNEY IN FACT)
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 30, 1999
II-7
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent the reference to our firm under the caption "Experts" and to the
use of our report dated March 6, 1997 (except for Note 8 as to which the date is
June 5, 1997), with respect to the financial statements of Navio Communications,
Inc. as of December 31, 1996 and for the period from inception (February 12,
1996) to December 31, 1996 included in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-78781) and related Prospectus of Liberate
Technologies for the registration of shares of its common stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 30, 1999
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
Liberate Technologies, Inc. (formerly Network Computer, Inc.):
We have audited in accordance with generally accepted auditing standards,
the financial statements of Liberate Technologies, Inc. (a Delaware corporation,
formerly known as Network Computer, Inc.) and subsidiaries included in this
registration statement and have issued our report thereon dated June 24, 1999.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index above is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
June 24, 1999
II-9
<PAGE>
LIBERATE TECHNOLOGIES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS,
BALANCE AT ADDITIONS- RETURNS AND BALANCE AT
DESCRIPTION BEGINNING OF YEAR PROVISIONS WRITE-OFFS END OF YEAR
- --------------------------------------------------------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ending May 31, 1999............................... $ 278 $ 220 $ 251 $ 247
Year ending May 31, 1998............................... 1 329 52 278
Year ending May 31, 1997............................... -- 1 -- 1
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT NUMBERED PAGE
- --------- ------------------------------------------------------------------------------------------ -------------
<C> <S> <C>
1.1* Form of underwriting agreement.
2.1+ Agreement and Plan of Merger, dated May 16, 1997, between Liberate and Navio.
3.1+ Fourth Amended and Restated Certificate of Incorporation of Liberate, as amended to date.
3.2 Form of Fifth Amended and Restated Certificate of Incorporation of Liberate to be filed
prior to the effectiveness of the offering made pursuant to this Registration Statement.
3.3 Bylaws of Liberate, as amended.
3.4 Form of Amended and Restated Bylaws of Liberate.
3.5 Form of Sixth Amended and Restated Certificate of Incorporation of Liberate to be filed
upon the closing of the offering made pursuant to this Registration Statement.
4.1* Specimen Certificate of Liberate's common stock.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to
Liberate.
9.1 Voting Agreement, dated May 12, 1999, among Liberate, Oracle, Comcast Technology, Cox
Communications and MediaOne Interactive Services.
10.1 Form of Indemnification Agreement entered into between Liberate and its directors and
executive officers.
10.2+ Network Computer, Inc. 1996 Stock Option Plan, and form of Option Agreement.
10.3+ Navio Communications, Inc. 1996 Stock Option Plan and form of Option Agreement.
10.4+ Navio Communications, Inc. 1996 Non-Qualified Option Plan, and form of Option Agreement.
10.5+ 1999 Equity Incentive Plan.
10.6+ 1999 Employee Stock Purchase Plan.
10.7+ Employment Agreement between Liberate and Mitchell E. Kertzman, dated October 12, 1998.
10.8+ Employment Agreement, dated October 17, 1997, with Wei Yen, as amended.
10.9+ Settlement Agreement and Release of Claims, dated October 8, 1998, with Wei Yen.
10.10+ Settlement Agreement and General Release of All Claims, dated March 16, 1998 between Jerry
Baker, Oracle and Liberate.
10.11+ Employment letter between Liberate and Gordon Yamate, dated March 12, 1999.
10.12+ Employment letter between Liberate and Jim Peterson, dated April 6, 1999.
10.13**+ OEM License Agreement, dated December 31, 1997, between Liberate and Wind River Systems,
as amended.
10.14+ Technology License Agreement, dated September 8, 1998, between Liberate and Oracle.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT NUMBERED PAGE
- --------- ------------------------------------------------------------------------------------------ -------------
<C> <S> <C>
10.15+ Letter Agreement, dated May 16, 1997, among Liberate, Oracle and Navio.
10.16+ Source Code License Agreement, dated July 9, 1996, between Netscape and TVsoft, as
amended.
10.17+ OEM License Agreement, dated October 17, 1996, between Oracle and Netscape, as amended.
10.18* Cooperation Agreement, dated November 6, 1997, between Liberate and Intel, as amended.
10.19* Convertible Promissory Note, dated November 12, 1997, issued to Middlefield Ventures.
10.20* Convertible Promissory Note Purchase Agreement, dated November 12, 1997, entered into
between Liberate and Middlefield Ventures.
10.21+ Stockholders Agreement, dated August 11, 1997, among Liberate and the investors named
therein.
10.22 Admission Agreement, dated November 12, 1997, among Liberate and the investors named
therein.
10.23+ Sublease Agreement for Redwood Shores office space, dated September 17, 1997, between
Liberate and Oracle.
10.24+ Maintenance Agreement for Redwood Shores office space, dated September 17, 1997, between
Liberate and Oracle.
10.25+ Furniture and Equipment Lease for Redwood Shores office space, dated September 17, 1997,
between Liberate and Oracle.
10.26+ Sublease Agreement for Salt Lake City office space, dated September 17, 1997, between
Liberate and Oracle.
10.27+ Letter Agreement for London office space, dated December 1998, between Liberate and
Oracle.
10.28+ Lease Agreement for Sunnyvale office space, dated November 4, 1996, between Navio and
Netscape.
10.29+ Circle Star Lease Agreement for San Carlos office space, dated April 27, 1999.
10.30+ Guaranty of Lease for San Carlos office space, dated April 27, 1999, between Circle Star
Center Associates and Oracle.
10.31+ Tax Allocation and Indemnity Agreement, dated August 17, 1997, between Liberate and
Oracle.
10.32 Network Computer, Inc. Stock Option Agreement, dated October 15, 1998, with David Roux.
10.33 Network Computer, Inc. Stock Option Agreement, dated October 15, 1998, with Mitchell
Kertzman.
10.34 Series E Preferred Stock Purchase Agreement, dated May 12, 1999, among Liberate and the
investors named therein.
10.35 Stock Purchase Agreement, dated June 30, 1999, among Liberate and Lucent Technologies Inc.
21.1 Subsidiary of Liberate.
23.1 Consent of Independent Public Accountants, Arthur Andersen LLP (see page II-7).
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to
Liberate. Reference is made to Exhibit 5.1.
23.3 Consent of Ernst & Young LLP, Independent Auditors (see page II-8).
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of this exhibits.
+ Previously filed.
<PAGE>
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
LIBERATE TECHNOLOGIES
The undersigned, Mitchell E. Kertzman and Gordon T. Yamate, hereby
certify that:
ONE: They are the duly elected, qualified and acting Chief
Executive Officer and Secretary, respectively, of Liberate Technologies, a
Delaware corporation.
TWO: The Fourth Amended and Restated Certificate of Incorporation
of this corporation was filed on May 11, 1999 with the Secretary of Delaware
under the name Network Computer, Inc., the Third Amended and Restated
Certificate of Incorporation of this corporation was filed on November 10, 1997
with the Secretary of State of Delaware, the Second Amended and Restated
Certificate of Incorporation of this corporation was filed on July 28, 1997 with
the Secretary of State of Delaware, the First Amended and Restated Certificate
of Incorporation of this corporation was filed on September 24, 1996 with the
Secretary of State of Delaware and the Certificate of Incorporation of this
corporation was originally filed with the Secretary of State of Delaware on
April 24, 1996.
THREE: The Fourth Amended and Restated Certificate of
Incorporation of this corporation shall be amended and restated to read in full
as follows:
ARTICLE I
The name of the corporation is Liberate Technologies.
ARTICLE II
The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that the corporation is authorized to issue
is 327,666,568 shares, each with a par value of $0.01 per share; 67,916,668
shares shall be Common Stock and 259,749,900 shares shall be Preferred Stock.
<PAGE>
Upon the filing of this Amended and Restated Certificate of
Incorporation, every six (6) shares of this corporation's outstanding Common
Stock shall be automatically combined into one (1) share of this corporation's
Common Stock, without any action by the holder thereof.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Restated Certificate of Incorporation may be
issued from time to time in one or more series. The Board of Directors is
authorized to determine and alter the rights, preferences, privileges and
restrictions granted to and imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares constituting any
series, may increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any series subsequent to the
issue of shares of that series. This corporation shall have seven series of
Preferred Stock designated as follows: "Series A Preferred Stock" consisting of
84,999,900 shares; "Series A-1 Preferred Stock" consisting of 25,500,000 shares;
"Series B Preferred Stock" consisting of 14,000,000 shares; "Series C Preferred
Stock" consisting of 42,500,000 shares; "Series C-1 Preferred Stock" consisting
of 53,500,000 shares; "Series D Preferred Stock" consisting of 8,000,000 shares;
and "Series E Preferred Stock" consisting of 31,250,000 shares. The rights,
preferences, privileges, and restrictions granted to and imposed on the each
series of Stock are as set forth below in this Article IV(B). Together, the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock shall hereinafter be referred to collectively as
the "Preferred Stock."
1. DIVIDEND PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, the holders of
shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
entitled to receive dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of this corporation) on the Common Stock, Series C
Preferred Stock or Series C-1 Preferred Stock of this corporation, at the rate
of $.10 per share per annum on each outstanding share of Series A Preferred
Stock, $.11 per share per annum on each outstanding share of Series A-1
Preferred Stock and Series B Preferred Stock, $.158 per share per annum on each
outstanding share of Series D Preferred Stock and $.16 per share per annum on
each outstanding share of Series E Preferred Stock, payable quarterly when, as
and if declared by the Board of Directors. Such dividends shall not be
cumulative. In addition, in the event this corporation shall declare a
distribution payable in cash, securities of other persons or this corporation
(payable other than in Common Stock of this corporation), evidences of
indebtedness issued by this corporation or other persons, assets or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of Preferred
Stock were the holders of the number of shares of Common Stock of the
Corporation into which their respective shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive such distribution. The
holders of
2
<PAGE>
Preferred Stock shall have no right to share in any preferential
distributions made to any other series of Preferred Stock which may hereafter be
issued.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of this corporation, either voluntary or involuntary, subject to
the rights of series of Preferred Stock that may from time to time come into
existence, the holders of the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this corporation to the holders of
Series C Preferred Stock, Series C-1 Preferred Stock and Common Stock by
reason of their ownership thereof, an amount equal to $1.00 per share, $1.10
per share, $1.10 per share, $1.58 per share and $1.60 per share,
respectively, for each share of Series A Preferred Stock, Series A-1
Preferred Stock, Series B Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock then held by them, plus declared but unpaid
dividends on each such share. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be insufficient to permit
the payment to such holders of the full aforesaid preferential amounts, then,
subject to the rights of series of Preferred Stock that may from time to time
come into existence, the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders of
the Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to receive.
(b) Upon the completion of the distribution required by
Section 2(a) above and any other distribution that may be required with respect
to series of Preferred Stock that may from time to time come into existence, the
holders of the Series C Preferred Stock and Series C-1 Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of this corporation to the holders of Common Stock by reason of their
ownership thereof, an amount equal to $.275 per share for each share of Series C
Preferred Stock and Series C-1 Preferred Stock then held by them. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series C Preferred Stock and Series C-1 Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
that may from time to time come into existence, the entire remaining assets and
funds of the corporation legally available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock and Series C-1
Preferred Stock in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(c) Upon the completion of the distributions required by
Sections 2(a) and 2(b) above and any other distribution that may be required
with respect to series of Preferred Stock that may from time to time come into
existence, the remaining assets of the corporation available for distribution to
stockholders shall be distributed among the holders of Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Common Stock pro rata based on the number of shares
of Common Stock held by each (assuming conversion of all such Series A Preferred
Stock, Series A-1
3
<PAGE>
Preferred Stock, Series B Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock).
(d) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, or to include, (i) the acquisition of the corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation, but excluding any
merger effected exclusively for the purpose of changing the domicile of the
corporation); or (ii) a sale of all or substantially all of the assets of the
corporation, UNLESS the corporation's stockholders of record as constituted
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for the
corporation's acquisition or sale or otherwise) hold at least 50% of the voting
power of the surviving or acquiring entity.
(e) In any of the events specified in (d) above, if the
consideration received by the corporation is other than cash, its value will be
deemed its fair market value. Any securities shall be valued as follows:
(i) Securities not subject to investment letter or
other similar restrictions on free marketability:
(A) If traded on a securities exchange or The
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days prior
to the closing; and
(C) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (i) (A), (B) or (C) to reflect the approximate fair
market value thereof, as mutually determined by the corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
Preferred Stock.
(iii) In the event the requirements of this
subsection 2(e) are not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until
such time as the requirements of this subsection 2(e) have been complied with;
or
(B) cancel such transaction, in which event
the rights, preferences and privileges of the holders of the Preferred Stock
shall revert to and be the same as
4
<PAGE>
such rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in subsection 2(e)(iv) hereof.
(iv) The corporation shall give each holder of record
of Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the corporation has given the first notice
provided for herein or sooner than ten (10) days after the corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Preferred
Stock that are entitled to such notice rights or similar notice rights and that
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
3. REDEMPTION. The Preferred Stock is not redeemable.
4. CONVERSION. The holders of the Preferred Stock shall have
conversion rights as follows (the "CONVERSION RIGHTS"):
(a) RIGHT TO CONVERT. (i) Subject to Section 4(c), each
share of Series C Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such share, at the
office of this corporation or any transfer agent for such stock, into one fully
paid and nonassessable share of Series C-1 Preferred Stock or into the number of
shares of fully paid and nonassessable shares of Common Stock as is determined
by dividing $1.10 for each share of Series C Preferred Stock by the Conversion
Price applicable to each such share of Series C Preferred Stock, determined as
hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial Conversion Price for each share of Series C Preferred
Stock shall be $1.10.
(ii) Subject to Section 4(c), each share of Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and
Series C-1 Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
this corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing $1.10
for each share of Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock and Series C-1 Preferred Stock by the Conversion Price
applicable to each such share of each such series of Preferred Stock, determined
as hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial Conversion Price for each share of Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series C-1
Preferred Stock shall be $1.10.
(iii) Subject to Section 4(c), each share of Series D
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of this
corporation or any transfer agent for such stock, into
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such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the price at which such Series D Preferred Stock is
first issued and sold by the Company for each share of Series D Preferred
Stock by the Conversion Price applicable to each such share of Series D
Preferred Stock, determined as hereafter provided, in effect on the date the
certificate is surrendered for conversion. The initial Conversion Price for
each share of Series D Preferred Stock shall be $1.58.
(iv) Subject to Section 4(c), each share of Series E
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of this
corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing $1.60 by
the Conversion Price applicable to each such share of Series E Preferred Stock,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Conversion Price for each share of
Series E Preferred Stock shall be $1.60.
(v) The initial Conversion Price for each series of
Preferred Stock shall be subject to adjustment as set forth in Section 4(d).
(b) AUTOMATIC CONVERSION. Unless earlier converted
pursuant to Section 4(a)(i), 4(a)(ii), 4(a)(iii) or 4(a)(iv), except as provided
below in Section 4(c), (i) each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price at the time in
effect for each such share of Preferred Stock immediately upon the sale of this
corporation's Common Stock in a firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with net proceeds of greater than $20,000,000
and a price to the public of at least $2.00 per share (as adjusted for stock
splits, stock dividends, combinations and similar events); (ii) each share of
Series A Preferred Stock and Series A-1 Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price at the time in
effect for each such share of Preferred Stock on the date specified by written
consent or agreement of the holders of a majority of the then outstanding shares
of Series A Preferred Stock and Series A-1 Preferred Stock, voting together as a
class; and (iii) each share of Series B Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall automatically be converted into shares of Common Stock at
the Conversion Price at the time in effect for each such share of Preferred
Stock on the date specified by written consent or agreement of the holders of a
majority of the then outstanding shares of Series B Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock, voting together as a class, provided, that no shares of
Series B Preferred Stock or of Series E Preferred Stock shall be so converted
without the prior written consent or agreement of eighty-one percent (81%) of
the outstanding shares of the Series B Preferred Stock or Series E Preferred
Stock (excluding shares of Series B Preferred Stock or Series E Preferred Stock
held by Oracle Corporation or its Affiliates (as such term is defined in Rule
12b-2 promulgated under the Securities Exchange Act of 1934, as amended
("Affiliates")), as the case may be, voting as separate classes.
(c) MECHANICS OF CONVERSION. Before any holder of Series C
Preferred Stock shall be entitled to convert the same into shares of Series C-1
Preferred Stock, and before
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any holder of Preferred Stock shall be entitled to convert the same into
shares of Common Stock, as the case may be, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of this
corporation or of any transfer agent for the Preferred Stock, and shall give
written notice to this corporation at its principal corporate office, of the
election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Series C-1 Preferred
Stock or Common Stock, as applicable, are to be issued. This corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Preferred Stock or to the nominee or nominees of such holder,
a certificate or certificates for the number of shares of Series C-1
Preferred Stock or Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Series C-1 Preferred Stock or Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Series C-1 Preferred Stock or Common Stock, as
applicable, as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities
Act, the conversion may, at the option of any holder tendering Preferred
Stock, be conditioned upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the person(s) entitled
to receive Common Stock upon conversion of such Preferred Stock shall not be
deemed to have converted such Preferred Stock until immediately prior to the
closing of such sale of securities.
(d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR
CERTAIN DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price for
each series of Preferred Stock shall be subject to adjustment from time to time
as follows:
(i) (A) If the corporation shall issue, after the
date upon which any shares of Series E Preferred Stock were first issued (the
"Purchase Date"), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, respectively, in effect immediately
prior to the issuance of such Additional Stock, the Conversion Price for the
Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock as the case may be, in
effect immediately prior to each such issuance shall automatically (except as
otherwise provided in this clause (d)(i)) be adjusted to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate
consideration received by the corporation for such issuance would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of such Additional Stock; provided, however, that no adjustment
to the Conversion Price for the Series A Preferred Stock, Series A-1 Preferred
Stock, Series B Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock shall be made if the holders of 81% or more of the then outstanding shares
of the affected series of Preferred Stock (excluding, in the case of a vote of
the holders of the Series B Preferred Stock or Series E Preferred Stock, any of
such series of Preferred Stock held by Oracle Corporation or its Affiliates),
voting separately as single classes, shall approve the issuance of any
Additional
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Stock, even if such Additional Stock is issued without consideration or for a
consideration per share less than the Conversion Price for any such series of
stock.
However, the foregoing calculation shall not take into account
shares deemed issued pursuant to Section 4(d)(i)(E) on account of options,
rights or convertible or exchangeable securities (or the actual or deemed
consideration therefor), except to the extent (i) such options, rights or
convertible or exchangeable securities have been exercised, converted or
exchanged or (ii) the consideration to be paid upon such exercise, conversion or
exchange per share of underlying Common Stock is less than or equal to the per
share consideration for the Additional Stock which has given rise to the
Conversion Price adjustment being calculated.
(B) No adjustment of the Conversion Price
for the Preferred Stock shall be made in an amount less than one cent per
share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken
into account in any subsequent adjustment made prior to three years from the
date of the event giving rise to the adjustment being carried forward, or
shall be made at the end of three years from the date of the event giving
rise to the adjustment being carried forward. Except to the limited extent
provided for in Sections (E)(3) and (E)(4), no adjustment of such Conversion
Price pursuant to this Section 4(d)(i) shall have the effect of increasing
the Conversion Price above the Conversion Price in effect immediately prior
to such adjustment.
(C) In the case of the issuance of Common
Stock for cash, the consideration shall be deemed to be the amount of cash
paid therefor before deducting any reasonable discounts, commissions or other
expenses allowed, paid or incurred by this corporation for any underwriting
or otherwise in connection with the issuance and sale thereof.
(D) In the case of the issuance of the
Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors irrespective of any
accounting treatment.
(E) In the case of the issuance (whether
before, on or after the applicable Purchase Date) of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or rights to
subscribe for such convertible or exchangeable securities, the following
provisions shall apply for all purposes of this Section 4(d)(i) and Section
4(d)(ii):
(1) The aggregate maximum number of
shares of Common Stock deliverable upon exercise (assuming the satisfaction of
any conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Sections 4(d)(i)(C) and (d)(i)(D)), if any, received by the corporation upon the
issuance of such options or rights plus the minimum exercise price provided in
such options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
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(2) The aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in exchange (assuming
the satisfaction of any conditions to convertibility or exchangeability,
including, without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the corporation (without
taking into account potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
Sections 4(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the
number of shares of Common Stock deliverable or in the consideration payable to
this corporation upon exercise of such options or rights or upon conversion of
or in exchange for such convertible or exchangeable securities, including, but
not limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series A Preferred Stock, Series A-1 Preferred Stock,
Series B Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
to the extent in any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any payment
of such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.
(4) Upon the expiration of any such
options or rights, the termination of any such rights to convert or exchange or
the expiration of any options or rights related to such convertible or
exchangeable securities, the Conversion Price of the Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series D Preferred Stock
and Series E Preferred Stock, to the extent in any way affected by or computed
using such options, rights or securities or options or rights related to such
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities.
(5) The number of shares of Common
Stock deemed issued and the consideration deemed paid therefor pursuant to
Sections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either
Section 4(d)(i)(E)(3) or (4).
(ii) "ADDITIONAL STOCK" shall mean any shares of
Common Stock or Preferred Stock issued (or deemed to have been issued pursuant
to Section 4(d)(i)(E)) by this corporation after the Purchase Date other than:
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(A) Common Stock issued pursuant to a
transaction described in Section 4(d)(iii) hereof;
(B) Common Stock issuable or issued to
employees, consultants or directors of this corporation directly or pursuant to
a stock option plan or restricted stock plan approved by the Board of Directors
of this corporation, provided, that the issue or exercise price therefor is
equal to or more than the greater of (i) the fair market value of the Common
Stock (as determined by the Board of Directors in good faith) or (ii) 70% of the
price per share of the shares of preferred stock sold by the Company in its most
recent preferred stock financing transaction;
(C) Capital stock, or options or warrants to
purchase capital stock, issued to financial institutions or lessors (including
the issuance of up to 234,309 shares of Series A-1 Preferred Stock upon
conversion of certain promissory notes issued or issuable to Oracle Corporation
pursuant to the Convertible Note Purchase Agreement dated July 23, 1997, between
Oracle Corporation and this corporation (the "Note Agreement")), in connection
with commercial credit arrangements, equipment financings or similar
transactions, the terms of which are approved by at least eighty-one percent
(81%) of both the Series B Preferred Stock and Series E Preferred Stock, each
voting as a separate class (excluding shares of Series B Preferred Stock and
Series E Preferred Stock held by Oracle Corporation or its Affiliates);
(D) Common Stock or Preferred Stock issuable
pursuant to the conversion or exercise of convertible or exercisable securities
that are outstanding as of the date of this Fifth Amended and Restated
Certificate of Incorporation (including Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series A-1 Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, or Series C-1 Preferred Stock
issued or issuable upon conversion of the Series C Preferred Stock) or that are
not outstanding as of the date of this Fifth Amended and Restated Certificate of
Incorporation but which this corporation is contractually obligated to issue and
sell hereafter (including pursuant to the Note Agreement or pursuant to that
certain Convertible Promissory Note Purchase Agreement dated November 12, 1997);
(E) Capital stock or warrants or options to
purchase capital stock issued to persons that are not stockholders of this
corporation or their affiliates or this corporation's affiliates (as such term
is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934,
as amended) in connection with bona fide acquisitions, mergers or similar
transactions, the terms of which are approved by all members of the Board of
Directors of this corporation present at the meeting of the Board at which such
transaction is approved by the Board; and
(F) Common Stock issued or issuable in a
public offering prior to or in connection with which all outstanding shares of
Preferred Stock will be automatically converted to Common Stock pursuant to
Section 4(b).
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(iii) In the event the corporation should at any time
or from time to time after the Purchase Date fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of each series of Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series of Preferred Stock shall be increased in proportion to
such increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents with the number of shares
issuable with respect to Common Stock Equivalents determined from time to time
in the manner provided for deemed issuances in Section 4(d)(i)(E).
(iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for each series of Preferred Stock shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of such series of Preferred Stock shall be decreased in
proportion to such decrease in outstanding shares.
(e) OTHER DISTRIBUTIONS. In the event this corporation
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by this corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in subsection 4(d)(iii),
then, in each such case for the purpose of this subsection 4(e), the holders of
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive such distribution.
(g) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Preferred Stock the number of shares of stock or other securities or property of
this corporation or otherwise, to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 4 with respect to the rights of the holders of the Preferred
Stock after the recapitalization to the end that the provisions of this
Section 4 (including adjustment of the Conversion Price then in effect and the
number of shares purchasable upon conversion of the Preferred Stock) shall be
applicable after that event and be as nearly equivalent as practicable.
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(g) NO IMPAIRMENT. This corporation will not, by amendment
of its Fifth Amended and Restated Certificate of Incorporation or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by this corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of Preferred Stock against impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of Preferred Stock into Common Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of any series of Preferred Stock pursuant
to this Section 4, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of such series of Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. This corporation shall, upon the
written request at any time of any holder of Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for the series of
Preferred Stock held by such holder at the time in effect and (C) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of such series of
Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by
this corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Preferred Stock, at least 20 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, in addition to
such other remedies as shall be available to the holder of such Preferred Stock,
this corporation will take such corporate action as
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may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary
amendment to this Amended and Restated Certificate of Incorporation.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
corporation.
5. VOTING RIGHTS. Except as otherwise expressly set forth
herein, the holder of each share of Preferred Stock shall have the right to
one vote for each share of Common Stock into which such Preferred Stock could
then be converted, and with respect to such vote, such holder shall have full
voting rights and powers equal to the voting rights and powers of the holders
of Common Stock, and shall be entitled, notwithstanding any provision hereof,
to notice of any stockholders' meeting in accordance with the bylaws of this
corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have
the right to vote; provided, that holders of Series C Preferred Stock shall
not have the right to vote for or against the election or removal of any
director of this corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights available on an as-converted basis
(after aggregating all shares of Common Stock into which shares of Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half being rounded upward).
6. PROTECTIVE PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence:
(a) So long as at least 500,000 shares of Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock or Series
E Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock and Series
E Preferred Stock, voting together as a class:
(i) increase or decrease (other than by redemption
or conversion) the total number of authorized shares of Preferred Stock;
(ii) authorize or designate any other equity
security, including any other security convertible into or exercisable for any
equity security having a right, preference, or privilege senior or prior to, or
on a parity with, the Series A Preferred Stock, Series A-1 Preferred Stock,
Series B Preferred Stock or Series E Preferred Stock with respect to voting,
dividends, antidilution or upon liquidation;
(iii) sell, convey, or otherwise dispose of or
encumber all or substantially all of its property or business or merge into or
consolidate with any other corporation (other than a wholly-owned subsidiary
corporation) or effect any other transaction or series of related transactions
in which more than fifty percent (50%) of the voting power of the
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corporation is disposed of, provided that this subsection 6(a) shall not
apply to a merger effected exclusively for the purpose of changing the
domicile of the corporation; or
(iv) redeem, purchase or otherwise acquire (or pay
into or set funds aside for a sinking fund for such purpose) any share or shares
of Preferred Stock or Common Stock; provided, however, that this restriction
shall not apply to the repurchase of shares of Common Stock from employees,
officers, directors, consultants or other persons performing services for this
corporation or any subsidiary pursuant to agreements under which this
corporation has the option to repurchase such shares at cost or at cost upon the
occurrence of certain events, such as the termination of employment.
(b) So long as at least 500,000 shares of Series A
Preferred Stock or Series A-1 Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock and Series A-1 Preferred Stock, voting
together as a class, alter or change the rights, preferences or privileges of
such shares of Series A Preferred Stock or Series A-1 Preferred Stock so as to
affect adversely the shares of either such series.
(c) So long as at least 500,000 shares of Series B
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series B
Preferred Stock, voting together as a class,
(i) alter or change the rights, preferences or
privileges of such shares of Series B Preferred Stock so as to affect adversely
the shares of such series; or
(ii) authorize or designate any other equity security
having a right, preference or privilege senior or prior to the Series B
Preferred Stock with respect to voting, dividends, antidilution or upon
liquidation.
(d) So long as at least 500,000 shares of Series C
Preferred Stock or Series C-1 Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the then outstanding
shares of Series C Preferred Stock and Series C-1 Preferred Stock, voting
together as a class, alter or change the rights, preferences or privileges of
such shares of Series C Preferred Stock or Series C-1 Preferred Stock so as to
affect adversely the shares of either such series.
(e) So long as at least 500,000 shares of Series E
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least eighty-one percent (81%) of the then outstanding shares of
Series E Preferred Stock (excluding shares of Series E Preferred Stock held by
Oracle Corporation or its Affiliates), voting together as a class,
(i) alter or change the rights, preferences or
privileges of such shares of Series E Preferred Stock so as to affect adversely
the shares of such series; or
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(ii) authorize or designate any other equity security
having a right, preference or privilege senior or prior to the Series E
Preferred Stock with respect to voting, dividends, antidilution or upon
liquidation.
7. STATUS OF CONVERTED STOCK. In the event any shares of
Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so
converted shall be canceled and shall not be issuable by the corporation. The
Amended and Restated Certificate of Incorporation of this corporation shall be
appropriately amended to effect the corresponding reduction in the corporation's
authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the corporation, the assets of the corporation shall be
distributed as provided in Section 2 of Division (B) of this Article IV.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
The Board of Directors of the Corporation is authorized to make,
alter or repeal Bylaws of the Corporation. Elections of directors need not be by
written ballot.
ARTICLE VI
A. To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the Director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which the Director derived any improper personal benefit.
B. Neither any amendment nor repeal of this Article VI, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article VI, shall eliminate or reduce the effect of this
Article VI in respect of any matter occurring, or
15
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any action or proceeding accruing or arising or that, but for this Article
VI, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE VII
The Corporation is to have perpetual existence.
ARTICLE VIII
The number of directors which will constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of the
Corporation.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any statutory provision) outside the State of Delaware at such place
or places as may be designated from time to time by the Board of Directors in
the Bylaws of the Corporation.
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The foregoing Fifth Amended and Restated Certificate of
Incorporation has been duly adopted by this corporation's Board of Directors and
stockholders in accordance with the applicable provisions of Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware.
Executed at Redwood Shores, California on __________________ __, 1999.
----------------------------------------
Mitchell E. Kertzman
Chief Executive Officer
----------------------------------------
Gordon T. Yamate
Secretary
<PAGE>
BYLAWS
OF
NETWORK COMPUTER, INC.
(a Delaware corporation)
<TABLE>
<S> <C> <C>
Article I - STOCKHOLDERS..........................................................1
Section 1.1: Annual Meetings..........................................1
Section 1.2: Special Meetings.........................................1
Section 1.3: Notice of Meetings.......................................1
Section 1.4: Adjournments.............................................1
Section 1.5: Quorum...................................................1
Section 1.6: Organization.............................................2
Section 1.7: Voting; Proxies..........................................2
Section 1.8: Fixing Date for Determination of Stockholders of Record..2
Section 1.9: List of Stockholders Entitled to Vote....................3
Section 1.10: Action by Consent of Stockholders........................3
Article II - BOARD OF DIRECTORS...................................................4
Section 2.1: Number; Qualifications...................................4
Section 2.2: Election; Resignation; Removal; Vacancies................4
Section 2.3: Regular Meetings.........................................4
Section 2.4: Special Meetings.........................................4
Section 2.5: Telephonic Meetings Permitted............................4
Section 2.6: Quorum; Vote Required for Action.........................4
Section 2.7: Organization.............................................5
Section 2.8: Written Action by Directors..............................5
Section 2.9: Powers...................................................5
Section 2.10: Compensation of Directors................................5
Article III - COMMITTEES..........................................................5
Section 3.1: Committees...............................................5
Section 3.2: Committee Rules..........................................6
Article IV - OFFICERS.............................................................6
Section 4.1: Generally................................................6
Section 4.2: President................................................6
Section 4.3: Vice President...........................................6
Section 4.4: Treasurer................................................7
Section 4.5: Secretary................................................7
Section 4.6: Delegation of Authority..................................7
Section 4.7: Removal..................................................7
Article V - STOCK.................................................................7
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.1: Certificates.............................................7
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance
of New Certificates......................................7
Section 5.3: Other Regulations........................................7
Article VI - INDEMNIFICATION......................................................8
Section 6.1: Indemnification of Officers, Directors and Employees.....8
Section 6.2: Advance of Expenses......................................8
Section 6.3: Non-Exclusivity of Rights................................8
Section 6.4: Indemnification of Contracts.............................8
Section 6.5: Insurance................................................9
Section 6.6: Effect of Amendment......................................9
Article VII - NOTICES.............................................................9
Section 7.1: Notice...................................................9
Section 7.2: Waiver of Notice.........................................9
Article VIII - INTERESTED DIRECTORS...............................................9
Section 8.1: Interest and Directors; Quorum...........................9
Article IX - MISCELLANEOUS.......................................................10
Section 9.1: Fiscal Year.............................................10
Section 9.2: Seal....................................................10
Section 9.3: Form of Records.........................................10
Section 9.4: Reliance Upon Books and Records.........................10
Section 9.5: Certificate of Incorporation Governs....................11
Section 9.6: Severability............................................11
Article X - AMENDMENT............................................................11
Section 10.1: Amendments..............................................11
</TABLE>
ii
<PAGE>
BYLAWS
OF
NETWORK COMPUTER, INC.
(a Delaware corporation)
Article I - STOCKHOLDERS
SECTION 1.1: ANNUAL MEETINGS. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
SECTION 1.2: SPECIAL MEETINGS. Special meetings of stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, the Board of Directors or stockholders holding shares representing
not less than twenty percent of the outstanding votes entitled to vote at the
meeting. Special meetings may not be called by any other person or persons.
SECTION 1.3: NOTICE OF MEETINGS. Written notice of all meetings of
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
nor more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting.
SECTION 1.4: ADJOURNMENTS. Any meeting of stockholders may adjourn from
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At the adjourned meeting the Corporation may transact any
business that might have been transacted at the original meeting.
SECTION 1.5: QUORUM. At each meeting of stockholders the holders of a
majority of the shares of stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum, except where otherwise required
by law. If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares entitled to vote who are
present, in person or by proxy, at the meeting may adjourn the meeting. Shares
of the Corporation's stock belonging to the Corporation or to another
corporation, if a majority of the
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shares entitled to vote in the election of directors of such other corporation
is held, directly or indirectly, by the Corporation, shall neither be entitled
to vote nor be counted for quorum purposes; provided, however, that the
foregoing shall not limit the right of the Corporation or any other corporation
to vote any of the Corporation's stock held by it in a fiduciary capacity.
SECTION 1.6: ORGANIZATION. Meetings of stockholders shall be presided over
by such person as the Board of Directors may designate, or, in the absence of
such a person, the Chairman of the Board, or, in the absence of such person,
the President of the Corporation, or, in the absence of such person, such person
as may be chosen by the holders of a majority of the shares entitled to vote who
are present, in person or by proxy, at the meeting. Such person shall be
chairman of the meeting and shall determine the order of business and the
procedure at the meeting, including such regulation of the manner of voting and
the conduct of discussion as seems to him or her to be in order. The Secretary
of the Corporation shall act as secretary of the meeting, but in his or her
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
SECTION 1.7: VOTING; PROXIES. Unless otherwise provided by law, and
subject to the provisions of Section 1.6 of these Bylaws, each stockholder shall
be entitled to one vote for each share of stock held by such stockholder. Each
stockholder entitled to vote at a meeting of stockholders, or to express consent
or dissent to corporate action in writing without a meeting, may authorize
another person or persons to act for such stockholder by proxy. Voting at
meetings of stockholders need not be by written ballot and need not be conducted
by inspectors unless such is demanded by a stockholder or stockholders holding
shares representing at least one percent of the votes entitled to vote at such
meeting, or by such stockholder's or stockholders' proxy. If a vote is to be
taken by written ballot, each such ballot shall state the name of the
stockholder or proxy voting and such other information as the chairman of the
meeting deems appropriate, and the ballots shall be counted by one or more
inspectors appointed by the chairman of the meeting. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions, unless otherwise
provided by law or these Bylaws, shall be decided by the vote of the holders of
a majority of the shares of stock entitled to vote thereon present in person or
by proxy at the meeting.
SECTION 1.8: FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. If no record date is fixed by the Board of Directors,
then the record date shall be as provided by law. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
2
<PAGE>
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Any stockholder of record seeking to have the stockholders authorize or
take corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix a record date for such consent.
Such request shall include a brief description of the action proposed to be
taken. The Board of Directors shall, within 10 days after the date on which such
a request is received, adopt a resolution fixing the record date. Such record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of
Directors within 10 days of the date on which such a request is received, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or any officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. If no record date has been fixed by the Board of Directors and prior
action by the Board of Directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
SECTION 1.9: LIST OF STOCKHOLDERS ENTITLED TO VOTE. A complete list of
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
SECTION 1.10: ACTION BY CONSENT OF STOCKHOLDERS. Unless otherwise
restricted by the Certificate of Incorporation, and except as set forth in
Section 1.8 above, any action required or permitted to be taken at any annual or
special meeting of the stockholders may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
3
<PAGE>
Article II - BOARD OF DIRECTORS
SECTION 2.1: NUMBER, QUALIFICATIONS. The Board of Directors shall consist
of one or more members. The initial number of directors shall be three, and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. Directors need not be stockholders.
SECTION 2.2: ELECTION; RESIGNATION; REMOVAL; VACANCIES. The Board of
Directors shall initially consist of the person or persons elected by the
incorporator. Each director shall hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified, or until
his or her earlier resignation or removal. Any director may resign at any time
upon written notice to the Corporation. Subject to the rights of any holders of
Preferred Stock then outstanding, (i) any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors, and (ii) any
vacancy occurring in the Board of Directors for any cause, and any newly created
directorship resulting from any increase in the authorized number of directors
to be elected by all stockholders having the right to vote as a single class,
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director, or by the stockholders. No decrease
in the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
SECTION 2.3: REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held at such places, within or without the State of Delaware, and at
such times as the Board of Directors may from time to time determine. Notice
of regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
SECTION 2.4: SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or the Board of
Directors and may be held at any time, date or place, within or without the
State of Delaware, as the person or persons calling the meeting shall fix.
Notice of the time, date and place of such meeting shall be given by the person
or persons calling the meeting to all directors at least four days before the
meeting if the notice is mailed, or at least two days before the meeting if such
notice is given by telephone, hand delivery, telegram, telex, mailgram,
facsimile or similar communication method. Unless otherwise indicated in the
notice, any and all business may be transacted at a special meeting.
SECTION 2.5. TELEPHONIC MEETINGS PERMITTED. Members of the Board of
Directors, or any committee of the Board, may participate in a meeting of the
Board or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
4
<PAGE>
SECTION 2.6: QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the
Board of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or required by law, the vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
SECTION 2.7: ORGANIZATION. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, or in his or her absence by the
President, or in his or her absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
SECTION 2.8: WRITTEN ACTION BY DIRECTORS. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board or such
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
SECTION 2.9: POWERS. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation.
SECTION 2.10: COMPENSATION OF DIRECTORS. Directors, as such, may receive,
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including, without limitation, their services
as members of committees of the Board of Directors.
Article III-COMMITTEES
SECTION 3.1: COMMITTEES. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meetings and not disqualified from
voting, whether or not he, she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of any such absent or disqualified member. Any such committee, to the extent
provided in a resolution of the Board of Directors, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation and may authorize the seal of the
Corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock
5
<PAGE>
adopted by the Board of Directors as provided in subsection (a) of Section
151 of the Delaware General Corporation Law, fix the designations and any of
the preferences or rights of such shares relating to dividends, redemption,
dissolution and distribution of assets of the Corporation, or the conversion
into, or the exchange of such shares for, shares of any other class or
classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock
or authorize the increase or decrease of the shares of any series), adopting
an agreement of merger or consolidation under Sections 251 or 252 of the
Delaware General Corporation Law, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property
and assets, recommending to the stockholders a dissolution of the Corporation
or a revocation of a dissolution, or amending the Bylaws of the Corporation;
and unless the resolution of the Board of Directors expressly so provides, no
such committee shall have the power or authority to declare a dividend,
authorize the issuance of stock or adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law.
SECTION 3.2: COMMITTEE RULES. Unless the Board of Directors otherwise
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
Article IV - OFFICERS
SECTION 4.1: GENERALLY. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer and such other officers, including a
Chairman of the Board of Directors, as may from time to time be appointed by the
Board of Directors. Officers shall be elected by the Board of Directors. Each
officer shall hold office until his or her successor is elected and qualified or
until his or her earlier resignation or removal. Any number of offices may be
held by the same person. Any officer may resign at any time upon written notice
to the Corporation. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise may be filled by the Board of
Directors.
SECTION 4.2: PRESIDENT. Unless otherwise designated by the Board of
Directors, the President shall be the chief executive officer of the
Corporation. Subject to the provisions of these Bylaws and to the direction
of the Board of Directors, he or she shall have the responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers that are commonly incident
to the office of chief executive or that are delegated to him or her by the
Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation that are
authorized and shall have general supervision and direction of all of the
duties, employees and agents of the Corporation.
6
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SECTION 4.3: VICE PRESIDENT. Each Vice President shall have such powers
and duties as may be delegated to him or her by the Board of Directors. A Vice
President may be designated by the Board to perform the duties and exercise the
powers of the President in the event of the President's absence or disability.
SECTION 4.3: TREASURER. The Treasurer shall have the responsibility for
maintaining the financial records of the Corporation and shall have custody of
all monies and securities of the Corporation. He or she shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all such transactions and of the financial
condition of the Corporation. The Treasurer shall also perform such other duties
as the Board of Directors may from time to time prescribe.
SECTION 4.4: SECRETARY. The Secretary shall issue or cause to be issued
all authorized notices for, and shall keep, or cause to be kept, minutes of, all
meetings of the stockholders and the Board of Directors. He or she shall have
charge of the corporate books and shall perform such other duties as the Board
of Directors may from time to time prescribe.
SECTION 4.5: DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
SECTION 4.6: REMOVAL. Any officer of the Corporation may be removed at any
time, with or without cause, by the Board of Directors. Such removal shall be
without prejudice to the contractual rights of such officer, if any, with the
Corporation.
Article V - STOCK
SECTION 5.1: CERTIFICATES. Every holder of stock shall be entitled to have
a certificate signed by or in the name of the Corporation by the Chairman of the
Board of Directors, or the President or a Vice President, and by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
Corporation, certifying the number of shares owned by such stockholder in the
Corporation. Any or all of the signatures on the certificate may be a facsimile.
SECTION 5.2: LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such owner's legal representative, to give
the Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
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SECTION 5.3: OTHER REGULATIONS. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other
regulations as the Board of Directors may establish.
Article VI - INDEMNIFICATION
SECTION 61: INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES. Each
person who was or is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he
or she or a person of whom he or she is the legal representative, is or was a
director, officer or employee of the Corporation (including any constituent
corporation absorbed in a merger) or is or was serving, at the request of the
Corporation (including any such constituent corporation) as a director, officer
or employee of another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by the Delaware General Corporation Law, as the same exists or may
hereafter be amended, against all expenses, liability and loss (including
attorneys' fees, judgments, FINES, ERISA excise taxes and penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
that the Corporation shall indemnify any such person seeking indemnity in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
SECTION 6.2: ADVANCE OF EXPENSES. The Corporation shall pay all expenses
incurred by such a director, officer or employee in defending any such
proceeding as they are incurred in advance of its final disposition; provided,
however, that if the Delaware General Corporation Law then so requires, the
payment of such expenses incurred by a director, officer or employee in advance
of the final disposition of such proceeding shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director, officer or
employee, to repay all amounts so advanced if it should be determined ultimately
that such director, officer or employee is not entitled to be indemnified under
this Article VI or otherwise; and provided further that the Corporation shall
not be required to advance any expenses to a person against whom the Corporation
brings a claim, in a proceeding, for breach of the duty of loyalty to the
Corporation, for acts or omissions not in good faith or that involve intentional
misconduct or,a knowing violation of law or for any transaction from which such
person derived an improper personal benefit.
SECTION 63: NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
in this Article VI shall not be exclusive of any other right that such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote or consent of stockholders or
disinterested directors or otherwise.
8
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SECTION 6.4: INDEMNIFICATION OF CONTRACTS. The Board of Directors is
authorized to cause the Corporation to enter into a contract with any director,
officer or employee of the Corporation, or any person serving at the request of
the Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VI.
SECTION 6.5: INSURANCE. The Corporation shall maintain insurance, at its
expense, to the extent it determines such to be reasonably available, to protect
itself, its officers and directors and any other persons the Board of Directors
may select, against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
SECTION 6.6: EFFECT OF AMENDMENT. Any amendment, repeal or modification
of any provision of this Article VI by the stockholders or the Directors of the
Corporation shall be prospective only, and shall not adversely affect any right
or protection conferred on a person pursuant to this Article VI and existing at
the time of such amendment, repeal or modification.
Article VII - NOTICES
SECTION 7.1: NOTICE. Except as otherwise specifically provided herein or
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a courier service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, mailgram
or facsimile. Any such notice shall be addressed to the person to whom notice is
to be given at such persons address as it appears on the records of the
Corporation. The notice shall be deemed given (i) in the case of hand delivery,
when received by the person to whom notice is to be given or by any person
accepting such notice on behalf of such person, (ii) in the case of delivery by
mail, when deposited in the mail, and (iii) in the case of delivery via
telegram, mailgram, telex, or facsimile, when dispatched.
SECTION 7.2: WAIVER OF NOTICE. Any written waiver of notice, signed by
the person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
9
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Article VIII - INTERESTED DIRECTORS
SECTION 8.1: INTEREST AND DIRECTORS, QUORUM. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board or committee thereof that authorizes the contract
or transaction, or solely because his, her or their votes are counted for such
purpose if: (i) the material facts as to his, her or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; (ii) the material facts as to his, her or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the Board of Directors, a committee thereof,
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Article IX - MISCELLANEOUS
SECTION 9.1: FISCAL YEAR. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 9.2: SEAL. The Board of Directors may provide for a corporate
seal, which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
SECTION 9.3: FORM OF RECORDS. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of account
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device,
provided that the records so kept can be converted into clearly legible form
within a reasonable time. The Corporation shall so convert any records so kept
upon the request of any person entitled to inspect the same.
SECTION 9.4: RELIANCE UPON BOOKS AND RECORDS. A member of the Board of
Directors of the Corporation, or a member of any committee designated by the
Board of Directors, shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or reports made to
the Corporation by any of its officers, or by an independent certified
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public accountant, or by an appraiser selected with reasonable care by the Board
of directors or by any such committee, or in relying in good faith upon other
records of the Corporation.
SECTION 9.5: CERTIFICATE OF INCORPORATION GOVERNS. In the event of any
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
SECTION 9.6: SEVERABILITY. If any provision of these Bylaws shall be held
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation) that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation shall remain
in full force and effect.
Article X - AMENDMENT
SECTION 10.1: AMENDMENTS. The shareholders of the Corporation shall have
the power to adopt, amend or repeal Bylaws. The Board of Directors of the
Corporation shall also have the power to adopt, amend or repeal Bylaws of the
Corporation, except Bylaws adopted by the shareholders that specify that they
cannot be amended or repealed by the Board of Directors.
11
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CERTIFICATE OF SECRETARY
OF
NETWORK COMPUTER, INC.
I, the undersigned, hereby certify that I am the duly elected, qualified
and acting Secretary of Network Computer, Inc., a Delaware corporation (the
"Corporation"), and that, as such, I am authorized to execute this Certificate
on behalf of the Corporation and further certify that:
1. The attached By-Laws were duly approved and adopted by the Directors
of the Corporation, and are true and correct copies of the By-Laws of this
Corporation.
2. The By-Laws have not been amended or revoked and are in full force and
effect on the date hereof.
IN WITNESS HEREOF, I have executed this Certificate and affixed the seal
of this Corporation this 22nd day of May, 1996.
By: /s/ Thomas Theodores
-----------------------
Thomas Theodores
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
NETWORK COMPUTER, INC.
The undersigned, Thomas Theodores, hereby certifies that:
1. I am the duly elected and incumbent Secretary of Network Computer,
Inc., a Delaware corporation (the "COMPANY").
2. By action of the Board of Directors of the Company duly adopted
pursuant to an Action by Unanimous Written Consent effective as of
June 22, 1997, Section 1.2 of the Bylaws of the Company was amended to read
in its entirety as follows:
"SECTION 1.2: SPECIAL MEETINGS. Special meetings of stockholders
for any purpose or purposes may be called at any time by the Chairman of
the Board, the President, the Board of Directors or stockholders
holding shares representing not less than ten percent of the
outstanding votes entitled to vote at the meeting. Special meetings may
not be called by any other person or persons."
3. The matters set forth in this certificate are true and correct of
my own knowledge.
Date: June 23, 1997
/s/ Thomas Theodores
---------------------------------
Thomas Theodores, Secretary
<PAGE>
AMENDED AND RESTATED
BYLAWS OF
LIBERATE TECHNOLOGIES
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE I OFFICE AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Delaware Office. . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Other Offices. . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Books and Records. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Special Meeting. . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.3 Place of Meeting . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.4 Notice of Meeting. . . . . . . . . . . . . . . . . . . . . . 1
Section 2.5 Quorum and Adjournment . . . . . . . . . . . . . . . . . . . 2
Section 2.6 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.7 Notice of Stockholder Business and Nominations . . . . . . . 2
Section 2.8 Procedure for Election of Directors. . . . . . . . . . . . . 4
Section 2.9 Inspectors of Elections; Opening and Closing the Polls . . . 5
Section 2.10 Consent of Stockholders in Lieu of Meeting. . . . . . . . . 5
ARTICLE III BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1 General Powers . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2 Number, Tenure and Qualifications. . . . . . . . . . . . . . 5
Section 3.3 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.4 Special Meetings . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.5 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.6 Conference Telephone Meetings. . . . . . . . . . . . . . . . 6
Section 3.7 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.8 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.9 Committee. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.10 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.1 Elected Officers . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.2 Election and Term of Office. . . . . . . . . . . . . . . . . 8
Section 4.3 Chairman of the Board. . . . . . . . . . . . . . . . . . . . 8
Section 4.4 President and Chief Executive Officer. . . . . . . . . . . . 8
Section 4.5 Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.6 Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.7 Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.8 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V STOCK CERTIFICATES AND TRANSFERS. . . . . . . . . . . . . . . . . . 9
Section 5.1 Stock Certificates and Transfers . . . . . . . . . . . . . . 9
<PAGE>
ARTICLE VI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1 Right to Indemnification . . . . . . . . . . . . . . . . . . 9
Section 6.2 Right to Advancement of Expenses . . . . . . . . . . . . . .10
Section 6.3 Right of Indemnitee to Bring Suit. . . . . . . . . . . . . .10
Section 6.4 Non-Exclusivity of Rights. . . . . . . . . . . . . . . . . .11
Section 6.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE VII MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . .11
Section 7.1 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . .11
Section 7.2 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 7.3 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 7.4 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . .11
Section 7.5 Audits . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 7.6 Resignations . . . . . . . . . . . . . . . . . . . . . . . .12
Section 7.7 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 7.8 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . .12
ARTICLE VIII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Section 8.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . . .13
</TABLE>
<PAGE>
ARTICLE I
OFFICES AND RECORDS
Section 1.1 DELAWARE OFFICE. The registered office of the
Corporation in the State of Delaware shall be located in the City of
Wilmington, County of New Castle.
Section 1.2 OTHER OFFICES. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time
to time require.
Section 1.3 BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's headquarters in Redwood Shores,
California or at such other locations outside the State of Delaware as may
from time to time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1 ANNUAL MEETING. The annual meeting of the
stockholders of the Corporation shall be held at such date, place and/or time
as may be fixed by resolution of the Board of Directors.
Section 2.2 SPECIAL MEETING. Special meetings of stockholders
of the Corporation may be called only by the Chairman of the Board, the
President or by the Board of Directors acting pursuant to a resolution
adopted by a majority of the Whole Board or at the request in writing of
stockholders owning at least fifty percent (50%) in amount of the entire
capital stock of the Corporation issued and outstanding and entitled to vote.
For purposes of these Amended and Restated Bylaws, the term "Whole Board"
shall mean the total number of authorized directors whether or not there
exist any vacancies in previously authorized directorships.
Section 2.3 PLACE OF MEETING. The Board of Directors may
designate the place of meeting for any meeting of the stockholders. If no
designation is made by the Board of Directors, the place of meeting shall be
the principal office of the Corporation.
Section 2.4 NOTICE OF MEETING. Except as otherwise required by
law, written or printed notice, stating the place, day and hour of the
meeting and the purposes for which the meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty
days before the date of the meeting, either personally, or by mail, to each
stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail with postage thereon prepaid, addressed to the stockholder at his
address as it appears on the stock transfer books of the Corporation. Such
further notice shall be given as may be required by law. Meetings may be
held without notice if
<PAGE>
all stockholders entitled to vote are present (except as otherwise provided
by law), or if notice is waived by those not present. Any previously
scheduled meeting of the stockholders may be postponed and (unless the
Corporations's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") otherwise provides) any special meeting of
the stockholders may be cancelled, by resolution of the Board of Directors
upon public notice given prior to the time previously scheduled for such
meeting of stockholders.
Section 2.5 QUORUM AND ADJOURNMENT. Except as otherwise
provided by law or by the Certificate of Incorporation, the holders of a
majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a
class or series voting separately as a class or series, the holders of a
majority of the voting power of the shares of such class or series shall
constitute a quorum for the transaction of such business. The chairman of
the meeting or a majority of the shares of Voting Stock so represented may
adjourn the meeting from time to time, whether or not there is such a quorum
(or, in the case of specified business to be voted on by a class or series,
the chairman or a majority of the shares of such class or series so
represented may adjourn the meeting with respect to such specified business).
No notice of the time and place of adjourned meetings need be given except
as required by law. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 2.6 PROXIES. At all meetings of stockholders, a
stockholder may vote by proxy executed in writing by the stockholder or as
may be permitted by law, or by his duly authorized attorney-in-fact. Such
proxy must be filed with the Secretary of the Corporation or his
representative at or before the time of the meeting.
Section 2.7 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
A. Nominations of persons for election to the Board of
Directors and the proposal of business to be transacted by the stockholders
may be made at an annual meeting of stockholders (1) pursuant to the
Corporation's notice with respect to such meeting, (2) by or at the direction
of the Board of Directors or (3) by any stockholder of record of the
Corporation who was a stockholder of record at the time of the giving of the
notice provided for in the following paragraph, who is entitled to vote at
the meeting and who has complied with the notice procedures set forth in this
Section 2.7.
B. For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to paragraph
(A)(3) of this Section 2.7, (1) the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation, (2) such business
must be a proper matter for stockholder action under the Delaware General
Corporation Law, (3) if the stockholder, or the beneficial owner on whose
behalf any such proposal or nomination is made, has provided the Corporation
with a Solicitation Notice, as that term is defined in subclause (c)(iii) of
this paragraph, such stockholder or beneficial owner must, in the case of a
proposal, have delivered a proxy statement and form of proxy to holders
2
<PAGE>
of at least the percentage of the Corporation's voting shares required under
applicable law to carry any such proposal, or, in the case of a nomination or
nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the Corporation's voting shares reasonably believed by such
stockholder or beneficial holder to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either
case, have included in such materials the Solicitation Notice and (4) if no
Solicitation Notice relating thereto has been timely provided pursuant to
this section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this section. To
be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 45 or more than
75 days prior to the first anniversary (the "Anniversary") of the date on
which the Corporation first mailed its proxy materials for the preceding
year's annual meeting of stockholders; provided, however, that if no proxy
materials were mailed by the Corporation in connection with the preceding
year's annual meeting, or if the date ofthe annual meeting is advanced more
than 30 days prior to or delayed by more than 30 days after the anniversary
of the preceding year's annual meeting, notice by the stockholder to be
timely must be so delivered not later than the close of business on the later
of (x) the 90th day prior to such annual meeting or (y) the 10th day
following the day on which public announcement of the date of such meeting is
first made. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person as would be required to be
disclosed in solicitations of proxies for the election of such nominees as
directors pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and such person's written consent to
serve as a director if elected; (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of such
business, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such
beneficial owner, (ii) the class and number of shares of the Corporation that
are owned beneficially and of record by such stockholder and such beneficial
owner, and (iii) whether either such stockholder or beneficial owner intends
to deliver a proxy statement and form of proxy to holders of, in the case of
a proposal, at least the percentage of the Corporation's voting shares
required under applicable law to carry the proposal or, in the case of a
nomination or nominations, a sufficient number of holders of the
Corporation's voting shares to elect such nominee or nominees (an affirmative
statemen of such intent, a "Solicitation Notice").
C. Notwithstanding anything in the second sentence of
paragraph (B) of this Section 2.7 to the contrary, in the event that the
number of directors to be elected to the Board of Directors is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board made by the Corporation at least
55 days prior to the Anniversary, a stockholder's notice required by this
Bylaw shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the
3
<PAGE>
Corporation not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Corporation.
D. Only persons nominated in accordance with the
procedures set forth in this Section 2.7 shall be eligible to serve as
directors and only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.7. The chair of the meeting shall
have the power and the duty to determine whether a nomination or any business
proposed to be brought before the meeting has been made in accordance with
the procedures set forth in these Bylaws and, if any proposed nomination or
business is not in compliance with these Bylaws, to declare that such
defective proposed business or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
E. Only such business shall be conducted at a special
meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (1) by or at the direction of the Board of
Directors or (2) by any stockholder of record of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
paragraph, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 2.7. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice required
by paragraph (B) of this Section 2.7 shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close
of business on the later of the 90th day prior to such special meeting or the
10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board to be
elected at such meeting.
F. For purposes of this Section 2.7, "public
announcement" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or a comparable national news service or
in a document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
G. Notwithstanding the foregoing provisions of this
Section 2.7, a stockholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder with respect to
matters set forth in this Section 2.7. Nothing in this Section 2.7 shall be
deemed to affect any rights of stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
Section 2.8 PROCEDURE FOR ELECTION OF DIRECTORS. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by written ballot, and, except as otherwise set forth in the
Certificate of Incorporation with respect to the right of the holders of any
series of Preferred Stock or any other series or class of stock to elect
additional directors under specified circumstances, a plurality of the votes
cast thereat shall elect directors. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, all matters
4
<PAGE>
other than the election of directors submitted to the stockholders at any
meeting shall be decided by the affirmative vote of a majority of the voting
power of the outstanding Voting Stock present in person or represented by
proxy at the meeting and entitled to vote thereon.
Section 2.9 INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
A. The Board of Directors by resolution shall appoint
one or more inspectors, which inspector or inspectors may include individuals
who serve the Corporation in other capacities, including, without limitation,
as officers, employees, agents or representatives of the Corporation, to act
at the meeting and make a written report thereof. One or more persons may be
designated as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate has been appointed to act, or if all inspectors
or alternates who have been appointed are unable to act, at a meeting of
stockholders, the chairman of the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before discharging his or
her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by the Delaware
General Corporation Law.
B. The chairman of the meeting shall fix and announce
at the meeting the date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting.
Section 2.10 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any
action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. In addition to the powers and authority expressly conferred upon
them by statute or by the Certificate of Incorporation or by these Bylaws,
the directors are hereby empowered to exercise all such powers and do all
such acts and things as may be exercised or done by the Corporation.
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS. Subject to the
rights of the holders of any series of Preferred Stock to elect additional
directors under specified circumstances, the number of directors shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the Whole Board. The directors, other
than those who may be elected by the holders of any series of Preferred Stock
under specified circumstances, shall be divided into three classes pursuant
to the Certificate of Incorporation. At each annual meeting of stockholders,
directors elected to succeed those
5
<PAGE>
directors whose terms expire shall be elected for a term of office to expire
at the third succeeding annual meeting of stockholders after their election.
Section 3.3 REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without notice other than this Bylaw immediately
after, and at the same place as, each annual meeting of stockholders. The
Board of Directors may, by resolution, provide the time and place for the
holding of additional regular meetings without notice other than such
resolution.
Section 3.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board, the
President or a majority of the Board of Directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the
place and time of the meetings.
Section 3.5 NOTICE. Notice of any special meeting shall be
given to each director at his business or residence in writing or by
telegram, facsimile transmission or telephone communication. If mailed, such
notice shall be deemed adequately delivered when deposited in the United
States mails so addressed, with postage thereon prepaid, at least five days
before such meeting. If by telegram, such notice shall be deemed adequately
delivered when the telegram is delivered to the telegraph company at least
twenty-four hours before such meeting. If by facsimile transmission, such
notice shall be transmitted at least twenty-four hours before such meeting.
If by telephone, the notice shall be given at least twelve hours prior to the
time set for the meeting. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting, except for amendments to these
Bylaws as provided under Section 8.1 of Article VIII hereof. A meeting may
be held at any time without notice if all the directors are present (except
as otherwise provided by law) or if those not present waive notice of the
meeting in writing, either before or after such meeting.
Section 3.6 CONFERENCE TELEPHONE MEETINGS. Members of the Board
of Directors, or any committee thereof, may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 3.7 QUORUM. A whole number of directors equal to at
least a majority of the Whole Board shall constitute a quorum for the
transaction of business, but if at any meeting of the Board of Directors
there shall be less than a quorum present, a majority of the directors
present may adjourn the meeting from time to time without further notice.
The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
Section 3.8 VACANCIES. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall,
unless
6
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otherwise provided by law or by resolution of the Board of Directors, be
filled only by a majority vote of the directors then in office, though less
than a quorum, and directors so chosen shall hold office for a term expiring
at the annual meeting of stockholders at which the term of office of the
class to which they have been chosen expires. No decrease in the authorized
number of directors shall shorten the term of any incumbent director.
Section 3.9 COMMITTEES.
A. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of the committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent permitted by law and
to the extent provided in the resolution of the Board of Directors, shall
have and may exercise all the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it.
B. Unless the Board of Directors otherwise provides,
each committee designated by the Board of Directors may make, alter and
repeal rules for the conduct of its business. In the absence of such rules
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to these Bylaws.
Section 3.10 REMOVAL. Subject to the rights of the holders of
any series of Preferred Stock then outstanding, any directors, or the entire
Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
ARTICLE IV
OFFICERS
Section 4.1 ELECTED OFFICERS. The elected officers of the
Corporation shall be a Chairman of the Board, a President, a Secretary, a
Treasurer, and such other officers as the Board of Directors from time to
time may deem proper. The Chairman of the Board shall be chosen from the
directors. All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject
to the specific provisions of this Article IV. Such officers shall also have
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
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Section 4.2 ELECTION AND TERM OF OFFICE. The elected officers
of the Corporation shall be elected annually by the Board of Directors at the
regular meeting of the Board of Directors held after each annual meeting of
the stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as convenient.
Subject to Section 4.7 of these Bylaws, each officer shall hold office until
his successor shall have been duly elected and shall have qualified or until
his death or until he shall resign.
Section 4.3 CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the Board.
Section 4.4 PRESIDENT AND CHIEF EXECUTIVE OFFICER. The
President and Chief Executive Officer shall be the general manager of the
Corporation, subject to the control of the Board of Directors, and as such
shall preside at all meetings of shareholders, shall have general supervision
of the affairs of the Corporation, shall sign or countersign or authorize
another officer to sign all certificates, contracts, and other instruments of
the Corporation as authorized by the Board of Directors, shall make reports
to the Board of Directors and shareholders, and shall perform all such other
duties as are incident to such office or are properly required by the Board
of Directors. If the Board of Directors creates the office of Chief
Executive Officer as a separate office from President, the President shall be
the chief operating officer of the corporation and shall be subject to the
general supervision, direction, and control of the Chief Executive Officer
unless the Board of Directors provides otherwise.
Section 4.5 SECRETARY. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors and all other
notices required by law or by these Bylaws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the Chairman of the Board or the President, or by the
Board of Directors, upon whose request the meeting is called as provided in
these Bylaws. He shall record all the proceedings of the meetings of the
Board of Directors, any committees thereof and the stockholders of the
Corporation in a book to be kept for that purpose, and shall perform such
other duties as may be assigned to him by the Board of Directors, the
Chairman of the Board or the President. He shall have custody of the seal of
the Corporation and shall affix the same to all instruments requiring it,
when authorized by the Board of Directors, the Chairman of the Board or the
President, and attest to the same.
Section 4.6 TREASURER. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate receipts
and disbursements in books belonging to the Corporation. The Treasurer shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors the Chairman of the Board, or the
President, taking proper vouchers for such disbursements. The Treasurer
shall render to the Chairman of the Board, the President and the Board of
Directors, whenever requested, an account of all his transactions as
Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond for
the faithful discharge of his duties in such amount and with such surety as
the Board of Directors shall prescribe.
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Section 4.7 REMOVAL. Any officer elected by the Board of
Directors may be removed by the Board of Directors whenever, in their
judgment, the best interests of the Corporation would be served thereby. No
elected officer shall have any contractual rights against the Corporation for
compensation by virtue of such election beyond the date of the election of
his successor, his death, his resignation or his removal, whichever event
shall first occur, except as otherwise provided in an employment contract or
an employee plan.
Section 4.8 VACANCIES. A newly created office and a vacancy in
any office because of death, resignation, or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of
the Board of Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1 STOCK CERTIFICATES AND TRANSFERS.
A. The interest of each stockholder of the Corporation
shall be evidenced by certificates for shares of stock in such form as the
appropriate officers of the Corporation may from time to time prescribe. The
shares of the stock of the Corporation shall be transferred on the books of
the Corporation by the holder thereof in person or by his attorney, upon
surrender for cancellation of certificates for the same number of shares,
with an assignment and power of transfer endorsed thereon or attached
thereto, duly executed, and with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require.
B. The certificates of stock shall be signed,
countersigned and registered in such manner as the Board of Directors may by
resolution prescribe, which resolution may permit all or any of the
signatures on such certificates to be in facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent
or registrar at the date of issue.
ARTICLE VI
INDEMNIFICATION
Section 6.1 RIGHT TO INDEMNIFICATION. Each person who was or is
made a party or is threatened to be made a party to or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she is or was a director or officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action
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in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than permitted prior thereto), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; PROVIDED, HOWEVER, that, except as provided in
Section 6.3 hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
Section 6.2 RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 6.1 shall include the right to be paid
by the Corporation the expenses incurred in defending any proceeding for
which such right to indemnification is applicable in advance of its final
disposition (hereinafter an "advancement of expenses"); PROVIDED, HOWEVER,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or otherwise.
Section 6.3 RIGHT OF INDEMNITEE TO BRING SUIT. The rights to
indemnification and to the advancement of expenses conferred in Section 6.1
and Section 6.2, respectively, shall be contract rights. If a claim under
Section 6.1 or Section 6.2 is not paid in full by the Corporation within
sixty days after a written claim has been received by the Corporation, except
in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. In (A) any suit brought
by the indemnitee to enforce a right to indemnification hereunder (but not in
a suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (B) in any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an undertaking
the Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to
the commencement of such
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suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth
in the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee
to enforce a right to indemnification or to an advancement of expenses
hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Section or otherwise shall be on the Corporation.
Section 6.4 NON-EXCLUSIVITY OF RIGHTS. The rights to
indemnification and to the advancement of expenses conferred in this Section
shall not be exclusive of any other right which any person may have or
hereafter acquire under the Certificate of Incorporation, these Amended and
Restated Bylaws, or any statute, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 6.5 INSURANCE. The Corporation may maintain insurance,
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 FISCAL YEAR. The fiscal year of the Corporation
shall begin on the first day of June and end on the thirty-first day of May
of each year.
Section 7.2 DIVIDENDS. The Board of Directors may from time to
time declare, and the Corporation may pay, dividends on its outstanding
shares in the manner and upon the terms and conditions provided by law and
its Certificate of Incorporation.
Section 7.3 SEAL. The corporate seal shall have inscribed the
name of the Corporation thereon and shall be in such form as may be approved
from time to time by the Board of Directors.
Section 7.4 WAIVER OF NOTICE. Whenever any notice is required
to be given to any stockholder or director of the Corporation under the
provisions of the Delaware General Corporation Law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at, nor the
purpose of, any annual or special
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meeting of the stockholders of the Board of Directors need be specified in
any waiver of notice of such meeting.
Section 7.5 AUDITS. The accounts, books and records of the
Corporation shall be audited upon the conclusion of each fiscal year by an
independent certified public accountant selected by the Board of Directors,
and it shall be the duty of the Board of Directors to cause such audit to be
made annually.
Section 7.6 RESIGNATIONS. Any director or any officer, whether
elected or appointed, may resign at any time by serving written notice of
such resignation on the Chairman of the Board, the President or the
Secretary, and such resignation shall be deemed to be effective as of the
close of business on the date said notice is received by the Chairman of the
Board, the President, or the Secretary or at such later date as is stated
therein. No formal action shall be required of the Board of Directors or the
stockholders to make any such resignation effective.
Section 7.7 CONTRACTS. Except as otherwise required by law, the
Certificate of Incorporation or these Bylaws, any contracts or other
instruments may be executed and delivered in the name and on the behalf of
the Corporation by such officer or officers of the Corporation as the Board
of Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board may determine. The Chairman of
the Board, the President or any Vice President may execute bonds, contracts,
deeds, leases and other instruments to be made or executed for or on behalf
of the Corporation. Subject to any restrictions imposed by the Board of
Directors or the Chairman of the Board, the President or any Vice President
of the Corporation may delegate contractual powers to others under his
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise
of such delegated power.
Section 7.8 PROXIES. Unless otherwise provided by resolution
adopted by the Board of Directors, the Chairman of the Board, the President
or any Vice President may from time to time appoint any attorney or attorneys
or agent or agents of the Corporation, in the name and on behalf of the
Corporation, to cast the votes which the Corporation may be entitled to cast
as the holder of stock or other securities in any other corporation or other
entity, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock and other securities of
such other corporation or other entity, or to consent in writing, in the name
of the Corporation as such holder, to any action by such other corporation or
other entity, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause
to be executed in the name and on behalf of the Corporation and under its
corporate seal or otherwise, all such written proxies or other instruments as
he may deem necessary or proper in the premises.
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ARTICLE VIII
AMENDMENTS
Section 8.1 AMENDMENTS. Subject to the provisions of the
Certificate of Incorporation, these Bylaws may be amended, altered, added to,
rescinded or repealed at any meeting of the Board of Directors or of the
stockholders, provided notice of the proposed change was given in the notice
of the meeting and, in the case of a meeting of the Board of Directors, in a
notice given no less than twenty-four hours prior to the meeting.
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CERTIFICATE OF SECRETARY OF
LIBERATE TECHNOLOGIES
The undersigned, Gordon T. Yamate, hereby certifies that he is the
duly elected and acting Secretary of Liberate Technologies, a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto
constitute the Bylaws of said Corporation as duly adopted by the Directors on
____________, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of __________, 1999.
---------------------------------------
Gordon T. Yamate
Secretary
<PAGE>
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
LIBERATE TECHNOLOGIES
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
The undersigned, Mitchell E. Kertzman and Gordon T. Yamate, hereby
certify that:
ONE: They are the duly elected, qualified and acting Chief
Executive Officer and Secretary, respectively, of Liberate Technologies, a
Delaware corporation.
TWO: The Fifth Amended and Restated Certificate of Incorporation
of this corporation was filed on _________ __, 1999 with the Secretary of
State of Delaware, the Fourth Amended and Restated Certificate of
Incorporation of this corporation was filed on May 11, 1999 with the
Secretary of Delaware under the name Network Computer, Inc., the Third
Amended and Restated Certificate of Incorporation of this corporation was
filed on November 10, 1997 with the Secretary of State of Delaware, the
Second Amended and Restated Certificate of Incorporation of this corporation
was filed on July 28, 1997 with the Secretary of State of Delaware, the First
Amended and Restated Certificate of Incorporation of this corporation was
filed on September 24, 1996 with the Secretary of State of Delaware and the
Certificate of Incorporation of this corporation was originally filed with
the Secretary of State of Delaware on April 24, 1996.
THREE: The Fifth Amended and Restated Certificate of
Incorporation of this corporation shall be amended and restated to read in
full as follows:
ARTICLE I
The name of the corporation is Liberate Technologies (the
"Corporation").
ARTICLE II
The address of the registered office of this corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle. The name of its registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
<PAGE>
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is Two
Hundred Million (200,000,000), par value $.01 per share, and the number of
shares of Preferred Stock authorized to be issued is Twenty Million
(20,000,000) par value $.01 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is
hereby authorized, in the resolution or resolutions adopted by the Board of
Directors providing for the issue of any wholly unissued series of Preferred
Stock, within the limitations and restrictions stated in this Amended and
Restated Certificate, to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and the number
of shares constituting any such series and the designation thereof, or any of
them, and to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
ARTICLE V
Except as otherwise provided in this Amended and Restated
Certificate, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from
time to time by a bylaw or amendment thereof duly adopted by the Board of
Directors.
ARTICLE VII
Elections of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Amended and Restated
Certificate of Incorporation, any action required or permitted to be taken by
the stockholders of the Corporation must be effected at an annual or special
meeting of the stockholders of the Corporation, and may not be effected by
any consent in writing of such stockholders.
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ARTICLE IX
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the Delaware General Corporation
Law is amended after approval by the stockholders of this Article to
authorize corporate action further eliminating or limiting the personal
liability of directors then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this
Article IX by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of, or increase the liability of any director of this Corporation with
respect to any acts or omissions of such director occurring prior to, such
repeal or modification.
ARTICLE X
In addition to any vote of the holders of any class or series
of the stock of this Corporation required by law or by this Amended and
Restated Certificate of Incorporation, the affirmative vote of the holders of
a majority of the voting power of all of the then outstanding shares of
capital stock of the Corporation entitled to vote generally in the election
of directors, voting together as a single class, shall be required to amend
or repeal the provisions of Article I, Article II, and Article III of this
Amended and Restated Certificate of Incorporation. Notwithstanding any other
provision of this Amended and Restated Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but
in addition to any vote of the holders of any class or series of the stock of
this Corporation required by law or by this Amended and Restated Certificate
of Incorporation, the affirmative vote of the holders of at least
seventy-five percent (75%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in
the election of directors, voting together as a single class, shall be
required to amend or repeal any provision of this Amended and Restated
Certificate of Incorporation not specified in the preceding sentence.
* * * *
THIRD: The foregoing Amended and Restated Certificate of
Incorporation has been duly adopted by the Corporation's Board of Directors
in accordance with the applicable provisions of Section 245 of the General
Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, the undersigned has signed this Certificate
this _____ day of ____________, 1999.
---------------------------------
Mitchell E. Kertzman
Chief Executive Officer
ATTEST:
- ----------------------------------
Gordon T. Yamate
Secretary
<PAGE>
Exhibit 5.1
July 1, 1999
Liberate Technologies
1000 Bridge Parkway
Redwood Shores, California 94065
Re: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-78781)
originally filed by Liberate Technologies (the "Company") with the Securities
and Exchange Commission (the "Commission") on May 19, 1999, as thereafter
amended or supplemented (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 6,250,000
shares of the Company's Common Stock (the "Shares"). The Shares, which include
an over-allotment option granted by the Company to the Underwriters to purchase
up to 937,500 additional shares of the Company's Common Stock, are to be sold to
the Underwriters by the Company as described in the Registration Statement for
resale to the public. As your counsel in connection with this transaction, we
have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares being sold by the Company and upon completion of the proceedings being
taken in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares being sold
by the Company, when issued and sold in the manner described in the Registration
Statement and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE>
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as
of May 12, 1999, by and among Network Computer, Inc., a Delaware corporation
(the "Company"), Oracle Corporation, a Delaware corporation ("Oracle") and
Comcast Technology, Inc., a Pennsylvania corporation, Cox Communications, Inc.,
a Delaware corporation and MediaOne Interactive Services, Inc., a Delaware
corporation (collectively referred to hereinafter as, the "Network Operators").
The Company, Oracle and the Network Operators are individually each referred to
herein as a "Party" and are collectively referred to herein as the "Parties."
The Board of Directors of the Company is referred to herein as the "Board."
WITNESSETH:
WHEREAS, the Network Operators, among others, are parties to that
certain Series E Preferred Stock Purchase Agreement, of even date herewith (the
"Purchase Agreement");
WHEREAS, Oracle and the Network Operators, among others, are parties
to that certain Put/Call and Voting Agreement, dated August 11, 1997, as amended
November 12, 1997 and on the date hereof (the "PCV Agreement");
WHEREAS, Section 5.1 of the PCV Agreement provides that one (1)
designee to the Board shall be a person with relevant industry experience (the
"Industry Director") who is reasonably acceptable to the other members of the
Board, including four (4) designees of Oracle; and
WHEREAS, to induce the Network Operators to enter into the Purchase
Agreement and to purchase shares of Series E Preferred Stock thereunder, the
Company and Oracle desire to enter into this Agreement with the Network
Operators.
NOW, THEREFORE, in consideration of the foregoing premises and certain
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties agree as follows:
1. BOARD OF DIRECTORS.
(a) From the date hereof and until the earlier of the date of
the sale of the Company's Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act of 1933,
as amended, with net proceeds of greater than $20,000,000 and a price to the
public of at least $2.00 per share (as adjusted for stock splits, stock
dividends and similar event) (the "Offering Date") and the date that this
Agreement terminates pursuant to Section 2 below, Oracle agrees to direct each
of its designees to the Board to appoint to the Industry Director seat a
designee agreed upon by the Network Operators, provided that such designee is
reasonably acceptable to the Company's management (the "Network Operator
Designee"). In addition, (i) the Company agrees to direct its Chief Executive
<PAGE>
Officer to vote in favor of the election of the Network Operator Designee to the
Industry Director seat and (ii) Oracle and the Company agree to use its best
efforts to ensure that the director designated pursuant to Section 5.1(c) of the
PCV Agreement votes in favor of the election of the Network Operator Designee to
the Industry Director seat. Furthermore, each of the Network Operators agrees
to vote all of the voting securities now or hereafter owned by them at any
regular or special meeting of stockholders (or by written consent) called for
the purpose of electing members of the Board, so as to elect members to the
Board as described in Section 5.1 of the PCV Agreement, including the election
of the four (4) designees of Oracle.
(b) From the Offering Date until the date that this Agreement
terminates pursuant to Section 2 below, Oracle and the Network Operators shall
vote at any regular or special meeting of stockholders such number of shares of
Common Stock then owned by them (or as to which they then have voting power) as
may be necessary to elect one (1) Board designee of Oracle and one (1) Board
designee agreed upon by the Network Operators.
(c) Should the provisions of this Section 1 be construed to
constitute the granting of proxies, such proxies shall be deemed coupled with an
interest and are irrevocable for the term of this Agreement. It is agreed and
understood that monetary damages would not adequately compensate an injured
party for the breach of this Section 1 by any Party, that this Section 1 shall
be specifically enforceable, and that any breach or threatened breach of this
Section 1 shall be the proper subject of a temporary or permanent injunction or
restraining order. Further, each party hereto waives any claim or defense that
there is an adequate remedy at law for such breach or threatened breach.
2. TERMINATION. This Agreement shall terminate in its entirety and
be of no further force or effect upon the earlier to occur of:
(i) a "change of control" of the Company which has been
consented to in writing by Oracle (a "change of control" shall mean a sale of
all or substantially all of the assets of the Company or any transaction
(including a merger) after which the holders of all of the Company's capital
stock (on a fully-diluted basis) immediately prior to such transaction own 50%
or less of the capital stock of the Company after such transaction.); or
(ii) the date that each of the Network Operators and their
affiliates (as such term is defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended) own less than 50% of the of the
Company's Common Stock issued or issuable upon conversion of the Company's
Series E Preferred Stock (as adjusted for stock splits, stock dividends and
similar events) originally issued to each such Network Operator on or about May
12, 1999 in the Company's Series E Preferred Stock financing; or
(iii) the later of (1) the date of termination of the PCV
Agreement or (2) three (3) years from the Offering Date.
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3. COVENANTS OF THE COMPANY. The Company hereby agrees that it
will:
(a) provide the Network Operator Board designee with written
notice at least five (5) business days prior to any Board meeting at which the
Board is to consider (i) waiving or otherwise avoiding the anti-dilution
protection provisions contained in Section IV(4)(d)(ii) of the Company's
Certificate of Incorporation by obtaining the approval of all members of the
Board present at such meeting or (ii) any other action that, pursuant to the
Company's Certificate of Incorporation or any contract or agreement, requires
the approval of all members of the Company's Board present at such meeting; and
(b) within thirty (30) days of the date hereof, create a three
(3) member advisory board to the Board which will consist of one (1)
representative of each of the Network Operators, and each member of such
advisory board shall be entitled, without further request, to receive copies of
all materials distributed at or in connection with the Company's Board meetings,
as well as any other information distributed to the Board concurrently with the
distribution of such items to the members of the Board; PROVIDED, HOWEVER, that
each member of such advisory board shall agree to hold in confidence and trust
and to act in a fiduciary manner with respect to all information so provided;
and, PROVIDED FURTHER, that the Company reserves the right to withhold any
information from members of the advisory board if access to such information
could adversely affect the attorney-client privilege between the Company and its
counsel or would result in disclosure of trade secrets or other commercially
sensitive competitive information to such advisory board.
4. TRANSFEREES. Oracle and the Network Operators agree not to make
any transfer or other disposition of all or any portion of the capital stock of
the Company that they now own or hereafter acquire unless and until the
transferee has agreed in writing to be bound by the obligations of such
transferor in this Agreement to the extent that such obligations are then
applicable; PROVIDED, HOWEVER, that this Section 4 shall not apply to any
transfer or other disposition effected on a national securities exchange or The
Nasdaq Stock Market's National Market or any other open market transaction or to
the transfer of less than 100,000 shares of the Company's capital stock in the
aggregate.
5. CAPTIONS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not in any way limit or amplify the
terms and provisions hereof.
6. NOTICES. All notices, requests and other communications to any
party hereunder shall be in writing (including telecopy, telex or similar
writing) and shall be deemed given or made as of the date delivered, if
delivered personally or by telecopy (provided that delivery by telecopy shall be
followed by delivery of an additional copy personally, by mail or overnight
courier), one day after being delivered by overnight courier or three days after
being mailed by registered or certified mail (postage prepaid, return receipt
requested), to the parties at the following addresses:
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If to the Company:
1000 Bridge Parkway
Redwood Shores, California 94065
Attn: Gordon Yamate
If to Oracle:
500 Oracle Parkway, MS 5op7
Redwood Shores, California 94065
Attn: Daniel Cooperman
If to Comcast Technology, Inc.:
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
Attn: Arthur Block
If to Cox Communications, Inc.:
1400 Lake Hearn Drive, N.E.
Atlanta, Georgia 30319
Attn: Tom Nagel
If to MediaOne Interactive Services, Inc.:
9000 E. Nichols Ave., Suite 100
Englewood, CO 80112
Attn: John Merchant
7. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the
observance of any term hereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of the Company, Oracle and each of the Network Operators. Any amendment
or waiver so effected shall be binding upon the Parties hereto.
8. SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the Parties.
9. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
10. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to
conflicts of law principles thereof.
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11. ENTIRE AGREEMENT. This Agreement is intended to be the sole
agreement of the Parties as it relates to this subject matter and does hereby
supersede all other agreements of the Parties relating to the subject matter
hereof other than the PCV Agreement.
12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
LIBERATE TECHNOLOGIES
By: /s/ Mitchell E. Kertzman
-------------------------
Mitchell E. Kertzman
President and Chief Executive Officer
ORACLE CORPORATION
By:
-------------------------
Title:
-------------------------
COMCAST CORPORATION
By:
-------------------------
Title:
-------------------------
COX COMMUNICATIONS, INC.
By:
-------------------------
Title:
-------------------------
MEDIAONE INTERACTIVE SERVICES, INC.
By:
-------------------------
Title:
-------------------------
<PAGE>
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of
___________, ____ between Liberate Technologies, a Delaware corporation ("the
Company"), and _____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted Bylaws
(the "Bylaws") providing for the indemnification of the officers and
directors of the Company to the maximum extent authorized by Section 145 of
the Delaware General Corporation Law, as amended ("Law"); and
WHEREAS, the Bylaws and the Law, by their nonexclusive nature,
permit contracts between the Company and the officers or directors of the
Company with respect to indemnification of such officers or directors; and
WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and
WHEREAS, in order to induce Indemnitee to continue to serve as an
officer or director of the Company, the Company has determined and agreed to
enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as an
officer or director after the date hereof, the parties hereto agree as
follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted
by the provisions of the Law, as such may be amended from time to time, and
Article VI of the Bylaws, as such may be amended. In furtherance of the
foregoing indemnification, and without limiting the generality thereof:
(a) PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT
OF THE COMPANY. Indemnitee shall be entitled to the rights of
indemnification provided in this Section l(a) if, by reason of his Corporate
Status (as hereinafter defined), he is, or is threatened to be made, a party
to or participant in any Proceeding (as hereinafter defined) other than a
Proceeding by or in the right of the Company. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses (as hereinafter
defined), judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if he acted in good faith
<PAGE>
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY.
Indemnitee shall be entitled to the rights of indemnification provided in
this Section 1(b) if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to or participant in any Proceeding brought by
or in the right of the Company. Pursuant to this Section 1(b), Indemnitee
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection with such Proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect
of any claim, issue or matter in such Proceeding as to which Indemnitee shall
have been adjudged to be liable to the Company unless and to the extent that
the Court of Chancery of the State of Delaware shall determine that such
indemnification may be made.
(c) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY
OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement,
to the extent that Indemnitee is, by reason of his Corporate Status, a party
to and is successful, on the merits or otherwise, in any Proceeding, he shall
be indemnified to the maximum extent permitted by law against all Expenses
actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or
matter. For purposes of this Section and without limitation, the termination
of any claim, issue or matter in such a Proceeding by dismissal, with or
without prejudice, shall be deemed to be a successful result as to such
claim, issue or matter.
2. ADDITIONAL INDEMNITY. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the
Company shall and hereby does indemnify and hold harmless Indemnitee against
all Expenses, judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf if, by reason of his
Corporate Status, he is, or is threatened to be made, a party to or
participant in any Proceeding (including a Proceeding by or in the right of
the Company), including, without limitation, all liability arising out of the
negligence or active or passive wrongdoing of Indemnitee. The only
limitation that shall exist upon the Company's obligations pursuant to this
Agreement shall be that the Company shall not be obligated to make any
payment to Indemnitee that is finally determined (under the procedures, and
subject to the presumptions, set forth in Sections 6 and 7 hereof) to be
unlawful under Delaware law.
3. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any threatened, pending
or completed action, suit or proceeding
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<PAGE>
in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall pay, in the first instance,
the entire amount of any judgment or settlement of such action, suit or
proceeding without requiring Indemnitee to contribute to such payment and
Company hereby waives and relinquishes any right of contribution it may have
against Indemnitee. Company shall not enter into any settlement of any
action, suit or proceeding in which Company is jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding) unless such
settlement provides for a full and final release of all claims asserted
against Indemnitee.
(b) Without diminishing or impairing the obligations of
the Company set forth in the preceding subparagraph, if, for any reason,
Indemnitee shall elect or be required to pay all or any portion of any
judgment or settlement in any threatened, pending or completed action, suit
or proceeding in which Company is jointly liable with Indemnitee (or would be
if joined in such action, suit or proceeding), Company shall contribute to
the amount of expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred and paid or
payable by Indemnitee in proportion to the relative benefits received by the
Company and all officers, directors or employees of the Company other than
Indemnitee who are jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), on the one hand, and Indemnitee, on the
other hand, from the transaction from which such action, suit or proceeding
arose; provided, however, that the proportion determined on the basis of
relative benefit may, to the extent necessary to conform to law, be further
adjusted by reference to the relative fault of Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, in
connection with the events that resulted in such expenses, judgments, fines
or settlement amounts, as well as any other equitable considerations which
the law may require to be considered. The relative fault of Company and all
officers, directors or employees of the Company other than Indemnitee who are
jointly liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, shall be
determined by reference to, among other things, the degree to which their
actions were motivated by intent to gain personal profit or advantage, the
degree to which their liability is primary or secondary, and the degree to
which their conduct is active or passive.
(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may
be jointly liable with Indemnitee.
4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding
any other provision of this Agreement, to the extent that Indemnitee is, by
reason of his Corporate Status, a witness in any Proceeding to which
Indemnitee is not a party, he shall be indemnified against all Expenses
actually and reasonably incurred by him or on his behalf in connection
therewith.
5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of
Indemnitee's Corporate Status within ten (10) days
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<PAGE>
after the receipt by the Company of a statement or statements from Indemnitee
requesting such advance or advances from time to time, whether prior to or
after final disposition of such Proceeding. Such statement or statements
shall reasonably evidence the Expenses incurred by Indemnitee and shall
include or be preceded or accompanied by an undertaking by or on behalf of
Indemnitee to repay any Expenses advanced if it shall ultimately be
determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5
shall be subject to the condition that, if, when and to the extent that the
Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within
thirty (30) days of such determination, by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law, any determination
made by the Company that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall not be
required to reimburse the Company for any advance of Expenses until a final
judicial determination is made with respect thereto (as to which all rights
of appeal therefrom have been exhausted or lapsed).
6. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT
TO INDEMNIFICATION. It is the intent of this Agreement to secure for
Indemnitee rights of indemnity that are as favorable as may be permitted
under the law and public policy of the State of Delaware. Accordingly, the
parties agree that the following procedures and presumptions shall apply in
the event of any question as to whether Indemnitee is entitled to
indemnification under this Agreement:
(a) To obtain indemnification (including, but not limited
to, the advancement of Expenses and contribution by the Company) under this
Agreement, Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Secretary of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods,
which shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by
independent legal counsel in a written opinion, or (3) by the stockholders.
(c) If the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 6(b) hereof, the
Independent Counsel shall be selected as provided in this Section 6(c). The
Independent Counsel shall be selected by
4
<PAGE>
Indemnitee (unless Indemnitee shall request that such selection be made by
the Board of Directors). Indemnitee or the Company, as the case may be, may,
within 10 days after such written notice of selection shall have been given,
deliver to the Company or to Indemnitee, as the case may be, a written
objection to such selection; provided, however, that such objection may be
asserted only on the ground that the Independent Counsel so selected does not
meet the requirements of "Independent Counsel" as defined in Section 13 of
this Agreement, and the objection shall set forth with particularity the
factual basis of such assertion. Absent a proper and timely objection, the
person so selected shall act as Independent Counsel. If a written objection
is made and substantiated, the Independent Counsel selected may not serve as
Independent Counsel unless and until such objection is withdrawn or a court
has determined that such objection is without merit. If, within 20 days
after submission by Indemnitee of a written request for indemnification
pursuant to Section 6(a) hereof, no Independent Counsel shall have been
selected and not objected to, either the Company or Indemnitee may petition
the Court of Chancery of the State of Delaware or other court of competent
jurisdiction for resolution of any objection which shall have been made by
the Company or Indemnitee to the other's selection of Independent Counsel
and/or for the appointment as Independent Counsel of a person selected by the
court or by such other person as the court shall designate, and the person
with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting
pursuant to Section 6(b) hereof, and the Company shall pay all reasonable
fees and expenses incident to the procedures of this Section 6(c), regardless
of the manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification
under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 6(a) of this Agreement. Anyone
seeking to overcome this presumption shall have the burden of proof and the
burden of persuasion, by clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good faith
if Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties,
or on the advice of legal counsel for the Enterprise or on information or
records given or reports made to the Enterprise by an independent certified
public accountant or by an appraiser or other expert selected with reasonable
care by the Enterprise. In addition, the knowledge and/or actions, or
failure to act, of any director, officer, agent or employee of the Enterprise
shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement. Whether or not the foregoing
provisions of this Section 6(e) are satisfied, it shall in any event be
presumed that Indemnitee has at all times acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company. Anyone seeking to overcome this presumption shall have the burden
of proof and the burden of persuasion, by clear and convincing evidence.
5
<PAGE>
(f) If the person, persons or entity empowered or selected
under Section 6 to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of a material
fact necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of
such indemnification under applicable law; provided, however, that such 30
day period may be extended for a reasonable time, not to exceed an additional
fifteen (15) days, if the person, persons or entity making the determination
with respect to entitlement to indemnification in good faith requires such
additional time for the obtaining or evaluating documentation and/or
information relating thereto; and provided, further, that the foregoing
provisions of this Section 6(g) shall not apply if the determination of
entitlement to indemnification is to be made by the stockholders pursuant to
Section 6(b) of this Agreement and if (A) within fifteen (15) days after
receipt by the Company of the request for such determination the Board of
Directors or the Disinterested Directors, if appropriate, resolve to submit
such determination to the stockholders for their consideration at an annual
meeting thereof to be held within seventy five (75) days after such receipt
and such determination is made thereat, or (B) a special meeting of
stockholders is called within fifteen (15) days after such receipt for the
purpose of making such determination, such meeting is held for such purpose
within sixty (60) days after having been so called and such determination is
made thereat.
(g) Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination
under the Agreement of the Indemnitee's entitlement to indemnification. Any
costs or expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating with the person, persons or entity making such
determination shall be borne by the Company (irrespective of the
determination as to Indemnitee's entitlement to indemnification) and the
Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.
(h) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party
to avoid expense, delay, distraction, disruption and uncertainty. In the
event that any action, claim or proceeding to which Indemnitee is a party is
resolved in any manner other than by adverse judgment against Indemnitee
(including, without limitation, settlement of such action, claim or
proceeding with or without payment of money or other consideration) it shall
be presumed that Indemnitee has been successful on the merits or otherwise in
such action, suit or proceeding. Anyone seeking to overcome this presumption
shall have the burden of proof and the burden of persuasion, by clear and
convincing evidence.
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<PAGE>
7. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made pursuant
to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not
timely made pursuant to Section 5 of this Agreement, (iii) no determination
of entitlement to indemnification shall have been made pursuant to Section
6(b) of this Agreement within 90 days after receipt by the Company of the
request for indemnification, (iv) payment of indemnification is not made
pursuant to this Agreement within ten (10) days after receipt by the Company
of a written request therefor, or (v) payment of indemnification is not made
within ten (10) days after a determination has been made that Indemnitee is
entitled to indemnification or such determination is deemed to have been made
pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any
other court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding seeking an
adjudication within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 7(a). The
Company shall not oppose Indemnitee's right to seek any such adjudication.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a DE NOVO trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination
under Section 6(b).
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to
indemnification, the Company shall be bound by such determination in any
judicial proceeding commenced pursuant to this Section 7, absent a
prohibition of such indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section
7, seeks a judicial adjudication of his rights under, or to recover damages
for breach of, this Agreement, or to recover under any directors' and
officers' liability insurance policies maintained by the Company the Company
shall pay on his behalf, in advance, any and all expenses (of the types
described in the definition of Expenses in Section 13 of this Agreement)
actually and reasonably incurred by him in such judicial adjudication,
regardless of whether Indemnitee ultimately is determined to be entitled to
such indemnification, advancement of expenses or insurance recovery.
(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures
and presumptions of this Agreement are not valid, binding and enforceable and
shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement.
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8. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which
Indemnitee may at any time be entitled under applicable law, the certificate
of incorporation of the Company, the Bylaws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit
or restrict any right of Indemnitee under this Agreement in respect of any
action taken or omitted by such Indemnitee in his Corporate Status prior to
such amendment, alteration or repeal. To the extent that a change in the
Law, whether by statute or judicial decision, permits greater indemnification
than would be afforded currently under the Bylaws and this Agreement, it is
the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits so afforded by such change. No right or
remedy herein conferred is intended to be exclusive of any other right or
remedy, and every other right and remedy shall be cumulative and in addition
to every other right and remedy given hereunder or now or hereafter existing
at law or in equity or otherwise. The assertion or employment of any right
or remedy hereunder, or otherwise, shall not prevent the concurrent assertion
or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person serves at the request of the Company,
Indemnitee shall be covered by such policy or policies in accordance with its
or their terms to the maximum extent of the coverage available for any such
director, officer, employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
take all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce
such rights.
(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to
the extent that Indemnitee has otherwise actually received such payment under
any insurance policy, contract, agreement or otherwise.
9. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought
by Indemnitee, or any claim therein, unless (a) the bringing of such
Proceeding or making of such claim shall have been approved by the Board of
Directors of the Company or (b) such Proceeding is being brought by the
Indemnitee to assert, interpret or enforce his rights under this Agreement.
10. DURATION OF AGREEMENT. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer or director of the
8
<PAGE>
Company (or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) and shall continue thereafter so long as
Indemnitee shall be subject to any Proceeding (or any proceeding commenced
under Section 7 hereof) by reason of his Corporate Status, whether or not he
is acting or serving in any such capacity at the time any liability or
expense is incurred for which indemnification can be provided under this
Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or
assets of the Company), assigns, spouses, heirs, executors and personal and
legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as an officer or director of the
Company or any other Enterprise at the Company's request.
11. SECURITY. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any
time and from time to time provide security to the Indemnitee for the
Company's obligations hereunder through an irrevocable bank line of credit,
funded trust or other collateral. Any such security, once provided to the
Indemnitee, may not be revoked or released without the prior written consent
of the Indemnitee.
12. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby
in order to induce Indemnitee to serve as an officer or director of the
Company, and the Company acknowledges that Indemnitee is relying upon this
Agreement in serving as an officer or director of the Company.
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof.
13. DEFINITIONS. For purposes of this Agreement:
(a) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the
Company or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such person is or was serving
at the express written request of the Company.
(b) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise of which Indemnitee is
9
<PAGE>
or was serving at the express written request of the Company as a director,
officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness
fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection
with prosecuting, defending, preparing to prosecute or defend, investigating,
participating, or being or preparing to be a witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of
a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent:
(i) the Company or Indemnitee in any matter material to either such party
(other than with respect to matters concerning the Indemnitee under this
Agreement, or of other indemnitees under similar indemnification agreements),
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term
"Independent Counsel" shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. The Company agrees to
pay the reasonable fees of the Independent Counsel referred to above and to
fully indemnify such counsel against any and all Expenses, claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.
(f) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual,
threatened or completed proceeding, whether brought by or in the right of the
Company or otherwise and whether civil, criminal, administrative or
investigative, in which Indemnitee was, is or will be involved as a party or
otherwise, by reason of the fact that Indemnitee is or was a director of the
Company, by reason of any action taken by him or of any inaction on his part
while acting as an officer or director of the Company, or by reason of the
fact that he is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other Enterprise; in each case whether or not he is acting
or serving in any such capacity at the time any liability or expense is
incurred for which indemnification can be provided under this Agreement;
including one pending on or before the date of this Agreement; and excluding
one initiated by an Indemnitee pursuant to Section 7 of this Agreement to
enforce his rights under this Agreement.
14. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby and shall remain enforceable
to the fullest extent permitted by law; and (b) to the fullest extent
10
<PAGE>
possible, the provisions of this Agreement (including, without limitation,
each portion of any section of this Agreement containing any such provision
held to be invalid, illegal or unenforceable, that is not itself invalid,
illegal or unenforceable) shall be construed so as to give effect to the
intent manifested thereby.
15. MODIFICATION AND WAIVER. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed
in writing by both of the parties hereto. No waiver of any of the provisions
of this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
16. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to
any Proceeding or matter which may be subject to indemnification covered
hereunder. The failure to so notify the Company shall not relieve the
Company of any obligation which it may have to the Indemnitee under this
Agreement or otherwise unless and only to the extent that such failure or
delay materially prejudices the Company.
17. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, or (ii) mailed
by certified or registered mail with postage prepaid, on the third business
day after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee signature hereto.
(b) If to the Company, to:
1000 Bridge Parkway
Redwood Shores, CA 94065
Attention: General Counsel
or to such other address as may have been furnished to Indemnitee by the
Company or to the Company by Indemnitee, as the case may be.
18. IDENTICAL COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to
be an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of
this Agreement.
19. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part
of this Agreement or to affect the construction thereof.
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<PAGE>
20. GOVERNING LAW. The parties agree that this Agreement shall
be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware without application of the conflict of laws principles
thereof.
21. GENDER. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
LIBERATE TECHNOLOGIES
By:
-----------------------------------
Name:
----------------------------
Title:
---------------------------
--------------------------------------
Name:
---------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
<PAGE>
NETWORK COMPUTER, INC.
ADMISSION AGREEMENT
This Admission Agreement is entered into as of November 12, 1997,
by and among Network Computer, Inc., a Delaware corporation ("NCI" or the
"COMPANY"), Oracle Corporation, a Delaware corporation ("ORACLE"),
Middlefield Ventures, Inc., a Delaware corporation ("MALLARD"), and the other
Company stockholder signatories hereto (the "STOCKHOLDERS").
WHEREAS, Mallard wishes to purchase, and the Company wishes to
sell, certain convertible promissory notes (the "NOTES") upon the terms and
subject to the conditions set forth in the Convertible Promissory Note
Purchase Agreement of even date herewith, between the Company and Mallard
(the "PURCHASE AGREEMENT"); and
WHEREAS, in connection with the sale of the Notes to Mallard, NCI,
Oracle and the Stockholders seek to amend the Stockholders Agreement dated
August 11, 1997, a copy of which is attached hereto as EXHIBIT A (the
"STOCKHOLDERS AGREEMENT") to admit Mallard as a signatory thereto; and
WHEREAS, in connection with the sale of the Notes to Mallard, NCI,
Oracle and the Stockholders seek additional agreements with Mallard; and to
amend the Put/Call and Voting Agreement dated August 11, 1997, a copy of
which is attached hereto as EXHIBIT B (the "PUT/CALL AGREEMENT") so as to
admit Mallard as a signatory thereto in a limited capacity.
NOW, THEREFORE, in consideration of the promises and conditions
contained herein, the parties hereby agree as follows:
SECTION 1 AMENDMENTS TO STOCKHOLDERS AGREEMENT. NCI, Oracle and
the Stockholders hereby agree that the Stockholders Agreement is hereby
amended as follows:
(a) The term "STOCKHOLDERS" as used in the Stockholders Agreement
is hereby amended to include Mallard. By executing this Agreement, Mallard
agrees to be bound by the Stockholders Agreement, as amended hereby.
(b) Section 1.1(c) of the Stockholders Agreement is hereby
amended to read as follows:
"The term "REGISTRABLE SECURITIES" means (i) the shares
of Common Stock issuable or issued upon conversion of the Series A Preferred
Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series C-1 Preferred Stock or Series D Preferred Stock, as
the case may be (such shares of Common Stock are collectively referred to
hereinafter as the "STOCK"), and (ii) any other shares of Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security that is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
Stock; PROVIDED, HOWEVER, that the foregoing definition shall exclude in all
cases any Registrable Securities sold by a person in a transaction in which
his or her rights under this Agreement are not assigned. Notwithstanding
the foregoing, Common Stock or other securities shall only be treated as
Registrable Securities if and so long as they have not been
<PAGE>
(A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the Act
under Section 4(1) thereof in which all transfer restrictions, and
restrictive legends with respect thereto, if any, are removed upon the
consummation of such sale;"
(c) Section 1.1(g) of the Stockholders Agreement is hereby
amended to read as follows:
"The term "FULLY DILUTED EQUITY," as of any date of
measurement, shall refer to (i) the number of shares of Common Stock issued
and outstanding as of such date, PLUS (ii) the number of shares of Common
Stock issuable upon conversion of any shares of Series A Preferred Stock,
Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series C-1 Preferred Stock or Series D Preferred Stock issued and
outstanding as of such date, PLUS (iii) any shares of Common Stock issuable
upon the conversion or exercise of any warrant, option, right or other
convertible security issued and outstanding as of such date;"
(d) The term "FIVE PERCENT HOLDER" as used in Section 2.1 of the
Stockholders Agreement shall include Mallard PROVIDED Mallard holds at least
one Note (as such term is defined in the Purchase Agreement) or 250,000
shares of the Company's Series D Preferred Stock (or shares of Common Stock
issuable upon conversion thereof).
(e) The term "SERIES B HOLDER" as such term is defined and used
in Section 2.2 of the Stockholders Agreement shall include Mallard PROVIDED
Mallard holds at least one Note (as such term is defined in the Purchase
Agreement) or 250,000 shares of the Company's Series D Preferred Stock (or
shares of Common Stock issuable upon conversion thereof).
(f) Section 2.2(d) of the Stockholders Agreement is hereby
amended to read as follows:
"(d) The right to maintain interest in this Section
2.2 shall not be applicable to (i) the issuance or sale of Common Stock (or
options therefor) to employees, consultants and directors, pursuant to plans or
agreements approved by the Board of Directors for the primary purpose of
soliciting or retaining their services, (ii) consummation of a bona fide, firmly
underwritten public offering of shares of Common Stock, registered under the Act
pursuant to a registration statement on Form S-1 with proceeds of greater than
$20,000,000; (iii) the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities; (iv) the issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or exchange of
stock or otherwise; (v) the issuance of securities to financial institutions or
lessors in connection with commercial credit arrangements, equipment financings,
or similar transactions; (vi) the issuance or sale of securities in connection
with the consummation of the Merger; (vii) the issuance of securities that with
unanimous approval of the Board of Directors of the Company are not offered to
any existing stockholder of the Company; (viii) the issuance after the date
hereof of up to 22,000,000 shares of Series A-1 Preferred Stock (plus any shares
of Series A-1 Preferred Stock issued to Oracle prior to the date hereof)
pursuant to the Convertible Note Purchase Agreement dated July 23, 1997 between
Oracle and NCI, at a purchase price of $1.10 per share; (ix) the issuance of
shares of Series A-1 Preferred Stock pursuant to Oracle's right to purchase
2
<PAGE>
Series A-1 Preferred upon the exercise by any Navio stockholder of
dissenters' rights or (x) the issuance on or after the date hereof to Mallard
of promissory notes with an aggregate principal amount of up to $12,000,000
that are convertible into shares of Series D Preferred Stock pursuant to the
Purchase Agreement."
(g) Section 2.5 of the Stockholders Agreement is hereby amended
to read as follows:
"RESTRICTIVE LEGENDS. The Stockholders and the Company agree that all
certificates of stock evidencing the capital stock of the Company issued to
the Stockholders shall prior to their issuance be endorsed in substantially
the form as follows for so long as this Agreement shall remain in effect:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND
MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE TERMS OF A STOCKHOLDERS
AGREEMENT DATED AS OF AUGUST 11, 1997, BETWEEN THE COMPANY AND CERTAIN
STOCKHOLDERS OF THE COMPANY, AS AMENDED, COPIES OF WHICH ARE ON FILE
AT THE OFFICES OF THE COMPANY."
(h) Except as amended hereby, the Stockholders Agreement shall
continue in full force and effect as originally constituted and is ratified
and affirmed by the parties hereto.
SECTION 2 AMENDMENTS TO THE PUT/CALL AGREEMENT. NCI, Oracle and
the Stockholders hereby agree that the Put/Call Agreement is hereby amended
as follows:
(a) The term "NAVIO STOCKHOLDERS" as used in Section 3, Section 4
and Section 6 of the Put/Call Agreement is hereby amended to include Mallard
PROVIDED Mallard holds at least a portion of a Note (as such term is defined
in the Purchase Agreement) or shares of the Company's Series D Preferred
Stock (or shares of Common Stock issuable upon conversion thereof). By
executing this Agreement, Mallard agrees to be bound by Section 3, Section 4
and Section 6 of the Put/Call Agreement, as amended hereby.
(b) Section 4.1(d) of the Put/Call Agreement is hereby amended to
read as follows:
" "TEN PERCENT HOLDER" means any Stockholder that as of
the date of measurement beneficially owns, together with its affiliates, ten
percent (10%) or more of the Fully Diluted Equity of the Company."
(c) Except as amended hereby, the Put/Call Agreement shall
continue in full force and effect as originally constituted and is ratified
and affirmed by the parties hereto.
SECTION 3 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
SECTION 4 LIMITS ON AMENDMENTS. No amendment or modification of
the Stockholders Agreement or Put/Call Agreement may be made without the
consent of Mallard if
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<PAGE>
such amendment would (i) impose any new obligation on Mallard or (ii)
increase any existing obligation of Mallard thereunder or (iii) diminish or
waive the rights of Mallard thereunder without similarly diminishing or
waiving the rights of all similarly situated parties.
SECTION 5 LIMITED CONSENT TO ASSIGNMENT OF MALLARD'S RIGHTS.
Mallard may assign the rights to which it is entitled under the Stockholders
Agreement (as amended hereby) and the Put/Call Agreement (as amended hereby)
to Mallard's parent or to any wholly-owned subsidiary of Mallard or its
parent; PROVIDED the obligations hereunder are also assumed by such
transferee; and PROVIDED FURTHER that notice of such assignment is provided
promptly to NCI.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Admission
Agreement as of the day and year first above written.
NETWORK COMPUTER, INC.
By:
--------------------------------
Title:
-----------------------------
ORACLE CORPORATION
By:
--------------------------------
Title:
-----------------------------
MIDDLEFIELD VENTURES, INC.
By:
--------------------------------
Title:
-----------------------------
STOCKHOLDER:
-----------------------------------
By:
--------------------------------
Title:
-----------------------------
--Signature Page to the Admission Agreement--
<PAGE>
EXHIBIT 10.32
NETWORK COMPUTER, INC.
NOTICE OF STOCK OPTION GRANT
David J. Roux
[Address]
You have been granted an option to purchase Common Stock of Network
Computer, Inc. (the "COMPANY") as follows:
<TABLE>
<CAPTION>
<S> <C>
Date of Grant: October 15, 1998
Vesting Commencement Date: February 16, 1998
Exercise Price per Share: $0.85
Total Number of Shares Granted: 5,000,000
Total Exercise Price: $4,250,000
Type of Option: Nonqualified Stock Option
Term/Expiration Date: October 15, 2008
Vesting Schedule: This Option may be exercised, in
whole or in part, in accordance
with the following schedule: One-
fourth (1/4) of the Option shall
vest on the one-year anniversary of
the Vesting Commencement Date; and
one thirty-sixth (1/36) of the
remaining total number of Shares of
the Option shall vest upon the
completion of each month of service
as an Employee or Consultant
thereafter.
Termination Period: This Option may be exercised for
three (3) months after termination
of the Optionee's employment or
consulting relationship except as
set out in Sections 7 and 8 of the
Stock Option Agreement (but in no
event later than the Expiration
Date).
</TABLE>
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and
governed by the terms and conditions of the Stock Option Agreement, which is
attached and made a part of this document.
DAVID J. ROUX: NETWORK COMPUTER, INC.
By:
- -------------------------- --------------------------
Signature
Title:
- -------------------------- -----------------------
Print Name
<PAGE>
NETWORK COMPUTER, INC.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. Network Computer, Inc., a Delaware corporation
(the "COMPANY"), hereby grants to Optionee named in the Notice of Stock Option
Grant (the "OPTIONEE"), an option (the "OPTION") to purchase a total number of
shares of Common Stock (the "SHARES") set forth in the Notice of Stock Option
Grant, at the exercise price per share set forth in the Notice of Stock Option
Grant (the "EXERCISE PRICE").
2. EXERCISE OF OPTION. This Option shall be exercisable during its
Term in accordance with the Exercise Schedule set out in the Notice of Stock
Option Grant as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a
share.
(ii) In the event of Optionee's death, disability or
other termination of employment or consulting service, the exercisability of the
Option is governed by Sections 6, 7 and 8 below, subject to the limitation
contained in Section 2(a)(i).
(iii) In no event may this Option be exercised after the
date of expiration of the Term of this Option as set forth in the Notice of
Stock Option Grant.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
written notice (in the form attached as EXHIBIT A), the terms of which are
hereby incorporated by reference into the terms of this Option. The notice
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company. Such written notice shall be
signed by Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The written notice shall be accompanied by payment of
the Exercise Price. This Option shall be deemed to be exercised upon receipt by
the Company of such written notice accompanied by the Exercise Price.
(c) COMPLIANCE WITH LAW. No Shares will be issued pursuant to
the exercise of an Option unless such issuance and such exercise shall comply
with all relevant provisions of applicable law and the requirements of any stock
exchange upon which the Shares may then be listed. Assuming such compliance,
for income tax purposes the Shares shall be considered transferred to Optionee
on the date on which the Option is exercised with respect to such Shares.
<PAGE>
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act at the time this Option is exercised, Optionee shall, if required
by the Company, concurrently with the exercise of all or any portion of this
Option, deliver to the Company Optionee's Investment Representation Statement in
the form attached hereto as EXHIBIT B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination thereof, at the election of Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company
which (i) in the case of Shares acquired pursuant to the exercise of a Company
option, have been owned by Optionee for more than six (6) months on the date of
surrender, and (ii) have a fair market value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised;
(d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the exercise
price; or
(e) such other consideration, including promissory notes, as
may be determined by the Board in its absolute discretion to the extent
permitted under Sections 408 and 409 of the California General Corporation Law.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would not constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "TERMINATION
DATE"), exercise this Option during the Termination Period set out in the Notice
of Stock Option Grant but in no event may Optionee exercise this Option
following the Expiration Date set out in the Notice of Stock Option Grant. To
the extent that Optionee was not entitled to exercise this Option at such
Termination Date, or if Optionee does not exercise this Option within the time
specified herein, the Option shall terminate.
-2-
<PAGE>
7. DISABILITY OF OPTIONEE.
(a) Notwithstanding the provisions of Section 6 above, in the
event of termination of Continuous Status as an Employee or Consultant as a
result of Optionee's total and permanent disability (as defined in Section
22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the
Termination Date (but in no event later than the date of expiration of the Term
of this Option as set forth in the Notice of Stock Option Grant and in
Section 10 below), exercise this Option to the extent Optionee was entitled to
exercise it as of such Termination Date. To the extent that Optionee was not
entitled to exercise the Option as of the Termination Date, or if Optionee does
not exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
(b) Notwithstanding the provisions of Section 6 above, in the
event of termination of Optionee's Continuous Status as an Employee or
Consultant as a result of any disability not constituting a total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within six (6) months from the Termination Date (but in no event later than the
date of expiration of the Term of this Option as set forth in the Notice of
Stock Option Grant and in Section 10 below), exercise this Option to the extent
Optionee was entitled to exercise it as of such Termination Date. To the extent
that Optionee was not entitled to exercise the Option at the Termination Date,
or if Optionee does not exercise such Option to the extent so entitled within
the time specified herein, the Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the Term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, or (b) within thirty (30) days after Optionee's
Termination Date, the Option may be exercised at any time within six (6) months
following the date of death (but in no event later than the date of expiration
of the Term of this Option as set forth in the Notice of Stock Option Grant and
in Section 10 below), by Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the Termination Date.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution
and may be exercised during the lifetime of Optionee only by him or her. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
10. TERM OF OPTION. This Option may be exercised only within the Term
set out in the Notice of Stock Option Grant, and may be exercised during such
Term only in accordance with the terms of this Option.
11. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND
-3-
<PAGE>
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER
BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF NONQUALIFIED STOCK OPTION. If this Option is a
Nonqualified Stock Option and, thus, does not qualify as an Incentive Stock
Option, there may be a regular federal income tax liability and a California
income tax liability upon the exercise of the Option. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price. If Optionee is an employee, the
Company will be required to file applicable reports with the taxing authorities
and withhold from Optionee's compensation or collect from Optionee and pay to
the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(b) DISPOSITION OF SHARES. In the case of a Nonqualified Stock
Option, if the Shares are held for more than one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes.
12. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon
exercising a Nonqualified Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then fair market value of the
Shares over the Exercise Price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Exchange Act. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation, or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income. The Optionee shall satisfy his or her tax withholding
obligation arising upon the exercise of this Option by one or some combination
of the following methods: (a) by cash payment, (b) out of Optionee's current
compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares which (i) in the case of Shares previously
acquired from the Company, have been owned by Optionee for more than six months
on the date of surrender, and (ii) have a fair market value on the date of
surrender equal to or greater than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "TAX
DATE").
If Optionee is subject to Section 16 of the Exchange Act (an "INSIDER"),
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("RULE 16B-3") and shall be
subject to such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act.
-4-
<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator; and
(d) if Optionee is an Insider, the election must comply with
the applicable provisions of Rule 16b-3 and shall be subject to such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act.
13. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as may be requested by
the Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the public
offering.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by this Option and the price per share of Common Stock covered by this Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination, recapitalization or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
-5-
<PAGE>
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale
of all or substantially all of the Company's assets or the consummation of a
merger or consolidation of the Company with or into another entity where the
successor corporation issues its securities to the Company's stockholders, this
Option shall be assumed or an equivalent option or right shall be substituted by
such successor corporation or a parent or subsidiary of such successor
corporation, unless the successor corporation does not agree to assume the
Option or to substitute an equivalent option or right, in which case such Option
shall terminate upon the consummation of the merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by this
outstanding Option to reflect the effect of such distribution.
15. DEFINITIONS.
(a) "ADMINISTRATOR" means the Board.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMON STOCK" means the Common Stock of the Company.
(e) "COMPANY" means Network Computer, Inc., a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. A
change in status from an Employee to a Consultant or from a Consultant to an
Employee will not constitute an interruption of Continuous Status as an Employee
or Consultant.
-6-
<PAGE>
(h) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national
market system including without limitation
the National Market of the National
Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its
Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if
no sales were reported), as quoted on such
system or exchange, or the exchange with the
greatest volume of trading in Common Stock
for the last market trading day prior to the
time of determination, as reported in The
Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq
System (but not on the National Market
thereof) or regularly quoted by a recognized
securities dealer but selling prices are not
reported, its Fair Market Value shall be the
mean between the high bid and low asked
prices for the Common Stock for the last
market trading day prior to the time of
determination, as reported in The Wall Street
Journal or such other source as the
Administrator deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value
thereof shall be determined in good faith by
the Administrator at the Administrator's
discretion. In making any such
determination, the Administrator may elect,
but shall not be obligated, to engage an
appraiser or investment banking firm to make
the determination of Fair Market Value and
such determination shall be conclusive and
binding.
(k) "INCENTIVE STOCK OPTION" or "ISO" means an Option intended
to qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(l) "NONQUALIFIED STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(m) "OPTION" means a stock option granted pursuant to this
Option Agreement.
(n) "OPTION AGREEMENT" means this Stock Option Agreement.
(o) "OPTIONED STOCK" means the Common Stock subject to an
Option.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option.
(q) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
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<PAGE>
(r) "REPORTING PERSON" means an officer, director, or greater
than ten percent stockholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
(s) "RULE 16B-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(t) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(u) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 14.
(v) "STOCK EXCHANGE" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(w) "SUBSIDIARY" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
-8-
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
document.
NETWORK COMPUTER, INC.
By:
---------------------------------
Title:
------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT
TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT
INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee has reviewed this Stock Option Agreement in its entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under this
Option.
Dated:
------------------------- -------------------------
DAVID J. ROUX
-9-
<PAGE>
EXHIBIT A
NETWORK COMPUTER, INC.
EXERCISE NOTICE
Network Computer, Inc.
1000 Bridge Parkway
Redwood Shores, CA 94065
1. EXERCISE OF OPTION. Effective as of today, _______________,
199__, the undersigned ("OPTIONEE") hereby elects to exercise Optionee's option
to purchase _____________ shares of the Common Stock (the "SHARES") of Network
Computer, Inc. (the "COMPANY") under the Stock Option Agreement dated October
15, 1998 (the "OPTION AGREEMENT").
2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee
has received, read and understood the Option Agreement and the Investment
Representation Statement attached as EXHIBIT B to the Option Agreement, and
agrees to abide by and be bound by their terms and conditions. If applicable,
Optionee has executed and delivered the Investment Representation Statement to
the Company. Optionee further represents that Optionee is purchasing the Shares
for Optionee's own account for investment and not with a view to, or for sale in
connection with, a "distribution" of any of such Shares for purposes of the
Securities Act of 1933, as amended (the "SECURITIES ACT").
3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and
acknowledges that the Shares have not been registered under the Securities Act
and, notwithstanding any other provision of the Option Agreement to the
contrary, the exercise of any rights to purchase any Shares is expressly
conditioned upon compliance with the Securities Act, all applicable state
securities laws and all applicable requirements of any stock exchange or over
the counter market on which the Company's Common Stock may be listed or traded
at the time of exercise and transfer. Optionee agrees to cooperate with the
Company to ensure compliance with such laws.
4. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that
the Shares have not been registered under the Securities Act and therefore
cannot be resold and must be held indefinitely unless they are registered
under the Securities Act or unless an exemption from such registration is
available and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available
or may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee. Specifically, Optionee has been advised that Rule 144
promulgated under the Securities Act, which permits certain resales of
unregistered securities, is not presently available with respect to the
Shares and, in any event requires that the Shares be fully paid for by means
other than a promissory note
<PAGE>
secured by the Shares themselves and then be held for at least one year (and
in some cases two years) before they may be resold under Rule 144.
5. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing
such Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the optioned Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 14 of the Option Agreement.
Optionee shall enjoy rights as a stockholder until such time as
Optionee disposes of the Shares.
6. ESCROW OF SHARES. For purposes of facilitating the enforcement of
the provisions of this Exercise Notice, the Optionee agrees, immediately upon
receipt of the certificate(s) for any Shares, to deliver such certificate(s),
together with an Assignment Separate from Certificate in the form attached to
this Exercise Notice as EXHIBIT A executed by Optionee and by Optionee's spouse
(if required for transfer), in blank, to the Secretary of the Company, or the
Secretary's designee, to hold such certificate(s) and Assignment Separate from
Certificate in escrow and to take all such actions and to effectuate all such
transfers and/or releases as are in accordance with the terms of this Exercise
Notice. The Optionee hereby acknowledges that the Secretary of the Company, or
the Secretary's designee, is so appointed as the escrow holder with the
foregoing authorities as a material inducement to make this agreement and that
said appointment is coupled with an interest and is accordingly irrevocable.
The Optionee agrees that said escrow holder shall not be liable to any party
hereof (or to any other party). The escrow holder may rely upon any letter,
notice or other document executed by any signature purported to be genuine and
may resign at any time. The Optionee agrees that if the Secretary of the
Company, or the Secretary's designee, resigns as escrow holder for any or no
reason, the Board of Directors of the Company shall have the power to appoint a
successor to serve as escrow holder pursuant to the terms of this Exercise
Notice.
7. RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or
any interest therein will receive and hold such Shares or interest subject to
the provisions of this Exercise Notice and the Option Agreement. Any sale or
transfer of the Company's Shares shall be void unless the provisions of this
Agreement are met.
8. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
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<PAGE>
9. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the Shares
together with any other legends that may be required by state or federal
securities laws:
(i) THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION
AGREEMENT AND THE EXERCISE NOTICE BETWEEN THE
ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(b) STOP-TRANSFER NOTICES. Optionee agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii) to
treat as owner of such Shares or to accord the right to vote or pay dividends to
any purchaser or other transferee to whom such Shares shall have been so
transferred.
10. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell,
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<PAGE>
make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Shares (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the
public offering.
11. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
12. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors, which shall review such dispute at its next
regular meeting. The resolution of such a dispute by the Board or committee
shall be final and binding on the Company and on Optionee.
13. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by
and construed in accordance with the laws of the State of California excluding
that body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
14. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
15. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
16. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company
the full Exercise Price for the Shares.
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<PAGE>
17. ENTIRE AGREEMENT. The Notice of Stock Option Grant/Option
Agreement are incorporated herein by reference. This Agreement and the Notice
of Stock Option Grant/Option Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the subject matter hereof, and is
governed by California law except for that body of law pertaining to conflict of
laws.
Submitted by: Accepted by:
OPTIONEE: NETWORK COMPUTER, INC.
By:
- ----------------------------------- -----------------------------------
((Optionee))
Title:
--------------------------------
Address: ((OptioneeAddress1)) Address: 1000 Bridge Parkway
((OptioneeAddress2)) Redwood Shores, CA 94065
I, _____________________________, spouse of Optionee, have read and
hereby approve the foregoing Exercise Notice. In consideration of the Company's
granting my spouse the right to purchase the Shares as set forth in the Exercise
Notice, I hereby agree to be irrevocably bound by the Exercise Notice and Option
Agreement and further agree that any community property or other such interest
shall be similarly bound by the terms of the Exercise Notice. I hereby appoint
my spouse as my attorney-in-fact with respect to any amendment or exercise of
any rights under the Exercise Notice and Option Agreement.
-----------------------------------
Spouse of Optionee
-5-
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Exercise Notice between
the undersigned and Network Computer, Inc., dated ____________________, 199__
(the "AGREEMENT") Optionee hereby sells, assigns and transfers unto
______________________ (__________) shares of the Common Stock of Network
Computer, Inc., standing in Optionee's name on the books of said corporation
represented by Certificate No. ______ herewith and does hereby irrevocably
constitute and appoint ___________________________________ to transfer said
stock on the books of the within-named corporation with full power of
substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED
BY THE EXERCISE NOTICE AND THE EXHIBITS THERETO.
Date: , 19 .
------------- ----
Signature:
-----------------------------------------
((Optionee))
-----------------------------------------
Spouse of Optionee (if applicable)
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
repurchase rights set forth in the Exercise Notice without requiring
additional signatures on the part of Optionee.
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE : ((Optionee))
COMPANY : Network Computer, Inc.
SECURITY : Common Stock
AMOUNT : ___________________ Shares
DATE : ___________________, 199__
In connection with the purchase of the above-listed Securities, I, Optionee,
represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "DISTRIBUTION"
thereof for purposes of the Securities Act of 1933, as amended (the "SECURITIES
ACT").
(b) I understand that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In
addition, I understand that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel for the Company.
(d) I am familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly, from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under
Rule 701 at the time of issuance of the Securities, such issuance will be exempt
from registration under the Securities Act. In the event the Company later
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ninety (90) days thereafter the securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including among other things: (1) the
sale being made through a broker in an unsolicited "broker's transaction" or in
<PAGE>
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the
availability of certain public information about the Company, and the amount
of securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), if applicable. Notwithstanding this
paragraph (d), I acknowledge and agree to the restrictions set forth in
paragraph (f) below.
In the event that the Company does not qualify under Rule 701
at the time of issuance of the Securities, then the Securities may be resold
in certain limited circumstances subject to the provisions of Rule 144, which
requires among other things: (1) the availability of certain public
information about the Company; (2) the resale occurring not less than one
year after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934), and (4) the amount of
securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable. I UNDERSTAND THAT
PAYMENT FOR THE SHARES WITH A PROMISSORY NOTE IS NOT DEEMED TO BE FULL
PAYMENT UNDER RULE 144 UNLESS THE NOTE IS SECURED BY ASSETS OTHER THAN THE
SHARES.
(e) I understand that at such time in the future that I might
wish to sell the Securities, there may be no public market upon which to make
such a sale, and that, even if such a public market then exists, the Company may
not be satisfying the current public information requirements of Rule 144, and
that, in such event, I will be precluded from selling the Securities under Rule
144 even if I have satisfied the one-year minimum holding period.
(f) I further understand that in the event all of the
applicable requirements of Rule 144 or Rule 701 are not satisfied, registration
under the Securities Act, compliance with Regulation A, or some other
registration exemption will be required; and that, notwithstanding the fact that
Rule 144 and Rule 701 are not exclusive, the Staff of the Securities and
Exchange Commission has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Optionee:
-------------------------------
((Optionee))
Date: , 199
---------------- ----
<PAGE>
Exhibit 10.33
NETWORK COMPUTER, INC.
NOTICE OF STOCK OPTION GRANT
Mitchell E. Kertzman
[Address]
You have been granted an option to purchase Common Stock of Network
Computer, Inc. (the "COMPANY") as follows:
Date of Grant: November 16, 1998
Vesting Commencement Date: November 16, 1998
Exercise Price per Share: $0.85
Total Number of Shares Granted: 10,000,000
Total Exercise Price: $8,500,000
Type of Option: Nonqualified Stock Option
Term/Expiration Date: November 16, 2008
Vesting Schedule: This Option may be exercised, in
whole or in part, in accordance
with the following schedule:
One-fourth (1/4) of the Option
shall vest on the one-year
anniversary of the Vesting
Commencement Date; and one
thirty-sixth (1/36) of the
remaining total number of Shares of
the Option shall vest upon the
completion of each month of service
as an Employee or Consultant
thereafter.
Termination Period: This Option may be exercised for
three (3) months after termination
of employment or consulting
relationship except as set out in
Sections 7 and 8 of the Stock
Option Agreement (but in no event
later than the Expiration Date).
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and
governed by the terms and conditions of the Stock Option Agreement, which is
attached and made a part of this document.
MITCHELL E. KERTZMAN: NETWORK COMPUTER, INC.
By:
- -------------------------------- ----------------------------
Signature
Title:
- -------------------------------- ---------------------------
Print Name
<PAGE>
NETWORK COMPUTER, INC.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. Network Computer, Inc., a Delaware
corporation (the "COMPANY"), hereby grants to Optionee named in the Notice of
Stock Option Grant (the "OPTIONEE"), an option (the "OPTION") to purchase a
total number of shares of Common Stock (the "SHARES") set forth in the Notice
of Stock Option Grant, at the exercise price per share set forth in the
Notice of Stock Option Grant (the "EXERCISE PRICE").
2. EXERCISE OF OPTION. This Option shall be exercisable during
its Term in accordance with the Exercise Schedule set out in the Notice of
Stock Option Grant as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a
share.
(ii) In the event of Optionee's death, disability or
other termination of employment or consulting service, the exercisability of
the Option is governed by Sections 6, 7 and 8 below, subject to the
limitation contained in Section 2(a)(i).
(iii) In no event may this Option be exercised after
the date of expiration of the Term of this Option as set forth in the Notice
of Stock Option Grant.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
written notice (in the form attached as EXHIBIT A), the terms of which are
hereby incorporated by reference into the terms of this Option. The notice
shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with
respect to such shares of Common Stock as may be required by the Company.
Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written
notice shall be accompanied by payment of the Exercise Price. This Option
shall be deemed to be exercised upon receipt by the Company of such written
notice accompanied by the Exercise Price.
(c) COMPLIANCE WITH LAW. No Shares will be issued pursuant
to the exercise of an Option unless such issuance and such exercise shall
comply with all relevant provisions of applicable law and the requirements of
any stock exchange upon which the Shares may then be listed. Assuming such
compliance, for income tax purposes the Shares shall be considered
transferred to Optionee on the date on which the Option is exercised with
respect to such Shares.
<PAGE>
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act at the time this Option is exercised, Optionee
shall, if required by the Company, concurrently with the exercise of all or
any portion of this Option, deliver to the Company Optionee's Investment
Representation Statement in the form attached hereto as EXHIBIT B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by
any of the following, or a combination thereof, at the election of Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company
which (i) in the case of Shares acquired pursuant to the exercise of a
Company option, have been owned by Optionee for more than six (6) months on
the date of surrender, and (ii) have a fair market value on the date of
surrender equal to the Exercise Price of the Shares as to which the Option is
being exercised;
(d) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds required to pay
the exercise price; or
(e) such other consideration, including promissory notes, as
may be determined by the Board in its absolute discretion to the extent
permitted under Sections 408 and 409 of the California General Corporation
Law.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised
until the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would not constitute a violation of any
applicable federal or state securities or other law or regulation, including
any rule under Part 207 of Title 12 of the Code of Federal Regulations as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or
regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to
the extent otherwise so entitled at the date of such termination (the
"TERMINATION DATE"), exercise this Option during the period ending on the
Expiration Date set out in the Notice of Option Grant. To the extent that
Optionee was not entitled to exercise this Option at such Termination Date,
or if Optionee does not exercise this Option within the time specified
herein, the Option shall terminate.
7. DISABILITY OF OPTIONEE.
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<PAGE>
(a) Notwithstanding the provisions of Section 6 above, in
the event of termination of Continuous Status as an Employee or Consultant as
a result of Optionee's total and permanent disability (as defined in Section
22(e)(3) of the Code), Optionee may, but only within twelve (12) months from
the Termination Date (but in no event later than the date of expiration of
the Term of this Option as set forth in the Notice of Stock Option Grant and
in Section 10 below), exercise this Option to the extent Optionee was
entitled to exercise it as of such Termination Date. To the extent that
Optionee was not entitled to exercise the Option as of the Termination Date,
or if Optionee does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(b) Notwithstanding the provisions of Section 6 above, in
the event of termination of Optionee's consulting relationship or Continuous
Status as an Employee as a result of any disability not constituting a total
and permanent disability (as defined in Section 22(e)(3) of the Code),
Optionee may, but only within six (6) months from the Termination Date (but
in no event later than the date of expiration of the Term of this Option as
set forth in the Notice of Stock Option Grant and in Section 10 below),
exercise this Option to the extent Optionee was entitled to exercise it as of
such Termination Date. To the extent that Optionee was not entitled to
exercise the Option at the Termination Date, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee (a)
during the Term of this Option and while an Employee or Consultant of the
Company and having been in Continuous Status as an Employee or Consultant
since the date of grant of the Option, or (b) within thirty (30) days after
Optionee's Termination Date, the Option may be exercised at any time within
six (6) months following the date of death (but in no event later than the
date of expiration of the Term of this Option as set forth in the Notice of
Stock Option Grant and in Section 10 below), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued
at the Termination Date.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by him
or her. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of Optionee.
10. TERM OF OPTION. This Option may be exercised only within the
Term set out in the Notice of Stock Option Grant, and may be exercised during
such Term only in accordance with the terms of this Option.
11. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND
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<PAGE>
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER
BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF NONQUALIFIED STOCK OPTION. If this Option
is a Nonqualified Stock Option and, thus, does not qualify as an Incentive
Stock Option, there may be a regular federal income tax liability and a
California income tax liability upon the exercise of the Option. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price. If
Optionee is an employee, the Company will be required to file applicable
reports with the taxing authorities and withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an
amount equal to a percentage of this compensation income at the time of
exercise.
(b) DISPOSITION OF SHARES. In the case of a Nonqualified
Stock Option, if the Shares are held for more than one year, any gain
realized on disposition of the Shares will be treated as long-term capital
gain for federal and California income tax purposes.
12. WITHHOLDING TAX OBLIGATIONS. Optionee understands that, upon
exercising a Nonqualified Stock Option, he or she will recognize income for
tax purposes in an amount equal to the excess of the then fair market value
of the Shares over the Exercise Price. However, the timing of this income
recognition may be deferred for up to six months if Optionee is subject to
Section 16 of the Exchange Act. If Optionee is an employee, the Company will
be required to withhold from Optionee's compensation, or collect from
Optionee and pay to the applicable taxing authorities an amount equal to a
percentage of this compensation income. The Optionee shall satisfy his or
her tax withholding obligation arising upon the exercise of this Option by
one or some combination of the following methods: (a) by cash payment, (b)
out of Optionee's current compensation, (c) if permitted by the
Administrator, in its discretion, by surrendering to the Company Shares which
(i) in the case of Shares previously acquired from the Company, have been
owned by Optionee for more than six months on the date of surrender, and (ii)
have a fair market value on the date of surrender equal to or greater than
Optionee's marginal tax rate times the ordinary income recognized, or (d) by
electing to have the Company withhold from the Shares to be issued upon
exercise of the Option that number of Shares having a fair market value equal
to the amount required to be withheld. For this purpose, the fair market
value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined (the "TAX DATE").
If Optionee is subject to Section 16 of the Exchange Act (an
"INSIDER"), any surrender of previously owned Shares to satisfy tax
withholding obligations arising upon exercise of this Option must comply with
the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
("RULE 16B-3") and shall be subject to such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act.
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<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator; and
(d) if Optionee is an Insider, the election must comply with
the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act.
13. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Optionee hereby agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Shares (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days) from the effective date of such registration as may be requested by
the Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the public
offering.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN
OTHER TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required
action by the stockholders of the Company, the number of shares of Common
Stock covered by this Option and the price per share of Common Stock covered
by this Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment
shall be made by the Board, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option.
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<PAGE>
(b) DISSOLUTION OR LIQUIDATION. In the event of the
proposed dissolution or liquidation of the Company, the Board shall notify
the Optionee at least fifteen (15) days prior to such proposed action. To
the extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a change in
control of the Company, including a proposed sale of all or substantially all
of the Company's assets or the consummation of a merger or consolidation of
the Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the Company
immediately prior to such merger, consolidation or other reorganization own
immediately after such merger, consolidation or other reorganization 50% or
more of the voting power of the outstanding securities of each of (A) the
continuing or surviving entity and (B) any direct or indirect parent
corporation of such continuing or surviving entity, 50% of the unvested
Shares subject to this outstanding Option shall become vested immediately
prior to the effective date of the change in control. In addition, to the
extent otherwise provided in the merger agreement, this Option may be assumed
or an equivalent option or right shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless
the successor corporation does not agree to assume the Option or to
substitute an equivalent option or right, in which case such Option shall
terminate upon the consummation of the merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution
to the Company's stockholders of securities of any other entity or other
assets (other than dividends payable in cash or stock of the Company) without
receipt of consideration by the Company, the Administrator may, in its
discretion, appropriately adjust the price per share of Common Stock covered
by this outstanding Option to reflect the effect of such distribution.
15. DEFINITIONS.
(a) "ADMINISTRATOR" means the Board.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMON STOCK" means the Common Stock of the Company.
(e) "COMPANY" means Network Computer, Inc., a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means
the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided
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<PAGE>
that such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the
Company or between the Company, its Subsidiaries or their respective
successors. A change in status from an Employee to a Consultant or from a
Consultant to an Employee will not constitute an interruption of Continuous
Status as an Employee or Consultant.
(h) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company, with the status of employment determined based upon such minimum
number of hours or periods worked as shall be determined by the Administrator
in its discretion, subject to any requirements of the Code. The payment by
the Company of a director's fee to a Director shall not be sufficient to
constitute "employment" of such Director by the Company.
(i) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the fair
market value of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national
market system including without limitation
the National Market of the National
Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its
Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if
no sales were reported), as quoted on such
system or exchange, or the exchange with the
greatest volume of trading in Common Stock
for the last market trading day prior to the
time of determination, as reported in The
Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq
System (but not on the National Market
thereof) or regularly quoted by a recognized
securities dealer but selling prices are not
reported, its Fair Market Value shall be the
mean between the high bid and low asked
prices for the Common Stock for the last
market trading day prior to the time of
determination, as reported in The Wall Street
Journal or such other source as the
Administrator deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value
thereof shall be determined in good faith by
the Administrator at the Administrator's
discretion. In making any such
determination, the Administrator may elect,
but shall not be obligated, to engage an
appraiser or investment banking firm to make
the determination of Fair Market Value and
such determination shall be conclusive and
binding.
(k) "INCENTIVE STOCK OPTION" or "ISO" means an Option
intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
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<PAGE>
(l) "NONQUALIFIED STOCK OPTION" means an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable
written option agreement.
(m) "OPTION" means a stock option granted pursuant to this
Option Agreement.
(n) "OPTION AGREEMENT" means this Stock Option Agreement.
(o) "OPTIONED STOCK" means the Common Stock subject to an
Option.
(p) "OPTIONEE" means an Employee or Consultant who receives
an Option.
(q) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any
successor provision.
(r) "REPORTING PERSON" means an officer, director, or
greater than ten percent stockholder of the Company within the meaning of
Rule 16a-2 under the Exchange Act, who is required to file reports pursuant
to Rule 16a-3 under the Exchange Act.
(s) "RULE 16B-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(t) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(u) "SHARE" means a share of the Common Stock, as adjusted
in accordance with Section 14.
(v) "STOCK EXCHANGE" means any stock exchange or
consolidated stock price reporting system on which prices for the Common
Stock are quoted at any given time.
(w) "SUBSIDIARY" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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<PAGE>
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute
one document.
NETWORK COMPUTER, INC.
By:
------------------------------
Title:
------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY
AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES
AND AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON OPTIONEE ANY
RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE
COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY
TIME, WITH OR WITHOUT CAUSE.
Optionee has reviewed this Stock Option Agreement in its entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under this
Option.
Dated:
------------------------------- -------------------------------
Mitchell E. Kertzman
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<PAGE>
EXHIBIT A
NETWORK COMPUTER, INC.
EXERCISE NOTICE
Network Computer, Inc.
1000 Bridge Parkway
Redwood Shores, CA 94065
1. EXERCISE OF OPTION. Effective as of today, _______________,
199__, the undersigned ("OPTIONEE") hereby elects to exercise Optionee's
option to purchase _____________ shares of the Common Stock (the "SHARES") of
Network Computer, Inc. (the "COMPANY") under the Stock Option Agreement dated
October 15, 1998 (the "OPTION AGREEMENT").
2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that
Optionee has received, read and understood the Option Agreement and the
Investment Representation Statement attached as EXHIBIT B to the Option
Agreement, and agrees to abide by and be bound by their terms and conditions.
If applicable, Optionee has executed and delivered the Investment
Representation Statement to the Company. Optionee further represents that
Optionee is purchasing the Shares for Optionee's own account for investment
and not with a view to, or for sale in connection with, a "distribution" of
any of such Shares for purposes of the Securities Act of 1933, as amended
(the "SECURITIES ACT").
3. COMPLIANCE WITH SECURITIES LAWS. Optionee understands and
acknowledges that the Shares have not been registered under the Securities
Act and, notwithstanding any other provision of the Option Agreement to the
contrary, the exercise of any rights to purchase any Shares is expressly
conditioned upon compliance with the Securities Act, all applicable state
securities laws and all applicable requirements of any stock exchange or over
the counter market on which the Company's Common Stock may be listed or
traded at the time of exercise and transfer. Optionee agrees to cooperate
with the Company to ensure compliance with such laws.
4. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that
the Shares have not been registered under the Securities Act and therefore
cannot be resold and must be held indefinitely unless they are registered
under the Securities Act or unless an exemption from such registration is
available and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available
or may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee. Specifically, Optionee has been advised that Rule 144
promulgated under the Securities Act, which permits certain resales of
unregistered securities, is not presently available with respect to the
Shares and, in any event requires that the Shares be fully paid for by means
other than a promissory note
<PAGE>
secured by the Shares themselves and then be held for at least one year (and
in some cases two years) before they may be resold under Rule 144.
5. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing
such Shares is issued (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the optioned Shares, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock
certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 14 of the
Option Agreement.
Optionee shall enjoy rights as a stockholder until such time as
Optionee disposes of the Shares.
6. ESCROW OF SHARES. For purposes of facilitating the enforcement
of the provisions of this Exercise Notice, the Optionee agrees, immediately
upon receipt of the certificate(s) for any Shares, to deliver such
certificate(s), together with an Assignment Separate from Certificate in the
form attached to this Exercise Notice as EXHIBIT A executed by Optionee and
by Optionee's spouse (if required for transfer), in blank, to the Secretary
of the Company, or the Secretary's designee, to hold such certificate(s) and
Assignment Separate from Certificate in escrow and to take all such actions
and to effectuate all such transfers and/or releases as are in accordance
with the terms of this Exercise Notice. The Optionee hereby acknowledges
that the Secretary of the Company, or the Secretary's designee, is so
appointed as the escrow holder with the foregoing authorities as a material
inducement to make this agreement and that said appointment is coupled with
an interest and is accordingly irrevocable. The Optionee agrees that said
escrow holder shall not be liable to any party hereof (or to any other
party). The escrow holder may rely upon any letter, notice or other document
executed by any signature purported to be genuine and may resign at any time.
The Optionee agrees that if the Secretary of the Company, or the Secretary's
designee, resigns as escrow holder for any or no reason, the Board of
Directors of the Company shall have the power to appoint a successor to serve
as escrow holder pursuant to the terms of this Exercise Notice.
7. RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares
or any interest therein will receive and hold such Shares or interest subject
to the provisions of this Exercise Notice and the Option Agreement. Any sale
or transfer of the Company's Shares shall be void unless the provisions of
this Agreement are met.
8. TAX CONSULTATION. Optionee understands that Optionee may
suffer adverse tax consequences as a result of Optionee's purchase or
disposition of the Shares. Optionee represents that Optionee has consulted
with any tax consultants Optionee deems advisable in connection with the
purchase or disposition of the Shares and that Optionee is not relying on the
Company for any tax advice.
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<PAGE>
9. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. Optionee understands and agrees that the
Company shall cause the legends set forth below or legends substantially
equivalent thereto, to be placed upon any certificate(s) evidencing ownership
of the Shares together with any other legends that may be required by state
or federal securities laws:
(i) THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO CERTAIN RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION
AGREEMENT AND THE EXERCISE NOTICE BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(b) STOP-TRANSFER NOTICES. Optionee agrees that, in order
to ensure compliance with the restrictions referred to herein, the Company
may issue appropriate "stop transfer" instructions to its transfer agent, if
any, and that, if the Company transfers its own securities, it may make
appropriate notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required
(i) to transfer on its books any Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Agreement or (ii)
to treat as owner of such Shares or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such Shares shall have
been so transferred.
10. MARKET STANDOFF AGREEMENT. In connection with the initial
public offering of the Company's securities and upon request of the Company
or the underwriters managing any underwritten offering of the Company's
securities, Optionee hereby agrees not to sell,
-3-
<PAGE>
make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Shares (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting
the foregoing as may be requested by the underwriters at the time of the
public offering.
11. SUCCESSORS AND ASSIGNS. The Company may assign any of its
rights under this Agreement to single or multiple assignees, and this
Agreement shall inure to the benefit of the successors and assigns of the
Company. Subject to the restrictions on transfer herein set forth, this
Agreement shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
12. INTERPRETATION. Any dispute regarding the interpretation of
this Agreement shall be submitted by Optionee or by the Company forthwith to
the Company's Board of Directors, which shall review such dispute at its next
regular meeting. The resolution of such a dispute by the Board or committee
shall be final and binding on the Company and on Optionee.
13. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed
by and construed in accordance with the laws of the State of California
excluding that body of law pertaining to conflicts of law. Should any
provision of this Agreement be determined by a court of law to be illegal or
unenforceable, the other provisions shall nevertheless remain effective and
shall remain enforceable.
14. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery
or upon deposit in the United States mail by certified mail, with postage and
fees prepaid, addressed to the other party at its address as shown below
beneath its signature, or to such other address as such party may designate
in writing from time to time to the other party.
15. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
16. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company
the full Exercise Price for the Shares.
-4-
<PAGE>
17. ENTIRE AGREEMENT. The Notice of Stock Option Grant/Option
Agreement are incorporated herein by reference. This Agreement and the
Notice of Stock Option Grant/Option Agreement constitute the entire agreement
of the parties and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and is governed by California law except for that body of law
pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: NETWORK COMPUTER, INC.
By:
- ----------------------------- -----------------------------
((Optionee))
Title:
-----------------------------
Address: ((OptioneeAddress1)) Address: 1000 Bridge Parkway
((OptioneeAddress2)) Redwood Shores, CA 94065
I, _____________________________, spouse of Optionee, have read and
hereby approve the foregoing Exercise Notice. In consideration of the
Company's granting my spouse the right to purchase the Shares as set forth in
the Exercise Notice, I hereby agree to be irrevocably bound by the Exercise
Notice and Option Agreement and further agree that any community property or
other such interest shall be similarly bound by the terms of the Exercise
Notice. I hereby appoint my spouse as my attorney-in-fact with respect to
any amendment or exercise of any rights under the Exercise Notice and Option
Agreement.
--------------------------------
Spouse of Optionee
-5-
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Exercise Notice
between the undersigned and Network Computer, Inc., dated
____________________, 199__ (the "AGREEMENT") Optionee hereby sells, assigns
and transfers unto ______________________ (__________) shares of the Common
Stock of Network Computer, Inc., standing in Optionee's name on the books of
said corporation represented by Certificate No. ______ herewith and does
hereby irrevocably constitute and appoint ___________________________________
to transfer said stock on the books of the within-named corporation with full
power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THE EXERCISE NOTICE AND THE EXHIBITS THERETO.
Date: _____________, 19__.
Signature:
----------------------------------
((Optionee))
----------------------------------
Spouse of Optionee (if applicable)
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
repurchase rights set forth in the Exercise Notice without requiring
additional signatures on the part of Optionee.
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE : ((Optionee))
COMPANY : Network Computer, Inc.
SECURITY : Common Stock
AMOUNT : ___________________ Shares
DATE : ___________________, 199__
In connection with the purchase of the above-listed Securities, I, Optionee,
represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only
and not with a view to, or for the resale in connection with, any
"DISTRIBUTION" thereof for purposes of the Securities Act of 1933, as amended
(the "SECURITIES ACT").
(b) I understand that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of my investment intent as expressed herein.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or
unless an exemption from registration is otherwise available. Moreover, I
understand that the Company is under no obligation to register the
Securities. In addition, I understand that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of
the Securities unless they are registered or such registration is not
required in the opinion of counsel for the Company.
(d) I am familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of issuance of the Securities, such
issuance will be exempt from registration under the Securities Act. In the
event the Company later becomes subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days
thereafter the securities exempt under Rule 701 may be resold, subject to the
satisfaction of certain of the conditions specified by Rule 144, including
among other things: (1) the sale being made through a broker in an
unsolicited "broker's transaction" or in
<PAGE>
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the
availability of certain public information about the Company, and the amount
of securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), if applicable. Notwithstanding this
paragraph (d), I acknowledge and agree to the restrictions set forth in
paragraph (f) below.
In the event that the Company does not qualify under Rule 701
at the time of issuance of the Securities, then the Securities may be resold
in certain limited circumstances subject to the provisions of Rule 144, which
requires among other things: (1) the availability of certain public
information about the Company; (2) the resale occurring not less than one
year after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than two
years, (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934), and (4) the amount of
securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable. I UNDERSTAND THAT
PAYMENT FOR THE SHARES WITH A PROMISSORY NOTE IS NOT DEEMED TO BE FULL
PAYMENT UNDER RULE 144 UNLESS THE NOTE IS SECURED BY ASSETS OTHER THAN THE
SHARES.
(e) I understand that at such time in the future that I
might wish to sell the Securities, there may be no public market upon which
to make such a sale, and that, even if such a public market then exists, the
Company may not be satisfying the current public information requirements of
Rule 144, and that, in such event, I will be precluded from selling the
Securities under Rule 144 even if I have satisfied the one-year minimum
holding period.
(f) I further understand that in the event all of the
applicable requirements of Rule 144 or Rule 701 are not satisfied,
registration under the Securities Act, compliance with Regulation A, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rule 144 and Rule 701 are not exclusive, the Staff of the
Securities and Exchange Commission has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 or Rule 701 will have a
substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their
own risk.
Optionee:
_______________________________
((Optionee))
Date: ________________, 199_ _
<PAGE>
Exhibit 10.34
SERIES E PREFERRED
STOCK PURCHASE AGREEMENT
MAY 12, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Purchase and Sale of Stock.........................................................1
1.1 Sale and Issuance of Series E Preferred Stock............................1
1.2 Closing..................................................................1
2. Representations and Warranties of the Company......................................1
2.1 Organization, Good Standing and Qualification............................2
2.2 Capitalization and Voting Rights.........................................2
2.3 Subsidiaries.............................................................3
2.4 Authorization............................................................3
2.5 Valid Issuance of Preferred and Common Stock.............................4
2.6 Governmental Consents....................................................4
2.7 Offering.................................................................4
2.8 Litigation...............................................................4
2.9 Patents and Trademarks...................................................5
2.10 Compliance with Other Instruments.......................................6
2.11 Agreements; Action......................................................7
2.12 Related-Party Transactions..............................................8
2.13 Permits.................................................................8
2.14 Environmental and Safety Laws...........................................8
2.15 Disclosure..............................................................8
2.16 Private Placement Memorandum............................................9
2.17 Registration Rights.....................................................9
2.18 Corporate Documents.....................................................9
2.19 Title to Property and Assets............................................9
2.20 Financial Statements....................................................9
2.21 Changes................................................................10
2.22 Employee Benefit Plans.................................................11
2.23 Tax Returns, Payments and Elections....................................12
2.24 Minute Books...........................................................12
2.25 Labor Agreements and Actions; Employee Compensation....................13
2.26 Brokers................................................................13
2.27 Year 2000..............................................................13
3. Representations and Warranties of the Investors...................................14
3.1 Authorization...........................................................14
3.2 Purchase Entirely for Own Account.......................................14
3.3 Disclosure of Information...............................................15
3.4 Investment Experience...................................................15
3.5 Accredited Investor.....................................................15
3.6 Restricted Securities...................................................15
3.7 Legends.................................................................15
3.8 Further Representations by Foreign Investors............................15
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<PAGE>
4. Conditions of Investors'Obligations at Closing....................................16
4.1 Representations and Warranties..........................................16
4.2 Performance.............................................................16
4.3 Compliance Certificate..................................................16
4.4 Qualifications..........................................................16
4.5 Proceedings and Documents...............................................16
4.6 Opinion of Company Counsel..............................................16
4.7 Admission Agreement.....................................................16
4.8 Compliance with Law.....................................................17
4.9 Secretary's Certificate.................................................17
4.10 Concurrent Purchase....................................................17
4.11. Waiver of Existing Rights.............................................17
4.12. Delivery of Stock Certificates........................................17
4.13. Restated Certificate..................................................17
4.14. Board of Directors....................................................17
5. Conditions of the Company's Obligations at Closing................................17
5.1 Representations and Warranties..........................................17
5.2 Payment of Purchase Price...............................................17
5.3 Qualifications..........................................................17
5.4 Admission Agreement.....................................................18
6. Miscellaneous.....................................................................18
6.1 Survival of Warranties..................................................18
6.2 Successors and Assigns..................................................18
6.3 Governing Law...........................................................18
6.4 Counterparts............................................................18
6.5 Titles and Subtitles....................................................18
6.6 Notices.................................................................18
6.7 Expenses................................................................18
6.8 Year 2000 Covenant......................................................19
6.9 Additional Sales of Series E Preferred Stock............................19
6.10 Further Limitations on Disposition.....................................19
6.11 Amendments and Waivers.................................................19
6.12 Severability...........................................................20
6.13 Corporate Securities Law...............................................20
6.14 Aggregation of Stock...................................................20
6.15 Entire Agreement.......................................................20
</TABLE>
<TABLE>
<S> <C>
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
EXHIBIT A Amended and Restated Certificate of Incorporation
EXHIBIT B Admission Agreement
EXHIBIT C Opinion of Counsel for the Company
EXHIBIT D Private Placement Memorandum
EXHIBIT E Pro Forma Capitalization Table
</TABLE>
ii
<PAGE>
LIBERATE TECHNOLOGIES
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 12th day of May
1999, by and among Liberate Technologies, a Delaware corporation (the
"Company"), and the investors severally and not jointly listed on SCHEDULE A
hereto, each of which is herein referred to as an "Investor."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES E PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of
State of Delaware on or before the Closing (as defined below) the Fourth
Amended and Restated Certificate of Incorporation in the form attached hereto
as EXHIBIT A (the "Restated Certificate").
(b) On or prior to the Closing (as defined below), the
Company shall have authorized (i) the sale and issuance to the Investors of
the Series E Preferred Stock and (ii) the reservation and issuance of the
shares of Common Stock to be issued upon conversion of the Series E Preferred
Stock (the "Conversion Shares"). The Series E Preferred Stock and the
Conversion Shares shall have the rights, preferences, privileges and
restrictions set forth in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement,
each Investor agrees, severally and not jointly, to purchase from the Company
at the Closing and the Company agrees to sell and issue to each Investor at
the Closing, that number of shares of the Company's Series E Preferred Stock
set forth opposite such Investor's name on SCHEDULE A hereto for the purchase
price set forth thereon.
1.2 CLOSING. The purchase and sale of the Series E Preferred
Stock shall take place at the offices of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California, at
10:00 a.m., on May 12, 1999, or at such other time and place as the Company
and Investors acquiring in the aggregate more than half the shares of Series
E Preferred Stock sold pursuant hereto mutually agree upon orally or in
writing (which time and place are designated as the "Closing"). At the
Closing the Company shall deliver to each Investor a certificate representing
the Series E Preferred Stock that such Investor is purchasing against payment
of the purchase price therefor by check, wire transfer or any combination
thereof.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to each Investor that, except as set forth on
the Schedule of Exceptions (the "Schedule of Exceptions") attached hereto,
which exceptions shall be deemed to be representations and warranties as if
made hereunder:
1
<PAGE>
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the
Company and its Subsidiaries (as defined in Section 2.3 below) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to carry on its business as now conducted and as now
proposed to be conducted, as described in the Private Placement Memorandum
attached hereto as EXHIBIT D (the "Private Placement Memorandum"). Each of
the Company and its Subsidiaries is duly qualified to transact business and
is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business, prospects, financial
condition or properties.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of
the Company consists of:
(a) PREFERRED STOCK. 259,749,900 shares of Preferred Stock
(the "Preferred Stock"), of which (i) 84,999,900 shares have been designated
Series A Preferred Stock (the "Series A Preferred Stock"), 84,999,900 of
which are outstanding, (ii) 25,500,000 of which have been designated Series
A-1 Preferred Stock (the "Series A-1 Preferred Stock"), 20,909,090 of which
are outstanding and 4,545,454 of which have been reserved for issuance by the
Company, (iii) 14,000,000 shares have been designated Series B Preferred
Stock (the "Series B Preferred Stock"), 13,924,533 of which are outstanding
and none of which are reserved for issuance, (iv) 42,500,000 shares have been
designated Series C Preferred Stock (the "Series C Preferred Stock"),
35,326,568 of which are outstanding and 6,759,209 of which have been reserved
for issuance by the Company, (v) 53,500,000 of which have been designated
Series C-1 Preferred Stock (the "Series C-1 Preferred Stock"), 11,013,429 of
which are outstanding and 42,085,777 of which have been reserved for issuance
by the Company, (vi) 8,000,000 of which have been designated Series D
Preferred Stock (the "Series D Preferred Stock"), none of which are
outstanding and 8,000,000 of which have been reserved for issuance by the
Company and (vii) 31,250,000 shares have been designated Series E Preferred
Stock (the "Series E Preferred Stock"), none of which will be outstanding
prior to the Closing and up to 31,250,000 of which may be sold pursuant to
this Agreement. The rights, privileges and preferences of the Preferred
Stock are as set forth in the Company's Restated Certificate attached hereto
as EXHIBIT A.
(b) COMMON STOCK. 407,500,000 shares of common stock, of
which (i) 365,000,000 have been designated Series A Common Stock (the "Series
A Common Stock"), 3,429,143 of which are outstanding and 280,528,303 of which
have been reserved for issuance and (ii) 42,500,000 have been designated
Series B Common Stock (the "Series B Common Stock"), none of which are
outstanding and 42,085,777 of which have been reserved for issuance.
(c) The outstanding shares of Common Stock and Preferred
Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the
"Act") and any relevant state securities laws including Blue Sky laws, or
pursuant to valid exemptions therefrom, and in accordance with the other
applicable provisions of the Act and the rules and regulations thereunder,
and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.
2
<PAGE>
(d) Except for (i) the conversion privileges of the Preferred
Stock and Series B Common Stock, (ii) the rights provided in that certain
Stockholders Agreement, dated August 11, 1997, as amended pursuant to that
certain Admission Agreement dated November 12, 1997 and that certain Waiver
and Amendment No. 1 of Stockholders Agreement dated March 15, 1999 and as
further amended by that certain Admission Agreement of even date herewith
(the "Stockholders Agreement"), (iii) the rights provided in that certain
Put/Call and Voting Agreement dated August 11, 1997, as amended pursuant to
that certain Admission Agreement dated November 12, 1997 and as further
amended by that certain Admission Agreement of even date herewith (the
"Put/Call Agreement"), (iv) currently outstanding options to purchase
6,400,403 shares of Series C Preferred Stock and 18,382,053 shares of Series
A Common Stock granted to employees pursuant to the Company's equity
incentive plans, (v) currently outstanding options to purchase an aggregate
of 13,645,834 shares of Series A Common Stock granted outside of the
Company's equity incentive plans, (vi) currently outstanding options to
purchase 162,916 shares of Series C Preferred Stock granted to vendors
pursuant to the Company's equity incentive plans, (vii) the rights provided
in that certain Convertible Promissory Note Purchase Agreement dated November
12, 1997, and (viii) the rights provided in that certain Convertible Note
Purchase Agreement dated July 23, 1997, there are no outstanding options,
warrants, rights (including conversion or preemptive rights and rights of
first refusal) or agreements for the purchase or acquisition from the Company
of any shares of its capital stock. The Company is not a party or subject to
any agreement or understanding, and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects
or relates to the voting or giving of written consents or proxies with
respect to any of the Company's securities or the voting by a director of the
Company other than the Put/Call Agreement and the Stockholders Agreement.
(e) EXHIBIT E sets forth the outstanding and fully-diluted
capitalization of the Company as of the date hereof immediately prior to the
sale of the Series E Preferred Stock hereunder and on a pro forma basis
assuming the sale and purchase of 31,250,000 shares of Series E Preferred
Stock pursuant to this Agreement.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity, except for Network Computer, Incorporated Nederland
B.V., which is a wholly-owned subsidiary of the Company (the "Subsidiaries").
The Company is not a participant in any joint venture, partnership or
similar arrangement. The Company itself is a majority owned subsidiary of
Oracle Corporation.
2.4 AUTHORIZATION. The Company has full power and authority to
execute and deliver each of this Agreement and the Admission Agreement of
even date herewith, by and among the Company and the Investors, the form of
which is attached hereto as EXHIBIT B (the "Admission Agreement") and to
perform its obligations under this Agreement, the Admission Agreement, the
Stockholders Agreement and the Put/Call Agreement (collectively, the
"Transaction Agreements"). All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Admission Agreement, the
performance of all obligations of the Company hereunder and under the other
Transaction Agreements, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Series E Preferred Stock being sold
hereunder
3
<PAGE>
and the Conversion Shares has been taken or will be taken prior to the
Closing, and this Agreement and the other Transaction Agreements constitute
valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Stockholders Agreement may be
limited by applicable federal or state securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series E
Preferred Stock that is being purchased by the Investors hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable, and will be free and clear of all liens, claims,
charges, security interests, pledges or encumbrances of any kind and free of
restrictions on transfer other than restrictions on transfer under this
Agreement and the other Transaction Agreements and under applicable state and
federal securities laws and will possess all of the rights, privileges and
preferences provided therefor in the Restated Certificate. The Conversion
Shares have been duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Restated Certificate, will be duly and
validly issued, fully paid, and nonassessable and will be free and clear of
all liens, claims, charges, security interests, pledges or encumbrances of
any kind and free of restrictions on transfer other than restrictions on
transfer under this Agreement and the other Transaction Agreements and under
applicable state and federal securities laws and will possess all of the
rights and powers provided therefor in the Restated Certificate.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except (i) the filing of the
Restated Certificate with the Secretary of State of Delaware; and (ii) the
filing pursuant to Section 25102(f) of the California Corporate Securities
Law of 1968, as amended, and the rules thereunder, which filing will be
effected within 15 days of the sale of the Series E Preferred Stock
hereunder, or such other post-closing filings as may be required.
2.7 OFFERING. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 3 of this Agreement, the
offer, sale and issuance of the shares of Series E Preferred Stock as
contemplated by this Agreement are exempt from the registration requirements
of any applicable state and federal securities laws, and neither the Company
nor any authorized agent acting on its behalf will take any action hereafter
that would cause the loss of such exemption.
2.8 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the Company's or any of its Subsidiaries'
knowledge, currently threatened against the Company or any of its
Subsidiaries that questions the validity of this Agreement or any other
Transaction Agreements or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby or thereby,
or related to the title and ownership of any Intellectual Property (as
defined below in Section 2.9) necessary for its
4
<PAGE>
business as now conducted and as proposed to be conducted as described in the
Private Placement Memorandum or that might result, either individually or in
the aggregate, in any material adverse changes in the assets, liabilities,
properties, condition, affairs, operating results, prospects or business of
the Company (as such business is now conducted and as it is proposed to be
conducted as described in the Private Placement Memorandum), financially or
otherwise, or any change in the current equity ownership of the Company. The
foregoing includes, without limitation, actions, suits, proceedings or
investigations pending or threatened involving the prior employment of any of
the Company's or any of its Subsidiaries' employees, their use in connection
with the Company's or any of its Subsidiaries' business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. Neither the Company
nor any of its Subsidiaries is a party or subject to and none of the assets
of the Company or any of its Subsidiaries is bound by the provisions of any
order, writ, injunction, judgment or decree of any court or government agency
or instrumentality. There is no action, suit, proceeding or investigation by
the Company or any of its Subsidiaries currently pending or that the Company
intends to initiate.
2.9 PATENTS AND TRADEMARKS.
(a) Each of the Company and its Subsidiaries has sufficient
title and ownership of or licenses to and has the right to bring actions for
infringement of all patents, trademarks, service marks, trade names, trade
dress, copyrights, computer software (including source code and object code),
trade secrets, information, proprietary rights and processes (the
"Intellectual Property") necessary for its and its Subsidiaries' business as
now conducted and as proposed to be conducted as described in the Private
Placement Memorandum without any conflict with or infringement of the rights
of others. Other than licenses or agreements entered into in the ordinary
course of business and arising from the purchase of "off the shelf" or
standard products, there are no outstanding options, licenses or agreements
of any kind relating to the Intellectual Property, nor is the Company or any
of its Subsidiaries as a licensee bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information
and other proprietary rights and processes of any other person or entity. To
the Company's and its Subsidiaries' knowledge, no third party is infringing
any Intellectual Property, except for such infringements, if any, as would
not, either individually or in the aggregate, have a material adverse effect
on its business, properties, prospects or financial condition. Neither the
Company nor any of its Subsidiaries has received any communications alleging
that, and neither the Company nor any of its Subsidiaries is otherwise aware
that either the Company or any of its Subsidiaries has violated or, by
conducting its business as proposed, would violate or infringe any of the
Intellectual Property rights of any other person or entity.
(b) The Company is not aware that any of its or its
Subsidiaries' employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or any of its Subsidiaries or that would conflict with the
Company's or any of its Subsidiaries' business as proposed to be conducted.
Neither the execution nor delivery of this Agreement or the Admission
Agreement, nor the performance of the transactions contemplated hereby or
thereby, nor the carrying on of the Company's or any of its Subsidiaries'
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business by the employees, agents and independent contractors of the Company
or any of its Subsidiaries, nor the conduct of the Company's or any of its
Subsidiaries' business as proposed, will, to the Company's or any of its
Subsidiaries' best knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees, agents
and independent contractors is now obligated. In furtherance, and not in
limitation, of the foregoing, to the Company's best knowledge, at no time
during the conception of or reduction of any of the Company's Intellectual
Property to practice was any developer, inventor or other contributor to such
Intellectual Property operating under any grants from any governmental entity
or agency or private source, performing research sponsored by any
governmental entity or agency or private source or, to its best knowledge,
subject to any employment agreement or invention assignment or nondisclosure
agreement or other obligation with any third party that could materially
adversely affect the Company's rights in such Intellectual Property. The
Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its or its
Subsidiaries' employees made prior to their employment or retention by the
Company or one of its Subsidiaries, except for inventions, trade secrets or
proprietary information that have been assigned to the Company.
2.10 COMPLIANCE WITH OTHER INSTRUMENTS. Each of the Company and
its Subsidiaries has not violated and is not in violation or default in any
respect of any provision of its Restated Certificate or Bylaws, or in any
respect of any instrument, judgment, order, writ, decree, permit or license
of or from any court or any federal, state or local government or
governmental agency or other governmental authority or arbitration authority
(each a "Governmental Authority"), or any mortgage, indenture, obligation,
contract, agreement, bond, debenture, note, other evidence of indebtedness,
deed of trust, loan agreement, lease, judgment, injunction, or any other
instrument each binding upon the Company or any of its Subsidiaries or by
which the Company and its Subsidiaries or any of their respective properties
may be bound or to which it is a party (each, a "Document"), or of any
provision of any federal, state or local statute, rule, regulation or
governmental requirement applicable to the Company or any of its Subsidiaries
the violation or default of which would have a material adverse effect on the
Company's or any of its Subsidiaries' business, including, without
limitation, the Foreign Corrupt Practices Act, the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the Export Administration Act
and the Comprehensive Environmental Response, Compensation and Liability Act,
and neither the Company nor any of its Subsidiaries has any liability or
potential liability for any such violations of any affiliates or other third
party. The execution and delivery of this Agreement and the Admission
Agreement and the performance of this Agreement and the other Transaction
Agreements, and the consummation of the transactions contemplated hereby and
thereby will not (a) result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, a
default under any such Document, (b) result in the termination of, or the
acceleration or cancellation of any obligation under, or give rise to a right
by any party to terminate or amend its obligations under any such Document or
(c) constitute an event that results in the creation of any lien, charge or
encumbrance upon any assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture, or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations or any of its assets or properties.
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2.11 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated in this
Agreement and by the other Transaction Agreements, there are no agreements,
understandings or proposed transactions between the Company or any of its
Subsidiaries and any of its officers, directors, affiliates, or any affiliate
thereof.
(b) There are no agreements, understandings (oral or
written), instruments, contracts, proposed transactions, judgments, orders,
writs or decrees to which the Company or any of its Subsidiaries or any of
its officers, directors or any Affiliate (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended ("Affiliate")) thereof is a party
or by which any of them are bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company or any of its
Subsidiaries in excess of, $100,000 (other than obligations of, or payments
to, the Company or any of its Subsidiaries arising from purchase or sale
agreements entered into in the ordinary course of business), (ii) the license
of any patent, copyright, trade secret or other proprietary right to or from
the Company or any of its Subsidiaries (other than the license of the
Company's or any of its Subsidiaries' software and products in the ordinary
course of business), or (iii) provisions restricting or affecting the
development, manufacture, sale, license or distribution of the Company's or
any of its Subsidiaries' products or services.
(c) Neither the Company nor any of its Subsidiaries has (i)
declared or paid any dividends or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or any other liabilities individually in
excess of $100,000 or, in the case of indebtedness and/or liabilities
individually less than $100,000, in excess of $250,000 in the aggregate,
(iii) made any loans or advances to any person, other than ordinary advances
for travel expenses or (iv) sold, exchanged or otherwise disposed of any of
its assets or rights, other than the sale of its inventory in the ordinary
course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including
persons or entities the Company or any of its Subsidiaries has reason to
believe are affiliated therewith) shall be aggregated for the purpose of
meeting the individual minimum dollar amounts of such subsections.
(e) Neither the Company nor any of its Subsidiaries is a
party to or is bound by any contract, agreement or instrument, or subject to
any restriction under its Restated Certificate or Bylaws that adversely
affects its business as now conducted or as proposed to be conducted as
described in the Private Placement Memorandum, or its properties, financial
condition or prospects.
(f) Neither the Company nor any of its Subsidiaries is
engaged, nor has engaged in the past six (6) months, in any discussion (i)
with any representative of any corporation or corporations or other entity
regarding the consolidation or merger of the Company or any of its
Subsidiaries with or into any such corporation or corporations, (ii) with any
corporation, partnership, association or other business entity or any
individual regarding the sale,
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conveyance or disposition of all or substantially all of the assets of the
Company or any of its Subsidiaries or a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of
the Company or any of its Subsidiaries is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
2.12 RELATED-PARTY TRANSACTIONS. No employee, officer, or director
of the Company or any of its Subsidiaries or member of his or her immediate
family is indebted to the Company or any of its Subsidiaries, nor is the
Company or any of its Subsidiaries indebted (or committed to make loans or
extend or guarantee credit) to any of them. To the Company's or any of its
Subsidiaries' best knowledge, none of such persons has any direct or indirect
ownership interest in any firm or corporation with which the Company or any
of its Subsidiaries is affiliated or with which the Company or any of its
Subsidiaries has a business relationship, or any firm or corporation that
competes with the Company or any of its Subsidiaries, except that employees,
officers, or directors of the Company or any of its Subsidiaries and members
of their immediate families may own stock in publicly traded companies that
may compete with the Company or any of its Subsidiaries; PROVIDED, that no
officer of the Company or any of its Subsidiaries owns more than two percent
(2%) of such stock and such officer or members of such officer's immediate
family are not involved in the management of such companies. Except as set
forth on SCHEDULE 2.12, no shareholder, employee, officer or director of the
Company or any of its Subsidiaries nor any member of the immediate family of
any employee, officer or director of the Company or any of its Subsidiaries
is directly or indirectly interested in any material contract with the
Company or any of its Subsidiaries.
2.13 PERMITS. The Company and its Subsidiaries have all
franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could
materially and adversely affect the business, properties, prospects, or
financial condition of the Company or any of its Subsidiaries, and the
Company and its Subsidiaries believe they can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to
be conducted. Neither the Company nor any of its Subsidiaries is in default
in any material respect under any of such franchises, permits, licenses, or
other similar authority.
2.14 ENVIRONMENTAL AND SAFETY LAWS. Neither the Company nor any of
its Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to the
Company's knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law or regulation and no such
expenditures are planned.
2.15 DISCLOSURE. The Company has fully provided each Investor with
all the information that such Investor has requested for deciding whether to
purchase the Series E Preferred Stock and all the information that the
Company believes is reasonably necessary to enable such Investor to make such
decision. Neither this Agreement, the Admission Agreement, nor any other
statements or certificates made or delivered in connection herewith or
therewith contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements herein or therein not
misleading.
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2.16 PRIVATE PLACEMENT MEMORANDUM. The Private Placement
Memorandum previously delivered to each Investor has been prepared in good
faith by the Company and does not contain any untrue statement of a material
fact nor does it omit to state a material fact necessary to make the
statements made therein not misleading, except that with respect to
projections contained in the Private Placement Memorandum, the Company
represents only that such projections were prepared in good faith and that
the Company reasonably believes there is a reasonable basis for such
projections.
2.17 REGISTRATION RIGHTS. Except as provided in the Stockholders
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.18 CORPORATE DOCUMENTS. The Board of Directors and the
stockholders of the Company have duly approved and adopted the Restated
Certificate attached hereto as EXHIBIT A. True and correct copies of the
Restated Certificate and Bylaws of the Company are in the form attached as
exhibits to the Secretary's Certificate to be delivered by the Company to the
Investors pursuant to Section 4.9 hereto.
2.19 TITLE TO PROPERTY AND ASSETS. The Company and its
Subsidiaries have good, valid and marketable title to, or a valid leasehold
interest in, all of its property and assets free and clear of all mortgages,
liens, loans and encumbrances, except such encumbrances and liens that arise
in the ordinary course of business and do not materially impair the Company's
or any of its Subsidiaries' ownership or use of such property or assets.
Such properties and assets are, to the Company's knowledge, sufficient to
allow the Company to conduct its business as now conducted and as proposed to
be conducted. With respect to the property and assets it leases, the Company
and its Subsidiaries are in compliance with such leases.
2.20 FINANCIAL STATEMENTS. The Company has delivered to each
Investor its audited consolidated financial statements (balance sheet and
statement of operations, statement of changes in stockholders' equity and
statement of cash flows, including notes thereto) at May 31, 1998 and for the
fiscal year then ended, and its unaudited consolidated financial statements
(balance sheet and statement of operations) as at and for the nine-month
period ended February 28, 1999 (collectively, the "Financial Statements").
The Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated and with each other, except that the unaudited Financial
Statements may not contain all footnotes required by generally accepted
accounting principles. The Financial Statements (i) have been compiled from
and are in accordance with the Company's books and records, (ii) are complete
and correct in all material respects and (iii) fairly present the financial
condition, assets and liabilities and operating results of the Company and
its Subsidiaries as of the dates, and for the periods, indicated therein,
subject in the case of the unaudited Financial Statements to normal year-end
audit adjustments. Except as set forth in the Financial Statements, neither
the Company nor any of its Subsidiaries has any material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to May 31, 1998 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results
of
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the Company. Except as disclosed in the Financial Statements, the Company is
not a guarantor or indemnitor of any indebtedness of any other person, firm
or corporation. The Company maintains and will continue to maintain a
standard system of accounting established and administered in accordance with
generally accepted accounting principles. During the two fiscal years ended
1997 and 1998 and the period between May 31, 1998 and the Closing, there has
not been any change in the method of accounting or keeping of books of
account or accounting practices with respect to the Company or its business.
2.21 CHANGES. Since February 28, 1999 there has not been:
(a) any change or changes in the assets, liabilities,
financial condition, operating results, prospects or business of the Company
or any of its Subsidiaries from that reflected in the Financial Statements as
of and for the period ending February 28, 1999, which could reasonably be
expected to materially and adversely affect the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(b) any damage, destruction or loss, whether or not covered
by insurance, which could reasonably be expected to materially and adversely
affect the assets, properties, financial condition, operating results,
prospects or business of the Company or any of its Subsidiaries (as such
business is presently conducted and as it is proposed to be conducted);
(c) any waiver, cancellation, compromise or release by the
Company or any of its Subsidiaries of a valuable right or of a material debt
owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company or any of its
Subsidiaries, except in the ordinary course of business and that is not
material to the assets, properties, financial condition, operating results,
prospects or business of the Company (as such business is presently conducted
and as it is proposed to be conducted);
(e) any material change or amendment to a material contract
or arrangement by which the Company or any of its Subsidiaries or any of its
assets or properties is bound or subject;
(f) any change in any compensation arrangement or agreement
with any employee, except changes occurring in the ordinary course of
business in accordance with past practice;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any
officer or key employee of the Company or any of its Subsidiaries whose
resignation or termination would have a material adverse effect on the
Company's or any of its Subsidiaries' business or prospects; and neither the
Company nor any of its Subsidiaries knows of the impending resignation or
termination of employment of any such officer or key employee;
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(i) any change in any of the Company's relations with, or any
loss of or material order cancellation by, any major customer of the Company
or any of its Subsidiaries or, to the Company's knowledge, any threat of any
change in any of its relations with, or any threat of loss of or material
order cancellation by any major customer of the Company or any of its
Subsidiaries, which, individually or in the aggregate, has had, or reasonably
could be expected to have, a material adverse effect on the assets,
properties, financial condition, operating results, prospects or business of
the Company or any of its Subsidiaries (as such business is presently
conducted and as it is proposed to be conducted as described in the Private
Placement Memorandum);
(j) any mortgage, pledge, transfer of a security interest in,
or lien, created, with respect to any of the Company's or any of its
Subsidiaries' material properties or assets, except liens for taxes not yet
due or payable;
(k) any loans or guarantees made by the Company or any of its
Subsidiaries to or for the benefit of its employees, officers or directors,
or any members of their immediate families, other than travel advances and
other advances made in the ordinary course of its business;
(l) any declaration, setting aside or payment or other
distribution in respect of any of the Company's or any of its Subsidiaries'
capital stock, or any direct or indirect redemption, purchase or other
acquisition of any of such stock by the Company or any of its Subsidiaries;
(m) to the Company's or any of its Subsidiaries' knowledge,
any other event or condition of any character that might materially and
adversely affect the assets, properties, financial condition, operating
results, prospects or business of the Company or any of its Subsidiaries (as
such business is presently conducted and as it is proposed to be conducted);
or
(n) any agreement or commitment by the Company to do any of
the things described in this Section 2.21.
2.22 EMPLOYEE BENEFIT PLANS. SCHEDULE 2.22 hereto sets forth a
list of each "employee pension benefit plan" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
maintained or contributed to by the Company or any of its Subsidiaries (the
"Retirements Plans"). Neither the Company nor any entity which is treated as
a single employer along with the Company under Section 414(b), (c), (m) or
(o) of the Internal Revenue Code, as amended, (the "Code") maintains or
contributes to, or has ever maintained or contributed to, or been required to
contribute to a multiemployer plan within the definition of Section 3(37) of
ERISA or any plan subject to Title IV of ERISA. SCHEDULE 2.22 hereto sets
forth a list of each "employee welfare benefit plan" (as defined in Section
3(1) of ERISA) and each other employee benefit plan, program, arrangement,
practice or contract, whether formal or informal, maintained by the Company
or any of its Subsidiaries providing benefits or compensation to or on behalf
of employees or former employees of the Company (the "Benefits Plans"). The
Retirement Plans and Benefit Plans are in compliance in all material respects
with the presently applicable provisions of ERISA and the Code, and the
Retirement
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Plans are qualified under Section 401(a) of the Code. No contributions are
required to be made by the Company or any of its Subsidiaries to any
Retirement Plan and all other liabilities with respect to any Retirement or
Benefit Plan shall have been satisfied prior to or on the Closing Date. Each
of the Company and its Subsidiaries has filed or caused to be filed all
reports required to be filed by it with the Internal Revenue Service or the
Department of Labor under applicable provisions of ERISA and the Code with
respect to each of the Retirement Plans and Benefit Plans. No liability to
the Pension Benefit Guaranty Corporation has been incurred with respect to
any retirement Plan subject to Title IV of ERISA that has not been satisfied
in full.
2.23 TAX RETURNS, PAYMENTS AND ELECTIONS. Each of the Company and
its Subsidiaries has filed on a timely basis all tax returns and reports
(including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects except to
the extent that a reserve has been reflected on the Financial Statements in
accordance with generally accepted accounting principles. Each of the
Company and its Subsidiaries has paid all taxes and other assessments due,
except those contested by it in good faith that are listed in the Schedule of
Exceptions and except to the extent that a reserve has been reflected on the
Financial Statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Financial
Statements is adequate for taxes due or accrued as of the date thereof. The
Company has not elected pursuant to the Code, to be treated as a Subchapter S
corporation or a collapsible corporation pursuant to Section 1362(a) or
Section 341(f) of the Code, nor has it made any other elections pursuant to
the Code (other than elections that relate solely to methods of accounting,
depreciation or amortization) that would have a material effect on the
Company, its financial condition, assets, properties, operating results,
prospects or its business as presently conducted or proposed to be conducted
or any of its properties or material assets. Neither the Company nor any of
its Subsidiaries has ever had any tax deficiency proposed or assessed against
it and has not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge. None of the
Company's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by
governmental authorities and neither the Company nor any of its Subsidiaries
is in dispute with any tax authorities. Since May 31, 1998, the date of the
audited Financial Statements, neither the Company nor any of its Subsidiaries
has incurred any taxes, assessments or governmental charges other than in the
ordinary course of business and the Company has made adequate provisions on
its books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. Each of
the Company and its Subsidiaries have withheld or collected from each payment
made to each of its employees, the amount of all taxes (including, but not
limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories. Neither the Company nor any Subsidiary is a party
to any tax sharing agreement with a party who is not a subsidiary. Neither
the Company nor any Subsidiary is liable for any taxes of another person that
is not a subsidiary.
2.24 MINUTE BOOKS. The minute books of the Company that have been
made available to the Investors contain a complete summary of all meetings of
directors and stockholders since the time of incorporation and reflect all
transactions referred to in such minutes accurately in all material respects.
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2.25 LABOR AGREEMENTS AND ACTIONS; EMPLOYEE COMPENSATION. Neither
the Company nor any of its Subsidiaries is bound by or subject to (and none
of its assets or properties is bound by or subject to) any written or oral,
express or implied, contract, commitment or arrangement with any labor union
or employee association, and no labor union or employee association has
requested or, to the Company's or its Subsidiaries' knowledge, has sought to
represent any of the employees, representatives or agents of the Company or
its Subsidiaries. There is no strike or other labor dispute involving the
Company pending, or to the Company's or its Subsidiaries' knowledge,
threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, prospects or business of
the Company (as such business is presently conducted and as it is proposed to
be conducted), nor is the Company or its Subsidiaries aware of any labor
organization activity involving its or its Subsidiaries' employees. Neither
the Company nor its Subsidiaries are aware that any officer or key employee,
or that any group of key employees, intends to terminate their employment
with the Company or its Subsidiaries, nor does the Company or its
Subsidiaries have a present intention to terminate the employment of any of
the foregoing. The employment of each officer and employee of the Company
and its Subsidiaries is terminable at the will of the Company or its
Subsidiaries. The Company and its Subsidiaries have complied in all material
respects with all applicable state and federal equal employment opportunity
and other laws related to employment. SCHEDULE 2.25 lists each employment
contract, deferred compensation agreement, bonus plan, incentive plan, profit
sharing plan, retirement agreement, pension, stock, stock option, other
equity-based compensation, savings, bonus, incentive compensation, and other
employee benefit plans, arrangements, contracts, policies or practices
whether written or unwritten, qualified or unqualified, funded or unfunded or
other employee compensation agreement to which the Company or its
Subsidiaries are a party or bound. Each employee of the Company and its
Subsidiaries has executed a proprietary information and inventions agreement
substantially in the form previously provided to the Investors.
2.26 BROKERS. Neither the Company nor its Subsidiaries have any
contract, arrangement or understanding with any broker, finder, investment
banker, financial advisor or similar agent with respect to the transactions
contemplated by this Agreement.
2.27 YEAR 2000.
(a) For purposes of this Agreement, "Year 2000 Compliant"
means that the applicable software, hardware and firmware product (each, a
"Computer System"), including without limitation, embedded microcontrollers
and the Company's software products currently under development will
correctly differentiate between years in different centuries and will
accurately process date/time data, including, but not limited to, recording,
storing, processing, comparing, sequencing, calculating and presenting from,
into and between the twentieth and twenty-first centuries, including leap
year calculations, and will accurately process any information dependent on
or relating to such dates without loss of functionality, data integrity or
performance.
(b) The Company has conducted an inventory of the Computer
Systems and other computer-based systems used in the Company's business to
determine whether such systems are Year 2000 Compliant. The Company is in
the process of upgrading such Computer Systems that are not Year 2000
Compliant, including without limitation, its
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accounting systems, to ensure that such systems are Year 2000 Compliant prior
to December 31, 1999 or such earlier date on which the applicable Computer
Systems may shut down or produce incorrect calculations or otherwise
malfunction without becoming totally inoperable and is not aware of any
events or circumstances that would delay or preclude the upgrading and
implementation of such upgrades prior to December 31, 1999 or such earlier
date on which the applicable Computer Systems may shut down or produce
incorrect calculations or otherwise malfunction without becoming totally
inoperable. The Company does not account for the costs incurred by it of
upgrading its internal Computer Systems to be Year 2000 Compliant separately
from the costs of upgrading its internal Computer Systems generally.
However, the costs of upgrading its internal Computer Systems to be Year 2000
Compliant will not be material.
(c) All software licensed or sublicensed by the Company
(whether or not developed, manufactured or otherwise produced by the Company)
to third parties is Year 2000 Compliant; provided, however, that except as
otherwise provided in this Section 2.27, the Company makes no representation
or warranty as to whether any Computer Systems that interact with such
software are Year 2000 Compliant. The Company has run tests on the hardware
manufactured by the Company's OEM licensees to determine whether the
Company's products running on such hardware are Year 2000 Compliant, and to
the Company's best knowledge, the operation of the Company's products on such
hardware is or will be Year 2000 Compliant prior to December 31, 1999 or such
earlier date on which the applicable Computer Systems may shut down or
produce incorrect calculations or otherwise malfunction without becoming
totally inoperable. The parties hereto acknowledge that the Company has not
developed nor manufactured the hardware to be used with or to operate and run
the Company's products, nor does the Company sell any hardware or have any
current plans to develop any hardware.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each
Investor, as to itself, severally and not jointly, hereby represents and
warrants that:
3.1 AUTHORIZATION. Such Investor has full power and authority to
enter into this Agreement and the Admission Agreement, and each such
Agreement constitutes its valid and legally binding obligation, enforceable
in accordance with its terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies and (iii) to the extent the indemnification
provisions contained in the Stockholders Agreement may be limited by
applicable federal or state securities laws or public policy.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with such Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Series E Preferred Stock to be received by such
Investor and the Conversion Shares (collectively, the "Securities") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that such Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, such Investor further represents that such Investor does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities.
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3.3 DISCLOSURE OF INFORMATION. Such Investor represents that it
has received the Private Placement Memorandum and the Company's financial
model and projections. Such Investor further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Series E Preferred Stock and
the business, properties, prospects and financial condition of the Company.
The foregoing, however, does not limit or modify the representations and
warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
3.4 INVESTMENT EXPERIENCE. Such Investor acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and
has such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series E
Preferred Stock. If other than an individual, Investor also represents it
has not been organized for the purpose of acquiring the Series E Preferred
Stock.
3.5 ACCREDITED INVESTOR. Such Investor is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC")
Rule 501 of Regulation D, as presently in effect.
3.6 RESTRICTED SECURITIES. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Act, only in certain limited circumstances. In this
connection, such Investor represents that it is familiar with SEC Rule 144,
as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.7 LEGENDS. It is understood that the certificates evidencing
the Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
(b) "The securities represented by this certificate are
subject to certain of the terms and conditions of a certain Put/Call and
Voting Agreement and a certain Stockholders Agreement. Copies of such
agreements are on file at the principal office of the Company."
(c) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
3.8 FURTHER REPRESENTATIONS BY FOREIGN INVESTORS. If an Investor
is not a United States person, such Investor hereby represents that he or she
has satisfied himself or herself as to the full observance of the laws of his
or her jurisdiction by such Investor in connection with any invitation to
subscribe for the Securities or any use of this Agreement,
15
<PAGE>
including (i) the legal requirements within his jurisdiction for the purchase
of the Securities by such Investor, (ii) any foreign exchange restrictions
applicable to such purchase, (iii) any governmental or other consents that
may need to be obtained by such Investor, and (iv) the income tax and other
tax consequences to such Investor, if any, that may be relevant to the
purchase, holding, redemption, sale, or transfer of the Securities. Such
Investor's subscription and payment for the Securities will not violate any
applicable securities or other laws of his or her jurisdiction.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING. The
obligations of each Investor under subsection 1.1(c) of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor
who does not consent thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
4.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before the
Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
operations, properties, prospects, assets or condition of the Company since
the date of the Financial Statements.
4.4 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing
and all documents incident thereto, including all necessary or appropriate
consents, permits and waivers, shall be reasonably satisfactory in form and
substance to counsel for each Investor, and they shall have received all such
counterpart original and certified or other copies of such documents as they
may reasonably request.
4.6 OPINION OF COMPANY COUNSEL. Each Investor shall have received
from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
for the Company, an opinion, dated as of the Closing, in the form attached
hereto as EXHIBIT C.
4.7 ADMISSION AGREEMENT. The Admission Agreement, in the form
attached as EXHIBIT B, shall be executed by all applicable parties and the
appropriate approvals for amending the Put/Call and the Stockholders
Agreement shall have been obtained.
16
<PAGE>
4.8 COMPLIANCE WITH LAW. No law, regulation, order or injunction
of any court or governmental authority of competent jurisdiction shall be in
effect which prohibits the consummation of the transactions contemplated
hereby.
4.9 SECRETARY'S CERTIFICATE. Each Investor shall have received a
certificate executed by the Company's Secretary and attaching the Company's
Restated Certificate and Bylaws as exhibits.
4.10 CONCURRENT PURCHASE. All other Investors shall have
concurrently purchased the amount of Series E Preferred Stock to be purchased
by them pursuant to this Agreement.
4.11 WAIVER OF EXISTING RIGHTS. On or before the Closing, any
preemptive rights, rights of first refusal and other rights (including but
not limited to, the right to receive notice of the transaction or the
transactions contemplated by this Agreement and the Admission Agreement) of
the parties to the Stockholders Agreement and the Put/Call Agreement shall
have been waived as and to the extent such rights apply to the issuance and
sale of the Securities hereunder and the other transactions contemplated
hereby and by the Admission Agreement.
4.12 DELIVERY OF STOCK CERTIFICATES. The Company shall have
delivered to such Investor the stock certificate specified for such Investor
in Section 1.1(c).
4.13 RESTATED CERTIFICATE. The Restated Certificate shall have
been duly approved and adopted by the Board of Directors and stockholders of
the Company and shall have been duly filed with and accepted by the Secretary
of State of the State of Delaware and shall be in full force and effect under
the Delaware General Corporation Law.
4.14 BOARD OF DIRECTORS. The directors of the Company shall be
Messrs. Barksdale, Corfield, Ellison, Henley, Kertzman and Roux.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to each Investor under this Agreement are subject
to the fulfillment on or before the Closing of each of the following
conditions by that Investor:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each of the Investors contained in Section 3 shall be true on
and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 PAYMENT OF PURCHASE PRICE. The Investor shall have delivered
the purchase price specified in Section 1.1(c).
5.3 QUALIFICATIONS. All authorizations, approvals, or permits, if
any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
17
<PAGE>
5.4 ADMISSION AGREEMENT. The Admission Agreement, in the form
attached as EXHIBIT B, shall be executed by all applicable parties and all
approvals for amending the Put/Call and the Stockholders Agreement shall have
been obtained.
6. MISCELLANEOUS.
6.1 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
6.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and
be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.3 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
6.4 COUNTERPARTS. This Agreement may be executed by facsimile in
two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other
address as such party may designate by ten (10) days' advance written notice
to the other parties.
6.7 EXPENSES. Irrespective of whether the Closing is effected,
the Company shall pay all costs and expenses that it incurs with respect to
the negotiation, execution, delivery and performance of this Agreement. If
the Closing is effected, the Company shall, at the Closing, reimburse the
reasonable fees and expenses of LeBoeuf, Lamb, Greene & MacRae, LLP, special
counsel for certain of the Investors, not to exceed $25,000. If any action
at law or in equity is necessary to enforce or interpret the terms of this
Agreement, the Admission Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party
may be entitled.
18
<PAGE>
6.8 YEAR 2000 COVENANT. The Company covenants and agrees that it
will use commercially reasonable efforts to assure that its business,
financial condition and results of operations are not materially adversely
affected by Computer Systems that are not Year 2000 Compliant. The Company
further covenants that it will continue to use commercially reasonable
efforts to ensure that its software products are Year 2000 Compliant,
including tests on hardware manufactured by the Company's OEM licensees to
determine whether the Company's products running on such hardware are Year
2000 Compliant.
6.9 ADDITIONAL SALES OF SERIES E PREFERRED STOCK. The Company
covenants and agrees that it will not issue or sell shares of its Series E
Preferred Stock other than pursuant to this Agreement without the prior
written consent or agreement of at least a majority of the then outstanding
shares of Series E Preferred Stock.
6.10 FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations made by the Investors in Section 3 above, each
such Investor agrees not to make any disposition of all or any portion of the
Securities unless and until the transferee has agreed in writing for the
benefit of the Company to be bound by Section 3 of this Agreement, this
Section 6.10 and the Admission Agreement provided and to the extent this
Section and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if reasonably requested by the Company, such Investor shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the
Company that such disposition will not require registration of such
securities under the Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor (i) that is a partnership to a
partner of such partnership or a retired partner of such partnership who
retires after the date hereof, or to the estate of any such partner or
retired partner or the transfer by gift, will or intestate succession of any
partner to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or his or her spouse or (ii) that is a corporation
to any wholly-owned or majority-owned subsidiary or Affiliate of such
Investor, if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if it, he or she were an original Investor
hereunder.
6.11 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of eighty-one percent (81%) of the Common Stock issued or issuable upon
conversion of the Series E Preferred Stock (excluding shares of Series E
Preferred Stock
19
<PAGE>
held by Oracle Corporation or its Affiliates). Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder
of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each
future holder of all such securities, and the Company.
6.12 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.13 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES THAT ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF
SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
6.14 AGGREGATION OF STOCK. All shares of the Preferred Stock held
or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
6.15 ENTIRE AGREEMENT. This Agreement and the documents referred
to herein constitute the entire agreement among the parties and no party
shall be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth herein or
therein.
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
COMPANY:
LIBERATE TECHNOLOGIES
By: /s/ Mitchell E. Kertzman
----------------------------------------
Mitchell E. Kertzman
President and Chief Executive Officer
Address: 1000 Bridge Parkway
Redwood Shores, California 94065
SIGNATURE PAGE TO NETWORK COMPUTER, INC.
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
INVESTORS:
COMCAST CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1500 Market Street
Philadelphia, Pennsylvania 19102-2148
<PAGE>
COX COMMUNICATIONS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1400 Lake Hearn Drive, Northeast
Atlanta, Georgia 30319
<PAGE>
GENERAL INSTRUMENT CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 101 Tournament Drive
Horsham, Pennsylvania 19044
<PAGE>
LUCENT TECHNOLOGIES INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 600 Mountain Avenue, Room 6E
Murray Hill, New Jersey 07974
<PAGE>
MARUBENI CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 1-4-2, Ohtemachi 1-Chome
Chiyoda-ku, Tokyo, Japan
<PAGE>
MEDIAONE INTERACTIVE SERVICES, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 9000 East Nichols Avenue, Suite 100
Englewood, Colorado 80112
<PAGE>
ROGERS COMMUNICATIONS INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 333 Bloor Street East
Toronto, Ontario M4W 1G9, Canada
<PAGE>
SHAW COMMUNICATIONS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 900-630 3RD Avenue
Calgary, Alberta T2P 4L4
<PAGE>
ACCESS TECHNOLOGY PARTNERS
By: ACCESS TECHNOLOGY MANAGEMENT, L.L.C
Its: General Partner
By: H&Q VENTURE MANAGEMENT, L.L.C
Its: Managing Member
By:
--------------------------------------
Its:
--------------------------------------
Address:
--------------------------------------------
--------------------------------------------
<PAGE>
ACCESS TECHNOLOGY PARTNERS BROKERS FUND, L.P.
By: H&Q VENTURE MANAGEMENT, L.L.C
Its: General Partner
By:
--------------------------------------
Its:
--------------------------------------
Address:
--------------------------------------------
--------------------------------------------
<PAGE>
HAMBRECHT & QUIST CALIFORNIA
By:
--------------------------------------
Its:
--------------------------------------
Address:
--------------------------------------------
--------------------------------------------
<PAGE>
HAMBRECHT & QUIST EMPLOYEE VENTURE
FUND, L.P. II
By: H&Q VENTURE MANAGEMENT, L.L.C
Its: General Partner
By:
--------------------------------------
Its:
--------------------------------------
Address:
--------------------------------------------
--------------------------------------------
<PAGE>
SUN MICROSYSTEMS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 901 San Antonio Road
Mail Stop PAL1-S21
Palo Alto, California 94303
<PAGE>
WIND RIVER SYSTEMS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Address: 500 Wind River Way
Alameda, California 94501
<PAGE>
INVESTORS:
---------------------------------------------
(Name of Investor as it should appear on the
Series E Preferred Stock Certificate)
By:
-----------------------------------------
Print Name:
---------------------------------
Title:
--------------------------------------
Address:
--------------------------------------------
--------------------------------------------
Telephone:
--------------------------------------------
Facsimile:
--------------------------------------------
PLEASE PROVIDE ALL OF THE ABOVE-REQUESTED INFORMATION
<PAGE>
SCHEDULE A
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
NUMBER OF TOTAL PURCHASE
NAME AND ADDRESS SHARES PURCHASED PRICE OF SHARES
---------------- ---------------- ---------------
<S> <C> <C>
COMCAST TECHNOLOGY, INC. 3,125,000 $5,000,000.00
1500 Market Street
Philadelphia, Pennsylvania 19102-2148
COX COMMUNICATIONS, INC. 3,125,000 $5,000,000.00
1400 Lake Hearn Drive, Northeast
Atlanta, Georgia 30319
GENERAL INSTRUMENT CORPORATION 3,125,000 $5,000,000.00
101 Tournament Drive
Horsham, Pennsylvania 19044
LUCENT TECHNOLOGIES INC. 3,125,000 $5,000,000.00
600 Mountain Avenue
Room 6E
Murray Hill, New Jersey 07974
MARUBENI CORPORATION 625,000 $1,000,000.00
1-4-2, Ohtemachi 1-Chome
Chiyoda-ku, Tokyo, Japan
MEDIAONE INTERACTIVE SERVICES, INC. 3,125,000 $5,000,000.00
c/o MediaOne Ventures
9000 E. Nichols Ave., Suite 100
Englewood, Colorado 80112
ROGERS COMMUNICATIONS, INC. 5,000,000 $8,000,000.00
333 Bloor St. East
Toronto, Ontario M4W 1G9, Canada
SHAW COMMUNICATIONS, INC. 5,000,000 $8,000,000.00
900-630 3rd Avenue
Calgary, Alberta T2P 4L4
DANIEL H. CASE, III 17,187 $27,499.20
KENNETH HAO 6,251 $10,001.60
CRISTINA MORGAN 12,500 $20,000.00
DANIEL RIMER 17,187 $27,499.20
ACCESS TECHNOLOGY PARTNERS, L.P. 493,750 $790,000.00
ACCESS TECHNOLOGY PARTNERS BROKERS FUND, L.P. 5,469 $8,750.40
HAMBRECHT & QUIST CALIFORNIA 49,219 $78,750.40
HAMBRECHT & QUIST EMPLOYEE VENTURE FUND, L.P. II 23,437 $37,499.20
c/o Alex Sloan
One Bush Street
San Francisco, California 94104
SUN MICROSYSTEMS, INC. 3,125,000 $5,000,000.00
901 San Antonio Road
Mail Stop PAL1-S21
Palo Alto, California 94303
WIND RIVER SYSTEMS, INC. 1,250,000 $2,000,000.00
50 Wind River Way ---------- --------------
Alameda, California 94501
Attn: Richard Kraber
31,250,000 $50,000,000.00
========== ==============
</TABLE>
S-1
<PAGE>
SCHEDULE B
SCHEDULE OF EXCEPTIONS
S-2
<PAGE>
EXHIBIT A
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
E-1
<PAGE>
EXHIBIT B
ADMISSION AGREEMENT
E-2
<PAGE>
EXHIBIT C
OPINION OF COMPANY COUNSEL
E-3
<PAGE>
EXHIBIT D
PRIVATE PLACEMENT MEMORANDUM
E-4
<PAGE>
EXHIBIT E
PRO FORMA CAPITALIZATION TABLE
E-5
<PAGE>
LIBERATE TECHNOLOGIES
STOCK PURCHASE AGREEMENT
June 30, 1999
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Purchase and Sale of Stock.............................................1
1.1 Sale and Issuance of Stock...................................1
1.2 The Closing..................................................1
2. Representations and Warranties of the Company..........................1
2.1 Organization and Good Standing...............................1
2.2 Authorization................................................2
2.3 Valid Issuance of Stock......................................2
2.4 Title to Property and Assets.................................2
2.5 Compliance with Other Documents..............................2
2.6 Registration Statement.......................................2
2.7 Capitalization...............................................3
2.8 Litigation...................................................3
2.9 Intellectual Property........................................3
2.10 Financial Statements........................................3
2.11 Changes.....................................................3
2.12 Taxes.......................................................3
3. Representations and Warranties of the Investor.........................3
3.1 Authorization................................................3
3.2 Investigation................................................4
3.3 Accredited Investor..........................................4
3.4 Purchase Entirely for Own Account............................4
3.5 Restricted Securities........................................4
4. Conditions to the Investor's Obligation at Closing.....................4
4.1 Representations and Warranties...............................4
4.2 Securities Laws..............................................4
4.3 Authorizations...............................................4
4.4 Initial Public Offering of Common Stock......................5
5. Conditions to the Company's Obligations at Closing.....................5
5.1 Representations and Warranties...............................5
5.2 Securities Laws..............................................5
5.3 Authorizations...............................................5
5.4 Initial Public Offering of Common Stock......................5
5.5 Payment of Purchase Price....................................5
6. Covenants of the Company and the Investor..............................5
6.1 Agreement Not to Transfer....................................5
6.2 Market Stand-Off.............................................6
6.3 Notice of Intention to Transfer..............................6
6.4 Registration of Stock........................................6
i
<PAGE>
6.5 Publicity....................................................6
7. Miscellaneous..........................................................6
7.1 Governing Law................................................6
7.2 Survival; Additional Securities..............................7
7.3 Successors and Assigns.......................................7
7.4 Entire Agreement.............................................7
7.5 Notices......................................................7
7.6 Amendments and Waivers.......................................7
7.7 Legal Fees...................................................7
7.8 Expenses.....................................................8
7.9 Titles and Subtitles.........................................8
7.10 Counterparts................................................8
7.11 Severability................................................8
7.12 Confidentiality.............................................8
1.3 Company Registration.........................................1
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 30th day of
June 1999, by and between Liberate Technologies, a Delaware corporation (the
"Company") and Lucent Technologies Inc., a Delaware corporation (the
"Investor").
WHEREAS, the Investor has indicated a desire to purchase the number of
shares of the Company's Common Stock obtained by dividing 12,500,000 by 96% of
the per share price paid by the public for the Company's Common Stock in the
Company's initial public offering (the "IPO").
WHEREAS, the Company has indicated a desire to sell the number of
shares of the Company's Common Stock obtained by dividing 12,500,000 by 96% of
the per share price paid by the public for the Company's Common Stock in the
Company's IPO to the Investor on the terms set forth herein.
WHEREAS, the Company and the Investor have agreed that this Agreement
shall constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF STOCK. Subject to the terms and
conditions of this Agreement, the Company agrees to sell to the Investor and
the Investor agrees to purchase from the Company the number of shares of the
Company's Common Stock obtained by dividing 12,500,000 by 96% of the per share
price paid by the public for the Company's Common Stock in the Company's IPO
(the "Stock"), having the rights, preferences, privileges and restrictions set
forth in the form of Amended and Restated Certificate of Incorporation of the
Company (the "Restated Certificate") to be filed with the Delaware Secretary of
State upon the Closing (as defined below).
1.2 THE CLOSING. The purchase and sale of the Stock shall be
held at the Company's offices immediately following the closing of the Company's
IPO or, if later, upon satisfaction or waiver of each of the conditions set
forth in Sections 4 and 5 (the "Closing"). At the Closing, the Company will
deliver the Stock to the Investor against payment of the purchase price therefor
by check payable to the order of the Company or by wire transfer. The per share
purchase price for the Stock shall be 96% of the per share price paid by the
public for the Company's Common Stock in the IPO.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Investor that:
2.1 ORGANIZATION AND GOOD STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware
<PAGE>
and has all requisite corporate power and authority to carry on its business
as now conducted. The Company is duly qualified to transact business and is
in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business or properties.
2.2 AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder, and the authorization, issuance, sale and
delivery of the Stock has been taken or will be taken prior to the Closing, and
this Agreement constitutes a valid and legally binding obligation of the
Company, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
2.3 VALID ISSUANCE OF STOCK. The Stock, when issued, sold and
delivered in accordance with the terms hereof for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement and under applicable state and federal securities laws. Subject
in part to the truth and accuracy of the Investor's representations set forth in
Section 3 of this Agreement, the offer, sale and issuance of the Stock as
contemplated by this Agreement are exempt from the registration requirements of
any applicable state and federal securities laws.
2.4 TITLE TO PROPERTY AND ASSETS. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens that arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
2.5 COMPLIANCE WITH OTHER DOCUMENTS. The execution and delivery
of this Agreement, consummation of the transactions contemplated hereby, and
compliance with the terms and provisions hereof will not conflict with or result
in a breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
2.6 REGISTRATION STATEMENT. The Company's registration
statement on Form S-1, as amended, (the "Registration Statement") shall not, at
the time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the Securities and Exchange Commission
("SEC"), contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
2
<PAGE>
2.7 CAPITALIZATION. The Company's capitalization information
contained in the Registration Statement is complete and accurate as of the dates
specified therein.
2.8 LITIGATION. Except as disclosed in the Company's
Registration Statement, there are no actions, proceedings or investigations
pending against the Company, that, either in any case or in the aggregate, would
result in any material adverse change in the business, financial condition, or
results of operations of the Company.
2.9 INTELLECTUAL PROPERTY. Except as disclosed in the
Registration Statement, the Company owns, possesses or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "Intellectual Property Rights")
necessary to conduct the business now operated by it, or presently employed
by it, and has not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property rights
that, if determined adversely to the Company, would individually or in the
aggregate have a material adverse effect on the condition (financial or
other), business, properties or results of operations.
2.10 FINANCIAL STATEMENTS. The financial statements included in
the Registration Statement present fairly the financial position of the Company
as of the dates shown and its results of operations and cash flows for the
periods shown, and, except as otherwise disclosed in the Registration Statement,
such financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis.
2.11 CHANGES. Except as disclosed in the Registration Statement,
since the date of the latest audited financial statements included in the
Registration Statement there has been no material adverse change, nor any
development or event involving a prospective material adverse change, in the
condition (financial or other), business, properties or results of operations of
the Company taken as a whole.
2.12 TAXES. The Company has filed on a timely basis all tax
returns and reports (including information returns and reports) as required by
law. These returns and reports are true and correct in all material respects
except to the extent that a reserve has been reflected on the Company's
financial statements in accordance with generally accepted accounting
principles. The Company has paid all taxes and other assessments due, except
those contested by it in good faith and except to the extent that a reserve has
been reflected on the Company's financial statements in accordance with
generally accepted accounting principles. The provision for taxes of the
Company as shown in the Company's financial statements is adequate for taxes due
or accrued as of the date thereof.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
hereby represents and warrants that:
3.1 AUTHORIZATION. This Agreement constitutes the valid and
legally binding obligation of the Investor, enforceable in accordance with its
terms, subject to laws of
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general application relating to bankruptcy, insolvency and the relief of
debtors and by general principles of equity.
3.2 INVESTIGATION. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's chief executive officer. The Investor further
acknowledges having had access to information about the Company that it has
requested or considers necessary for purposes of purchasing the Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.3 ACCREDITED INVESTOR. The Investor is an "accredited
investor" as such term is defined in Regulation D adopted by the SEC.
3.4 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Stock will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same.
3.5 RESTRICTED SECURITIES. Investor understands that the Stock
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
4. CONDITIONS TO THE INVESTOR'S OBLIGATION AT CLOSING. The
obligation of the Investor to purchase the Stock at the Closing is subject to
the fulfillment to the Investor's satisfaction on or prior to the Closing of the
following conditions:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Company in Section 2 hereof shall be true and correct
when made, and shall be true and correct as of the Closing with the same force
and effect as if they had been made on and as of such date, subject to changes
contemplated by this Agreement. The Chief Executive Officer of the Company
shall deliver at the Closing a certificate stating that the condition specified
in the preceding sentence has been fulfilled.
4.2 SECURITIES LAWS. The offer and sale of the Stock to the
Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act") and
qualification requirements of all applicable state securities laws.
4.3 AUTHORIZATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body that are required in
connection with the lawful
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issuance and sale of the Stock pursuant to this Agreement shall have been
duly obtained and shall be effective on and as of the Closing.
4.4 INITIAL PUBLIC OFFERING OF COMMON STOCK. The closing of the
initial public offering of the Company's Common Stock shall have occurred.
5. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligation of the Company to sell the Stock at the Closing is subject to the
fulfillment to the Company's satisfaction on or prior to the Closing of the
following conditions:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 hereof shall be true as of the
Closing with the same force and effect as if they had been made on and as of
such date, subject to changes contemplated by this Agreement.
5.2 SECURITIES LAWS. The offer and sale of the Stock to the
Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Act qualification requirements of all applicable state
securities laws.
5.3 AUTHORIZATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body that are required in
connection with the lawful issuance and sale of the Stock pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of the
Closing.
5.4 INITIAL PUBLIC OFFERING OF COMMON STOCK. The closing of the
initial public offering of the Company's Common Stock shall have occurred.
5.5 PAYMENT OF PURCHASE PRICE. The Investor shall have
delivered to the Company the purchase price for the Stock as set forth in
Section 1.2 hereof.
6. COVENANTS OF THE COMPANY AND THE INVESTOR.
6.1 AGREEMENT NOT TO TRANSFER.
(a) Prior to the first anniversary of the Closing, the
Investor shall not, directly or indirectly, Transfer or offer to Transfer any
shares of the Stock other than to affiliates who agree to be bound by the terms
of this Agreement, unless the Company consents to such Transfer and the
transferee agrees to be bound by this Agreement.
(b) In order to enforce the Transfer Restrictions, the
Company may impose stop transfer instructions with respect to the Stock until
the end of the restricted period.
(c) As used in this Agreement, the term "Transfer" shall
mean any sale, transfer, assignment, hypothecation, encumbrance or other
disposition, whether voluntary or involuntary, of shares of the Stock. In the
case of a hypothecation, the Transfer shall be deemed to occur both at the time
of the initial pledge and at any pledgee's sale or a sale by any secured
creditor or a retention by the secured creditor of the pledged shares of the
Stock
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in complete or partial satisfaction of the indebtedness for which the
shares of the Stock are security.
6.2 MARKET STAND-OFF. In addition to the Transfer
Restrictions (which shall in no way be limited by the following), in
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the
Act, the Investor shall not Transfer or offer to Transfer any shares of the
Stock without the prior written consent of the Company and its underwriters.
Such restriction (the "Market Stand-Off") shall be in effect for such period
of time from and after the effective date of the final prospectus for the
offering as may be requested by the Company or such underwriters; provided,
however, that (i) such Market Stand-Off shall not exceed one hundred eighty
(180) days, and (ii) the Investor shall be subject to the Market Stand-Off
only if the officers and directors of the Company are also subject to similar
restrictions. In order to enforce the Market Stand-Off, the Company may
impose stop-transfer instructions with respect to the Stock until the end of
the applicable stand-off period.
6.3 NOTICE OF INTENTION TO TRANSFER. In the event the Investor
plans to Transfer shares of the Stock in one or more transactions, the Investor
shall inform the Company of such intention to Transfer such shares fifteen (15)
days prior to such Transfer. Investor shall agree that any transfer, sale or
other disposition of the Company's Common Stock shall be through an orderly
disposition, including, at the request of the Company, through a broker-dealer
recommended by the Company.
6.4 REGISTRATION OF STOCK. The Company agrees that, with regard
to the Stock, the Investor shall have the registration rights described in
EXHIBIT A attached hereto. The Investor understands and agrees that (i) the
Stock will be characterized as "restricted securities" under the federal
securities laws inasmuch as it is being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances, and (ii) each certificate
representing the Stock and any other securities issued in respect of the Stock
upon any stock split, stock dividend, recapitalization, merger or similar event
(unless no longer required in the opinion of counsel for the Company) shall be
stamped or otherwise imprinted with appropriate legends mandated by federal and
state securities laws.
6.5 PUBLICITY. Except as required by law, no press release,
public statement, advertisement or similar publicity from any party hereunder
with respect to the participation of the Investor in the transactions
contemplated hereby (or any other matter relating to the Company and the
Investor or its affiliates) shall be issued or made without the prior consent of
Investor. Notwithstanding the foregoing, the Company may disclose Investor's
investment in the Company and the terms thereof and such other information
previously approved by Investor as of the date hereof for inclusion in the
Registration Statement.
7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as applied to agreements among
California residents
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entered into and to be performed entirely within California, without regard
to the conflict of law provisions thereof.
7.2 SURVIVAL; ADDITIONAL SECURITIES. The representations and
warranties set forth in Sections 2 and 3 shall survive until the Closing. The
covenants and agreements set forth in Section 6 shall survive in accordance with
their terms. Any new, substituted or additional securities which are by reason
of any stock split, stock dividend, recapitalization or reorganization
distributed with respect to the Stock ("Stock Distributions") shall be
immediately subject to the covenants and agreements set forth in Section 6 to
the same extent the Stock is at such time covered by such provisions.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the respective successors and assigns of the parties hereto.
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement. Notwithstanding
anything to the contrary contained herein, the covenants set forth in Section 6
shall not be binding upon any entity (other than an affiliate of the Investor)
which acquires any shares of the Stock or a Stock Distribution in a transaction
permitted hereunder.
7.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement between the parties with regard to the subject
matter hereof.
7.5 NOTICES. Except as otherwise provided, all notices and
other communications required or permitted hereunder shall be in writing, shall
be effective when given, and shall in any event be deemed to be given upon
receipt or, if earlier, (i) five (5) days after deposit with the U.S. postal
service or other applicable postal service, if delivered by first class mail,
postage prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1)
business day after the day of deposit with Federal Express or similar overnight
courier, freight prepaid, if delivered by overnight courier or (iv) one (1)
business day after the day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed, (a) if to the Investor, at the Investor's address set forth below its
signature, or at such other address as the Investor shall have furnished to the
Company in writing, or (b) if to the Company, at its address as set forth below
its signature, or at such other address as the Company shall have furnished to
the Investor in writing.
7.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of the Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of the Company and the Investor.
7.7 LEGAL FEES. In the event of any action at law, suit in
equity or arbitration proceeding in relation to this Agreement or the Stock or
any Stock Distribution, the prevailing party shall be paid by the other party a
reasonable sum for the attorneys' fees and expenses incurred by such prevailing
party.
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7.8 EXPENSES. Irrespective of whether the Closing is effected,
the Company and the Investor shall each pay their own costs and expenses
incurred with respect to the negotiation, execution, delivery and performance of
this Agreement.
7.9 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.10 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
7.11 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7.12 CONFIDENTIALITY. The parties hereto agree that, except with
the prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish, or make accessible to anyone any
confidential information, knowledge, or data concerning or relating to the
business or financial affairs of such other party to which said party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, or the performance of its obligations hereunder.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year hereinabove first written.
LIBERATE TECHNOLOGIES
By: /s/ Mitchell E. Kertzman
--------------------------
Mitchell E. Kertzman
President and Chief Executive Officer
Address: 1000 Bridge Parkway
Redwood Shores, California 94065
Attn: General Counsel
LUCENT TECHNOLOGIES INC.
By:
--------------------------
Title:
--------------------------
Address: 600 Mountain Avenue, Room 6E
Murray Hill, New Jersey 07974
<PAGE>
EXHIBIT A
1. REGISTRATION RIGHTS. The Company covenants and agrees as
follows:
1.1 DEFINITIONS. For purposes of this EXHIBIT A, capitalized
terms used herein and not otherwise defined shall have the meanings ascribed to
them in the Stock Purchase Agreement between the Company and the Investor to
which this EXHIBIT A is attached. In addition, the following terms used herein
shall have the following meanings: (a) the term "Form S-3" means such form under
the Act as in effect on the date hereof or any registration form under the Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC; (b) the term "1934 Act" means the Securities Exchange Act of 1934,
as amended; and (c) the term "register", "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
1.2 COMPANY REGISTRATION.
(a) If, at any time 180 days after the Registration
Statement is declared effective by the SEC, the Company proposes to register any
of its stock or other securities under the Act in connection with the public
offering of such securities (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, a registration
relating to a corporate reorganization or other transaction under Rule 145 of
the Act, a registration on any form that does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Stock, or a registration in which the only Common Stock
being registered is Common Stock issuable upon conversion of debt securities
that are also being registered), the Company shall, at such time, promptly give
Investor written notice of such registration. Upon the written request of
Investor given within twenty (20) days after mailing of such notice by the
Company, the Company shall, subject to the provisions of Section 1.2(c) below,
use all reasonable efforts to cause to be registered under the Act all of the
Stock that each Investor has requested to be registered. Nothing contained in
this Section 1.2 obligates the Company to register any of its stock or other
securities under the Act.
(b) The Company shall have the right to terminate or
withdraw any registration initiated by it under this Section 1.2 prior to the
effectiveness of such registration whether or not Investor has elected to
include securities in such registration.
(c) In connection with any offering involving an
underwriting of shares of the Company's capital stock, the Company shall not be
required under this Section 1.2 to include any of the Investor's securities in
such underwriting unless Investor accepts the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it (or by other
persons entitled to select the underwriters) and enter into an underwriting
agreement in customary form with an underwriter or underwriters selected by the
Company, and then only in such quantity as the underwriters determine in their
sole discretion will not jeopardize the success of the offering by the Company.
If the total amount of securities, including share of the Stock, requested by
stockholders to be included in such offering exceeds
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the amount of securities sold other than by the Company that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of such securities, including shares of the Stock, that the
underwriters determine in their sole discretion will not jeopardize the
success of the offering. In no event shall shares of the Stock be included
in such registration unless all shares of Registrable Securities (as defined
in the Stockholders Agreement described below) that request registration
pursuant to Section 1.3 of that certain Stockholders Agreement dated August
11, 1997, as amended, are first included in such registration.
1.3 FORM S-3 REGISTRATION.
(a) If the Company shall receive a written request from
the Investor that the Company effect a registration on Form S-3 and any
related qualification or compliance with respect to the Stock, then the
Company shall promptly commence preparation of such registration statement,
and as expeditiously as reasonably possible when the Company is eligible to
use Form S-3, effect the registration of all, but not less than all, such
Stock on Form S-3 and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of all
of the Stock. The Company shall have no obligation to effect any
registration of less than all of the Stock.
(b) Notwithstanding anything to the contrary in this
Section 1.3, the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this section 1.3: (i) if the Company
shall furnish to the Investor a certificate signed by the Chief Executive
Officer or Chairman of the Board of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than one hundred twenty (120) days after receipt of the request of the Investor
under this Section 1.3; or (ii) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) The Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.3 after
the earlier to occur of the following events: (i) the Company has effected one
(1) registration pursuant to this Section 1.3, and such registration has been
declared or ordered effective and otherwise satisfies and continues to satisfy
the terms and conditions of this Section 1.3; (ii) the Company has voluntarily
effected the registration of all of the Stock without having first received a
request for such registration pursuant to this Section 1.3 (a "Voluntary
Registration"), and such Voluntary Registration has been declared or ordered
effective and otherwise satisfies and continues to satisfy the terms and
conditions of this Section 1.3; or (iii) if Form S-3 is not available for such
offering by the Investor.
1.4 OBLIGATIONS OF THE COMPANY. Whenever required under Section
1.3 to effect the registration on Form S-3 of the Stock, the Company shall, as
expeditiously as reasonably possible:
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(a) Prepare and file with the SEC a Form S-3 with respect
to such Stock and use its best efforts to cause such registration statement to
become effective as soon as reasonably practicable after the mailing of the
request for such registration but in no event later than ninety (90) days after
such mailing. The Company shall keep such registration statement effective
until the earlier of (i) two (2) years after the Closing, (ii) the distribution
of all of the Stock as contemplated in the registration statement has been
completed, and (iii) the date which all shares of the Stock held by the Investor
may immediately be sold under Rule 144 during any 90-day period.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Investor such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as the Investor may reasonably
request in order to facilitate the disposition of the Stock.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Investor; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(e) Notify the Investor covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Act of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(f) Cause all such Stock registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed.
(g) Provide a transfer agent and registrar for all of the
Stock registered pursuant hereunder and a CUSIP number for all such Stock, in
each case not later than the effective date of such registration.
1.5 INVESTOR OBLIGATION TO FURNISH INFORMATION. It shall be a
condition precedent to the obligations of the Company to take any action
pursuant hereto with respect to the Stock that the Investor shall furnish to the
Company such information regarding itself, the Stock, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Stock.
1.6 EXPENSES OF REGISTRATION. All expenses incurred in
connection with registrations, filings or qualifications pursuant hereto,
including (without limitation) all
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registration, filing and qualification fees, printers' and accounting fees,
fees and disbursements of counsel for the Company (including fees and
disbursements of counsel for the Company in its capacity as counsel to the
Investor hereunder but excluding the fees and disbursements of any other
counsel for the Investor) shall be borne by the Company; provided, however,
that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant hereto if the registration request is
subsequently withdrawn at the request of the Investor unless Investor agrees
to forfeit its right of registration under Section 1.3; provided further,
however, that if at the time of such withdrawal, the Investor has learned of
a material adverse change in the condition, business, or prospects of the
Company from that known to the Investor at the time of its request and has
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Investor shall not be
required to pay any of such expenses and shall retain its right of
registration pursuant to Section 1.3.
1.7 INDEMNIFICATION. In the event any Stock is included in a
registration statement under Sections 1.2 or 1.3:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless the Investor, any underwriter (as defined in the
Act) for the Investor and each person, if any, who controls the Investor or
underwriter within the meaning of the Act or the 1934 Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, the 1934 Act or any state
securities law; and the Company will pay to the Investor, or such underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this subsection (a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability, or action if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Investor, underwriter or controlling person.
(b) To the extent permitted by law, the Investor will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, and any
controlling person of any such underwriter, against any losses, claims, damages,
or liabilities (joint or several) to which any of the foregoing persons may
become subject, under the Act, the 1934 Act or other federal or state law,
insofar as such losses,
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claims, damages, or liabilities (or actions in respect thereto) arise out of
or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Investor expressly for use in
connection with such registration; and each such Investor will pay, as
incurred, any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this subsection (b), in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
subsection (b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected
without the consent of the Investor, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this
subsection (b) exceed the gross proceeds from the offering received by the
Investor.
(c) Promptly after receipt by an indemnified party
under this Section 1.7 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.7,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.7, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.7.
(d) If the indemnification provided for in this
Section 1.7 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to there in, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
E-5
<PAGE>
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in an underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and the Investor
under this Section 1.7 shall survive the completion of any offering of the Stock
in a registration statement pursuant hereto, and otherwise.
1.8 TERMINATION. The Company's obligation to register the Stock
pursuant to this agreement shall terminate on the earlier of (i) the third
anniversary of the Closing and (ii) the date on which all shares of the Stock
held by the Investor may immediately be sold under Rule 144 during any 90-day
period.
E-6
<PAGE>
Exhibit 21.1
Exhibit 21.1 Subsidiaries of Registrant
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
Network Computer Incorporated Nederland B.V. Netherlands
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