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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 29, 2000
Commission File Number 000-26565
LIBERATE TECHNOLOGIES
(Exact name of registrant as specified in its charter)
Delaware 94-3245315
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 Circle Star Way, San Carlos, California 94070-6200
(Address of principal executive office) (Zip Code)
(650) 701-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
90,119,011 shares of the Registrant's common stock were outstanding as of
March 31, 2000.
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LIBERATE TECHNOLOGIES
FORM 10-Q
For The Quarter Ended February 29, 2000
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at February 29, 2000
and May 31, 1999............................................................... 1
Condensed Consolidated Statements of Operations and Comprehensive Loss
for the Three Months and Nine Months Ended February 29, 2000 and
February 28, 1999.............................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
February 29, 2000 and February 28, 1999........................................ 3
Notes to Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 30
Item 2. Changes in Securities and Use of Proceeds........................................... 30
Item 3. Defaults in Securities.............................................................. 31
Item 5. Other Information................................................................... 31
Item 6. Exhibits and Reports on Form 8-K.................................................... 31
Signature................................................................................... 32
</TABLE>
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<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
February 29, May 31,
2000 1999
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $332,735 $ 33,657
Short-term investments............................................. 94,474 19,751
Accounts receivable, net .......................................... 1,583 644
Receivable from affiliate, net..................................... 1,044 482
Prepaid expenses and other current assets.......................... 4,996 2,553
------------- -----------
Total current assets............................................. 434,832 57,087
Property and equipment, net........................................... 9,694 2,269
OTHER ASSETS
Purchased intangibles, net......................................... 3,042 7,606
Restricted cash.................................................... 8,788 --
Warrants........................................................... 93,191 862
Other assets....................................................... 618 358
------------- -----------
Total assets................................................... $550,165 $ 68,182
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $ 2,920 $ 1,643
Accrued payroll and related expenses............................... 2,714 2,248
Accrued liabilities................................................ 12,615 8,911
Short-term portion of capital leases............................... 379 --
Note payable to affiliate.......................................... -- 52
Deferred revenues.................................................. 47,802 38,787
------------- -----------
Total current liabilities...................................... 66,430 51,641
Long-term portion of capital leases................................... 690 --
Long-term debt........................................................ -- 4,315
------------- -----------
Total liabilities.............................................. 67,120 55,956
------------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Convertible preferred stock........................................ -- 660
Common stock....................................................... 882 12
Contributed and paid-in capital.................................... 610,008 166,643
Deferred stock compensation........................................ (6,231) (6,579)
Warrants........................................................... 71,857 1,522
Stockholder notes receivable....................................... (8) (348)
Accumulated other comprehensive income............................. 16 28
Accumulated deficit................................................ (193,479) (149,712)
------------- -----------
Total stockholders' equity .................................... 483,045 12,226
------------- -----------
Total liabilities and stockholders' equity..................... $550,165 $ 68,182
============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<TABLE>
<CAPTION>
LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Unaudited
Three months ended Nine months ended
--------------------------- ----------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
License and royalty................................. $ 3,043 $ 1,525 $ 6,525 $ 4,062
Service............................................. 4,488 2,956 12,368 8,128
----------- ----------- ----------- ------------
Total revenues.................................... 7,531 4,481 18,893 12,190
----------- ----------- ----------- ------------
COST OF REVENUES
License and royalty................................. 510 638 1,618 1,954
Service............................................. 4,576 1,827 15,269 4,698
----------- ----------- ----------- ------------
Total cost of revenues............................ 5,086 2,465 16,887 6,652
----------- ----------- ----------- ------------
Gross margin...................................... 2,445 2,016 2,006 5,538
----------- ----------- ----------- ------------
OPERATING EXPENSES
Research and development............................ 9,633 4,834 21,275 12,889
Sales and marketing................................. 5,200 2,673 12,118 8,076
General and administrative.......................... 2,370 952 5,550 2,560
Amortization of purchased intangibles............... 1,521 1,521 4,563 4,563
Amortization of warrants............................ 4,023 -- 5,092 --
Amortization of deferred stock compensation......... 518 282 1,547 393
----------- ----------- ----------- ------------
Total operating expenses.......................... 23,265 10,262 50,145 28,481
----------- ----------- ----------- ------------
Loss from operations.............................. (20,820) (8,246) (48,139) (22,943)
Interest and other income (expense), net............... 2,095 (10) 4,433 139
----------- ----------- ----------- ------------
Loss before income tax provision (benefit)........ (18,725) (8,256) (43,706) (22,804)
Income tax provision (benefit)......................... 12 (329) 61 (887)
----------- ----------- ----------- ------------
Net loss.......................................... (18,737) (7,927) (43,767) (21,917)
Foreign currency translation adjustment................ (12) 5 4 3
----------- ----------- ----------- ------------
Comprehensive loss................................ $ (18,749) $ (7,922) $ (43,763) $ (21,914)
=========== =========== =========== ============
Basic and diluted net loss per share................... $ (0.22) $ (15.95) $ (0.68) $ (46.83)
=========== =========== =========== ============
Shares used in computing basic and diluted net loss
per share........................................... 84,147 497 64,530 468
=========== =========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<TABLE>
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LIBERATE TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine months ended
-----------------------------
February 29, February 28,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................................... $ (43,767) $(21,917)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation and amortization................................................ 5,952 5,525
Amortization of warrants..................................................... 5,092 --
Provision for doubtful accounts.............................................. 303 240
Loss on disposal of property and equipment................................... 600 --
Non-cash compensation expense................................................ 1,547 393
Changes in operating assets and liabilities
Increase in accounts receivable............................................ (1,242) (496)
Increase in receivable from affiliate, net................................. (562) (1,206)
Increase in prepaid expenses and other current assets...................... (2,054) (31)
(Increase) decrease in other assets........................................ (260) 126
Increase in restricted cash................................................ (8,788) --
Increase (decrease) in accounts payable.................................... 1,277 (332)
Increase in accrued liabilities............................................ 3,704 1,250
Increase in accrued payroll and related expenses........................... 466 170
Increase in deferred revenues.............................................. 9,015 5,041
Increase in interest payable............................................... -- 145
------------- -------------
Net cash used in operating activities.................................... (28,717) (11,092)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................................ (8,189) (781)
Purchase of short-term investments............................................. (74,723) --
------------- -------------
Net cash used in investing activities................................... (82,912) (781)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secondary public offering, net................................... 297,219 --
Proceeds from initial public offering, net..................................... 97,970 --
Proceeds from private placement, net........................................... 12,500 --
Proceeds from exercise of stock options........................................ 3,237 249
Proceeds from (payments of) notes payable...................................... (52) 5,000
Principal payments on capital lease obligations................................ (155) --
------------- -------------
Net cash provided by financing activities................................ 410,719 5,249
------------- -------------
Effect of exchange rates on cash.................................................. (12) 3
------------- -------------
Net increase (decrease) in cash and cash equivalents.............................. 299,078 (6,621)
Cash and cash equivalents, beginning of period.................................... 33,657 12,138
------------- -------------
Cash and cash equivalents, end of period.......................................... $332,735 $ 5,517
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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LIBERATE TECHNOLOGIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Liberate Technologies ("Liberate" or "the Company") and
its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated. These financial statements have been prepared by Liberate,
without audit, and reflect all adjustments, which in the opinion of management
are necessary to present fairly the financial position and the results of
operation for the interim periods. These financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. However, they omit certain information and footnote disclosures
necessary to conform to generally accepted accounting principles. These
statements should be read in conjunction with the audited consolidated financial
statements and notes to consolidated financial statements included in Liberate's
Form S-1/A and subsequent reports on Form 10-Q filed with the Securities and
Exchange Commission since July 27, 1999. The results of operations for such
periods are not necessarily indicative of the results expected for the full
fiscal year or for any future period.
RECENT ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition
issues in financial statements. The Company will adopt SAB 101 as required in
the first quarter of fiscal 2001 and is evaluating the effect that such
adoption may have on its consolidated results of operations and financial
position.
NOTE 2. OFFERINGS OF COMMON STOCK
COMMON STOCK. On February 24, 2000, Liberate completed a secondary
public offering in which it sold 2,890,000 shares of common stock at $108 per
share. Proceeds from this transaction were $312.1 million. Underwriters'
discounts and other related costs were $14.9 million, resulting in net proceeds
of $297.2 million. The net proceeds were predominately held in cash, cash
equivalents and short-term investments at February 29, 2000.
On December 21, 1999, the Company announced a two-for-one stock split
in the form of a stock dividend, effective after January 14, 2000. The stock
split increased the number of shares of Liberate's common stock outstanding to
approximately 83,975,388 shares.
On August 2, 1999, Liberate completed its initial public offering in
which it sold 12,500,000 shares of common stock at $8 per share. Liberate
sold an additional 902,100 shares of common stock at $8 per share related to
the exercise of the underwriters' overallotment. The total aggregate proceeds
from these transactions were $107.2 million. Underwriters' discounts and
other related costs were $9.2 million, resulting in net proceeds of $98.0
million. The net proceeds were predominately held in cash, cash equivalents
and short-term investments at February 29, 2000. Shortly before the initial
public offering, Liberate recorded a one-for-six reverse stock split of its
outstanding preferred and common stock. Additionally, upon the close of the
offering, all of Liberate's preferred stock, par value $0.01 per share,
automatically converted into 66,178,670 shares of common stock. Immediately
following the closing of the initial public offering, Liberate sold 1,627,604
shares of common stock in a private placement to Lucent Technologies for an
aggregate of $12.1 million, net of underwriters' discounts. In addition,
following the closing of the initial public offering, Liberate issued 843,880
shares of common stock to Middlefield Ventures, an affiliate of Intel, in
connection with the cancellation of a convertible promissory note in the
amount of $4.0 million payable by Liberate to Middlefield. Related to this
transaction, the accrued interest on the convertible promissory note was
charged to additional paid-in capital.
During the nine months ended February 29, 2000, Liberate issued
1,997,201 shares of common stock to employees, external consultants and other
service providers upon the exercise of stock options.
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WARRANTS. In April and May 1999, the Company entered into agreements
with several network operators that require Liberate to issue warrants to
purchase up to an aggregate of 4,599,992 shares of common stock if those
network operators satisfy commercial milestones. In December 1999, in
connection with prepaid fees, warrants to purchase 866,664 shares of common
stock were issued to two network operators under the terms of those
agreements. The fair market value of these warrants was approximately $95.6
million. Of these warrants, 466,664 warrants were fully vested. The remaining
warrants continue to vest through May 31, 2003, as these network operators
satisfy certain commercial milestones. A portion of these fully vested
warrants, valued at approximately $27.5 million, were exercised in January
2000. As of February 29, 2000, warrants to purchase 1,303,330 shares of
common stock at a range of $4.80 to $6.90 per share have been issued, net of
warrants exercised and expired, under the terms of these agreements. Of these
warrants, 983,330 warrants were fully vested. The remaining warrants continue
to vest through May 31, 2003, as these network operators satisfy certain
commercial milestones. The recorded value of these warrants as of February
29, 2000 was $94.2 million, net of amortization. Amortization for the first
nine months of fiscal 2000 was approximately $5.1 million.
NOTE 3. SEGMENT INFORMATION
The Company operates solely in one segment - the development,
manufacturing and sale of information appliance software for consumer, corporate
and educational marketplaces. As of February 29, 2000, the Company's long-term
assets were located primarily in the United States. The Company's revenues by
geographic area are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------ -----------------------------
February 29, February 28, February 29, February 28,
(IN THOUSANDS) 2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
United States....................... $3,222 $2,371 $ 9,126 $5,837
Japan............................... 538 824 2,350 2,924
England............................. 2,524 910 4,691 1,763
Canada.............................. 703 78 1,049 521
Other............................... 544 298 1,677 1,145
--------------- -------------- -------------- --------------
Total revenues...................... $7,531 $4,481 $18,893 $12,190
=============== ============== ============== ==============
</TABLE>
International revenues consist of sales to customers incorporated in
foreign countries. International revenues were 57% and 47% of total revenues for
each of the three months ended February 29, 2000 and February 28, 1999.
International revenues were 52% of total revenues for both the nine months ended
February 29, 2000 and February 28, 1999.
For the three months ended February 29, 2000, three customers each
provided for 10% or more of our total revenues - Cable & Wireless, Wind River
and AOL. For the three months ended February 28, 1999, two customers each
provided over 10% or more of our total revenues - Wind River and Cable &
Wireless. For the nine months ended February 29, 2000 Cable & Wireless and Wind
River each provided for 10% or more of our total revenues. For the nine months
ended February 28, 1999 Wind River provided for 10% or more of our total
revenues.
NOTE 4. CALCULATION OF NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share are based
on the weighted average shares outstanding in each period. The effect of
outstanding stock options and warrants are excluded from the calculation of
diluted net loss per share, as their inclusion would be antidilutive. Previously
issued preferred stock, which converted to common stock, is weighted from the
time the shares were converted. At February 29, 2000, options to purchase
13,210,078 shares of common stock and warrants to purchase 1,303,330 shares of
common stock were outstanding and were excluded from the calculation of net loss
per share.
5
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<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------ -----------------------------
February 29, February 28, February 29, February 28,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss............................. $(18,737) $(7,927) $(43,767) $(21,917)
=============== ============== ============== ==============
Weighted average shares of
common stock outstanding........... 84,147 497 64,530 468
=============== ============== ============== ==============
Basic and diluted net loss per share. $ (0.22) $(15.95) $ (0.68) $ (46.83)
=============== ============== ============== ==============
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES. In August 1999, the Company entered into a master lease
agreement for office furniture. This agreement gives the Company the right to
lease certain furniture and equipment under non-cancelable three year terms.
Borrowings under this agreement are accounted for as capital leases and are
secured by the related furniture and equipment. The Company is required to
maintain liability and property damage insurance for the leased assets. As of
February 29, 2000, furniture and equipment totaling $1.2 million has been
recorded as leased property and equipment and accumulated amortization of
approximately $137,000 is included in depreciation expense. Total future minimum
lease payments under this agreement are approximately $1.2 million.
COMMITMENTS. During the first quarter of fiscal 2000, the Company
signed an amendment to the Technology License and Distribution Agreement with
Sun Microsystems ("Sun"). This amendment called for Liberate to pay certain
minimum royalties in exchange for the right to certain Sun technology and to
maintain the status as a preferred vendor of Sun. Minimum guaranteed royalties
of approximately $3.8 million are to be paid to Sun through the period ended
December 31, 2004. Expenses related to this contract of approximately $56,000
and $406,000 were recorded for the three months and nine months ended February
29, 2000.
The Company previously leased its headquarters, furniture and equipment
from Oracle. By mutual consent, the Company's Redwood Shores, California office
lease, furniture and equipment lease and service agreement was terminated
without penalty in September 1999.
In September 1999, the Company relocated its headquarters to a new
facility of approximately 78,000 square feet in San Carlos, California. The
lease provides for monthly rent payments of approximately $202,000 with annual
increases of three percent and terminates in February 2010. Over the term of the
lease, total payments will be approximately $35.5 million. At the lease signing,
Oracle Corporation provided a $10.0 million guarantee to the Company's landlord.
Oracle's guarantee was subsequently replaced with a security deposit provided by
Liberate in the form of an Irrevocable Letter of Credit for approximately $2.5
million.
Simultaneous with the relocation, Liberate exercised its option to
lease additional space of approximately 103,000 square feet in an adjacent
newly-constructed building. Beginning in March 2000, the additional monthly rent
is $268,000, with annual increases of three percent. Over the term of the lease
for this new facility, total payments are expected to be approximately $45.3
million. The lease will end in March 2010. The Company's security deposit
increased to $8.8 million for both buildings and is provided for in the form of
an Irrevocable Letter of Credit for the same amount. This letter of credit is
secured by Certificates of Deposit in amounts equal to the letter of credit;
such amount is classified as restricted cash on the accompanying balance sheet.
SUBLEASES. In December 1999, the Company signed an agreement with a
third party to sublease approximately 27,000 square feet in the Company's
headquarters building located in San Carlos, California. The sublease is for 18
months and commenced in March 2000. In February 2000, the Company signed an
agreement with another third party to sublease an additional 27,000 square feet
in the same
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building. This sublease is for 30 months and commenced in March 2000. Total
future minimum sublease income under these agreements is approximately $4.5
million.
LITIGATION. In December 1998, a former employee of the Company filed an
action in the California Superior Court for the County of San Mateo against the
Company for, among other things, unpaid commissions of approximately $1.5
million, constructive employment termination, intentional misrepresentation and
negligent misrepresentation. In October 1999, the plaintiff amended his
complaint against the Company, adding claims for damages for failure to pay
wages under the California Labor Code and common law retaliation, and sought to
impose a constructive trust on the allegedly withheld commissions and any
enhancement in value of that money. In December 1999, the Company filed a motion
for summary judgment/summary adjudication to dismiss all of the claims brought
by the plaintiff. In January 2000, the Court dismissed eight of the ten claims
brought against Liberate leaving only the claims of intentional and negligent
misrepresentation for trial. In February 2000, Liberate settled this matter,
obtaining the complete dismissal of all claims against the Company in exchange
for the payment of a nominal amount of cash and the issuance of a nominal number
of shares of Liberate's common stock.
As part of the Company's acquisition of the VirtualModem software
product and related assets and technology of SourceSuite LLC described below
in Note 7, the Company acquired certain patents that were the subject of a
patent infringement lawsuit. This lawsuit was initially brought by
Interactive Channel Technologies, Inc. and SMI Holdings, Inc., affiliated
companies of SourceSuite LLC, against Worldgate Communications, Inc. in May
1998. The patent infringement claims have been assigned to the Company as a
result of the merger with SourceSuite. In June 1998, Worldgate filed a
counterclaim against the plaintiffs and Source Media, Inc., alleging among
others violations of the Lanham Act and Delaware's Uniform Deceptive Trade
Practices Act, common law unfair competition, tortious interference with
existing and prospective business relationships and misappropriation of
confidential information and trade secrets. The case is still in the
discovery stage. The Company believes that the patent infringement claims
against Worldgate are valid and intends to continue to vigorously prosecute
this action. In addition, the Company has agreed to defend Interactive
Channel, SMI Holdings and Source Media against the cross-complaint brought by
Worldgate.
NOTE 6. OTHER
JOINT VENTURE. In January 2000, Liberate entered into a joint venture
with several parties, including Oracle Corporation Australia Pty Limited and
Burdekin Pacific Ltd to form ICE Interactive Ltd to facilitate deployment of
interactive TV services in Australia and New Zealand. As part of this
transaction, the Company contributed cash of approximately $276,000 and
approximately $168,000 in software to the joint venture in exchange for a 9.9%
equity interest in the new entity. In addition, ICE signed an agreement to
obtain licenses from the Company.
MERGER TERMINATION COSTS. In January 2000, negotiations involving
Liberate's proposed acquisition for another company terminated. For the quarter
ended, February 29, 2000, the Company expensed terminated merger costs of
approximately $624,000. These costs are included in general and administrative
expenses in the accompanying Consolidated Statements of Operations.
NOTE 7. SUBSEQUENT EVENTS
On March 3, 2000, Liberate completed the acquisition of the interactive
TV software product known as VirtualModem(TM) owned by SourceSuite LLC. Pursuant
to the Merger Agreement and Plan of Reorganization, Liberate purchased all of
the VirtualModem software and all related tangible assets and intellectual
properties related to the VirtualModem business in exchange for the issuance of
1,772,000 shares of Liberate common stock, valued at $107.53 per share, to each
of Source Media and Insight Interactive. The acquisition was completed in March
2000, and is therefore not reflected in the financial statements for the quarter
ended February 29, 2000. The acquisition will be accounted for as a purchase. In
connection with the acquisition, we hired various individuals who provide
services to SourceSuite. Also in connection with the acquisition, the Company
expects to write off approximately $1.9 million of acquired
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in-process research and development, which in the opinion of management, had not
reached technological feasibility and had no alternative future use. The Company
expects to record goodwill and other intangibles of approximately $192.2 million
to be amortized over an estimated economic life of 36 months.
In connection with this acquisition, the Company entered into a
Preferred Content Provider Agreement with a subsidiary of Source Media and
Insight Communications. The Company will use commercially reasonable efforts to
introduce the subsidiary's products to the Company's multiple network operator
customers using the technology purchased pursuant to the Agreement and Plan of
Reorganization. In addition, various incentive credits are provided to both
parties if the network operators select the subsidiary's products. The Company
has also entered into a Programming Services Agreement with the subsidiary where
the Company would continue to develop certain products for the subsidiary.
In March 2000, the Company entered into a Plan and Agreement of
Reorganization to acquire MoreCom, Inc. for $561.0 million of Liberate's
common stock, subject to adjustments based on fluctuations in the price of
the Company's common stock prior to closing. As a result of such adjustments,
no more than 8,030,059 shares and no less than 6,570,048 shares of common
stock will be issued in this transaction. For accounting purposes, a portion
of the purchase price will be allocated to compensation expense which will be
recorded over the next two years related to a portion of Liberate's common
stock that will be subject to repurchase by Liberate if MoreCom's founders
and other employees' employment is terminated in certain circumstances prior
to certain specified dates. In addition, the Company may incur additional
non-cash expense depending on how certain stock options to be granted to
MoreCom employees on or about the closing date are structured. The
acquisition will be accounted for as a purchase. Also in connection with the
acquisition, the Company expects to expense up to $30.0 million of acquired
in-process research and development, which in the opinion of Liberate's
management, has not reached technological feasibility and has no alternative
future use. The Company also expects to record goodwill and other intangibles
of up to $525.0 million to be amortized over an estimated economic life of
three years.
Also in March 2000, the Company increased its future minimum lease payments
under the master furniture and equipment lease by approximately $556,000.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 23E of the
Securities Act of 1934, as amended. These statements relate to future events or
our future financial performance. Any statements contained in this document that
are not statements of historical fact may be deemed to be forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"intend," "believe," "estimate," "predict," "potential" or "continue," or the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we, nor any
other person, assume responsibility for the accuracy and completeness of the
forward-looking statements. We are under no obligation to update any of the
forward-looking statements after the filing of this Form 10-Q to conform such
statements to actual results or to changes in our expectations.
The following discussion should be read in conjunction with our
financial statements, related notes and the other financial information
appearing elsewhere in this Form 10-Q. Readers are also urged to carefully
review and consider the various disclosures made by us which attempt to advise
interested parties of the factors which affect our business, including without
limitation, the disclosures made under the caption "Risk Factors," and the
factors and risks discussed in our Registration Statements on Form S-1 filed and
declared effective on February 17, 2000.
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.
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
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accounted for $2.5 million of our total revenues. For the nine months ended
February 29, 2000, sales of NC Navigator and NC Desktop products and related
services accounted for $2.0 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 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
17% 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. During the
first nine months of fiscal 2000, total service revenues were $12.4 million,
representing 65% 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.
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 $38.8 million at May 31,
1999 to $47.8 million at February 29, 2000. This increase resulted primarily
from license prepayments from two network operators who signed license
agreements during the period, from our license to Wind River and from
prepayments from network operators. This increase was offset by revenue
recognized from deployments and services performed during the period. 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
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- 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.
For the three months ended February 29, 2000, three customers each
provided for 10% or more of our total revenues - Cable & Wireless, Wind River
and AOL. For the three months ended February 28, 1999, two customers each
provided over 10% or more of our total revenues - Wind River and Cable &
Wireless. For the nine months ended February 29, 2000 Cable & Wireless and Wind
River each provided for 10% or more of our total revenues. For the nine months
ended February 28, 1999 Wind River provided for 10% or more of our total
revenues.
International revenues accounted for approximately 51% of our total
revenues in fiscal 1999 and 52% of our total revenues during the first nine
months of fiscal 2000. International revenues were 57% and 47% of total revenues
for each of the three months ended February 29, 2000 and February 28, 1999,
respectively. We anticipate international revenues to continue to represent a
significant portion of total revenues.
In April and May 1999, the Company entered into agreements with
several network operators that require Liberate to issue warrants to purchase up
to an aggregate of 4,599,992 shares of common stock if those network operators
satisfy commercial milestones. In December 1999, in connection with prepaid
fees, warrants to purchase 866,664 shares of common stock were issued to two
network operators under the terms of those agreements. The fair market value of
these warrants was approximately $95.6 million. Of these warrants, 466,664
warrants were fully vested. The remaining warrants continue to vest through May
31, 2003, as these network operators satisfy certain commercial milestones. A
portion of these fully vested warrants, valued at approximately $27.5 million,
were exercised in January 2000. As of February 29, 2000, warrants to purchase
1,303,330 shares of common stock at a range of $4.80 to $6.90 per share have
been issued, net of warrants exercised and expired, under the terms of these
agreements. Of these warrants, 983,330 warrants were fully vested. The remaining
warrants continue to vest as these network operators satisfy certain commercial
milestones. The value of these warrants on the balance sheet as of February 29,
2000 was $94.2 million, net of amortization. Amortization for the first nine
months of fiscal 2000 was $5.1 million.
Since inception, we have incurred net losses of $193.5 million. These
losses include a write-off of $58.1 million of acquired in-process research and
development related to the Navio acquisition and $86.6 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; and
- Record non-cash expenses related to the write-off of in-process
research and development and amortization of intangible assets
associated with our acquisitions, amortization of deferred
compensation and amortization of warrant expense associated with
the issuance of performance warrants to various network operators.
On December 21, 1999, we announced a two-for-one stock split in the
form of a stock dividend, effective after January 14, 2000. The stock split
increased the number of shares of our common stock outstanding to approximately
83,975,388 shares.
In January 2000, we entered into a joint venture with several parties,
including Oracle Corporation Australia Pty Limited and Burdekin Pacific Ltd to
form ICE Interactive Ltd to facilitate deployment of interactive TV services in
Australia and New Zealand. As part of this transaction, we contributed cash of
approximately $276,000 and approximately $168,000 in software to the joint
venture in exchange for a 9.9% equity interest in the new entity. In addition,
ICE signed an agreement to obtain licenses from us.
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In January 2000, we entered into a Merger Agreement and Plan of
Reorganization to acquire SourceSuite for approximately 1,772,000 shares of our
common stock, or approximately $190.5 million based on a common stock price of
$107.53 per share. The acquisition was completed in March 2000, and is therefore
not reflected in the financial statements for the quarter ended February 29,
2000. The acquisition will be accounted for as a purchase. In connection with
the acquisition, we hired various individuals who provide services to
SourceSuite. Also in connection with the acquisition, we expect to expense
approximately $1.9 million of acquired in-process research and development,
which in the opinion of our management, has not reached technological
feasibility and has no alternative future use. We also expect to record goodwill
and other intangibles of approximately $192.2 million to be amortized over an
estimated economic life of three years.
Additionally, in January 2000, negotiations involving Liberate's
proposed acquisition for another company terminated. For the quarter ended,
February 29, 2000, the Company expensed terminated merger costs of approximately
$624,000. These costs are included in general and administrative expenses in the
accompanying Consolidated Statements of Operations.
In March 2000, we entered into a Plan and Agreement of
Reorganization to acquire MoreCom, Inc. for $561.0 million of our common
stock, subject to adjustments based on fluctuations in the price of our
common stock prior to closing. As a result of such adjustments, no more than
8,030,059 shares and no less than 6,570,048 shares of common stock will be
issued in this transaction. For accounting purposes, a portion of the
purchase price will be allocated to compensation expense which will be
recorded over the next two years related to a portion of our common stock
that will be subject to repurchase by us if MoreCom's founders and other
employees' employment is terminated in certain circumstances prior to certain
specified dates. In addition, we may incur additional non-cash expense
depending on how certain stock options to be granted to MoreCom employees on
or about the closing date are structured. The acquisition will be accounted
for as a purchase. Also in connection with the acquisition, we expect to
expense up to $30.0 million of acquired in-process research and development,
which in the opinion of our management, has not reached technological
feasibility and has no alternative future use. We also expects to record
goodwill and other intangibles of up to $525.0 million to be amortized over
an estimated economic life of three years.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999.
REVENUES
Total revenues increased 68% from $4.5 million for the three months
ended February 28,1999, to $7.5 million for the three months ended February 29,
2000.
LICENSE AND ROYALTY. License and royalty revenues increased 100% from
$1.5 million for the three months ended February 28, 1999 to $3.0 million for
the three months ended February 29, 2000. This increase was due primarily to
increased royalty revenues resulting from increased deployments.
SERVICE. Service revenues increased 52% from $3.0 million for the three
months ended February 28, 1999 to $4.5 million for the three months ended
February 29, 2000. This increase was due primarily to the continued expansion of
our professional services organization. To a lesser extent, the increase was due
to the overall increase in the level of support and billable custom-development
projects.
COST OF REVENUES
Total cost of revenues increased 106% from $2.5 million for the three
months ended February 28, 1999 to $5.1 million for the three months ended
February 29, 2000. We anticipate that total cost of revenues will increase in
dollar amounts in future periods as we provide continued services to support
customer implementations and as we experience higher third party license costs
as deployments increase.
COST OF LICENSE AND ROYALTY. Cost of license and royalty revenues
decreased 20% from $638,000 for the three months ended February 28, 1999 to
$510,000 for the three months ended February 29, 2000. These amounts represented
17% and 42% of license and royalty revenues over the respective periods. The
decrease in cost of license and royalty revenues in dollar amounts was due
primarily to a one-time credit received from a third party license vendor
related to maintenance and support. 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 as deployments continue to
increase. Certain previously capitalized third party costs, have been fully
amortized which will have the effect of decreasing license and royalty costs as
a percentage of related revenues. However, introduction of new third party
technology may offset the effect of the amortized costs or increase license and
royalty cost as a percentage of related revenues.
COST OF SERVICE. Cost of service revenues increased 150% from $1.8
million for the three months ended February 28, 1999 to $4.6 million for the
three months ended February 29, 2000. These amounts represented 62% and 102% of
service revenues over the respective periods. The increase in dollar amounts and
as a percentage of service revenues was due primarily to our continued
investment in our professional service organization. In addition, we had an
increased reliance on third party consultants which were necessary to meet the
growth in customer installation, training and deployment of our products. We
expect cost of service revenues to increase in dollar amounts to the extent
existing and new customers install and deploy our products. We also expect the
cost of service revenues, as a percentage of service revenues, to fluctuate in
future periods. These costs may increase in the near term due to continued
expansion of services as existing and new customers install and deploy our
products and we continue to provide and support limited trial installations of
our products at discounted prices to network operators in order to continue to
increase our market share.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salary and other related costs for personnel and external
consultants as well as costs related to outsourced development projects to
support product development. Research and development expenses increased 99%
from $4.8 million for the three months ended February 28, 1999 to $9.6 million
for the three months ended February 29, 2000. These amounts represented 128% and
108% of total revenues over the respective periods. The
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increase in both dollar amounts and as a percentage of total revenues was
primarily due to increases in headcount and related expenses, as well as an
increase in outsourced development projects, in particular with General
Instrument. Research and development expenses were further increased by a
reduction in the level of custom development projects, which when billable to
customers, the related costs are classified as cost of service revenues. The
classification of costs between research and development and cost of service
revenues may fluctuate between categories depending on the level of projects
that are billable at any point in time. We believe that continued investment in
research and development is critical to attaining our strategic objectives.
Consequently, we 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.
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 increased 95%
from $2.7 million for the three months ended February 28, 1999 to $5.2 million
for the three months ended February 29, 2000. These amounts represented 69% and
60% of total revenues over the respective periods. The increase in dollar
amounts was due primarily to increased employee-related expenses, increased
marketing activities such as our PopTV program and increased trade show
presence, as well as higher commission costs. We believe sales and marketing
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 in
the long-term.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for legal, corporate development,
human resource and finance employees, as well as outside legal and other
professional services. General and administrative expenses increased 149% from
$952,000 for the three months ended February 28, 1999 to $2.4 million for the
three months ended February 29, 2000. These amounts represented 31% and 21% of
total revenues over the respective periods. The increase in both dollar amounts
and as a percentage of total revenues was due primarily to increased staffing,
including the formation of our corporate development organization and the
establishment of the infrastructure necessary to support our obligations as a
public company, as well as $624,000 of merger termination costs. We believe
general and administrative expenses will increase in dollar amounts as we
continue to add personnel. However, if revenues increase, we expect these costs
to decrease as a percentage of total revenues in the long-term.
AMORTIZATION OF PURCHASED INTANGIBLES. Purchased intangibles represent
the purchase price of Navio in excess of identified tangible assets and is
amortized over three years. In August 1997, we recorded approximately $18.3
million of purchased intangibles, which is being amortized on a straight-line
basis over an estimated useful life of three years. We recorded approximately
$1.5 million of amortization expense for each of the three months ended February
29, 2000 and February 28, 1999.
AMORTIZATION OF WARRANTS. Warrant expense represents the amortization
of warrants based on their estimated fair value, as determined using the
Black-Scholes model, at the earlier of the grant date or the date it becomes
probable that the warrants will be earned. In accordance with the Emerging
Issues Task Force No. 96-18, the warrants will continue to be revalued in
situations where they are granted prior to establishment of a performance
commitment. In April and May 1999, we entered into agreements with several
network operators that require us to issue warrants to purchase up to an
aggregate of 4,599,992 shares of common stock if the network operators satisfy
commercial milestones. As of February 29, 2000, we recorded warrants to purchase
up to 1,303,330 shares of common stock, net of exercises and expirations, as
being earned by six network operators for signing license agreements and making
license prepayments. These warrants are expensed over their respective
amortization periods. Amortization expense for the three months ended February
29, 2000 was $4.0 million. No amortization expense was recorded during the three
months ended February 28, 1999. As of February 29, 2000, approximately $94.2
million of prepaid warrants have been recorded on the consolidated balance
sheet. We expect amortization expense for warrants to increase significantly as
additional warrants are earned.
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AMORTIZATION OF DEFERRED STOCK COMPENSATION. Deferred stock
compensation represents the difference between the estimated fair value of our
common stock for accounting purposes and the option exercise price of such
options at the grant date. In fiscal 1999, we began recording deferred stock
compensation for 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. Amortization of deferred stock compensation was approximately $518,000
for the three months ended February 29, 2000, compared to amortization of
deferred stock compensation of $282, 000 for the three months ended February 28,
1999. The majority of the stock option grants being amortized were granted in
the latter part of fiscal 1999. As of February 29, 2000, we have recorded total
deferred stock compensation related to stock option grants of approximately $6.2
million, net of terminations. We anticipate that deferred stock compensation
expense will remain relatively stable from year to year, with decreases
resulting from the effect of employee terminations. Beginning in fiscal 2003, we
expect deferred stock compensation expense to decrease ratably through the first
quarter of fiscal 2004.
INTEREST AND OTHER INCOME, NET
Net interest and other income includes interest income (net of interest
expense) on our cash, cash equivalents and short-term investments partially
offset by bank charges and losses on disposals of fixed assets. Net interest and
other income was $2.1 million for the three months ended February 29, 2000
compared to net expense of $10,000 for the three months ended February 28, 1999.
The increase is due to interest income on proceeds from our private placement
offering in May 1999, as well as our initial public offering of common stock in
August 1999, and our secondary offering in February 2000. This was partially
offset by losses on disposals of fixed assets.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) includes income tax benefit and foreign
withholding tax expense. Income tax provision of approximately $12,000 for the
three months ended February 29, 2000, consisted primarily of foreign withholding
tax expense for royalty revenue. Income tax benefit of approximately $329,000
for the three months ended February 28, 1999 was comprised of the benefits
received under a tax-sharing agreement with Oracle that provides for our
consolidation into Oracle's tax group for certain state income tax payment
purposes. Since the effective date of our initial public offering, upon which
Oracle's ownership percentage was reduced to less than 50%, our results are no
longer included in any of Oracle's consolidated state tax returns and we will no
longer receive a tax benefit from Oracle.
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NINE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999.
REVENUES
Total revenues increased 55% from $12.2 million for the nine months
ended February 28, 1999, to $18.9 million for the nine months ended February 29,
2000.
LICENSE AND ROYALTY. License and royalty revenues increased 61% from
$4.1 million in the nine months ended February 28, 1999 to $6.5 million in the
nine months ended February 29, 2000. This increase was due primarily to
increased royalty revenues resulting from increased deployments and the
expiration of prepayments associated with legacy contracts.
SERVICE REVENUES. Service revenues increased 52% from $8.1 million in
the nine months ended February 28, 1999 to $12.4 million in the nine months
ended February 29, 2000. This increase was due primarily to the continued
expansion of our professional services organization created in the beginning of
fiscal 1999. To a lesser extent, the increase was due to the overall increase in
the level of support and billable custom-development projects.
COST OF REVENUES
Total cost of revenues increased 154% from $6.7 million in the nine
months ended February 28, 1999 to $16.9 million in the nine months ended
February 29, 2000. We anticipate that total cost of revenues will increase in
dollar amounts in future periods as we provide continued services to support
customer implementations and as we experience higher third party license costs
as deployments increase.
COST OF LICENSE AND ROYALTY. Cost of license and royalty revenues
decreased 17% from $2.0 million in the nine months ended February 28, 1999 to
$1.6 million in the nine months ended February 29, 2000. These amounts
represented 25% and 48% of license and royalty revenues over the respective
periods. The decrease in cost of license and royalty revenues in dollar amounts
was due primarily to the full amortization of certain prepaid inbound licenses,
as well as a one-time credit received from a third party license vendor related
to maintenance and support. 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. Certain previously capitalized third party
costs, have been fully amortized which will have the effect of decreasing
license and royalty costs as a percentage of related revenues. However,
introduction of new third party technology may offset the effect of the lower
amortized costs or increase license and royalty cost as a percentage of related
revenues.
COST OF SERVICE. Cost of service revenues increased 225% from $4.7
million in the nine months ended February 28, 1999 to $15.3 million in the nine
months ended February 29, 2000. These amounts represented 123% and 58% of
service revenues over the respective periods. The increase in dollar amounts and
as a percentage of service revenues was due primarily to our continued
investment in our professional service organization. In addition, we experienced
increased reliance on third party consultants, which were necessary to meet the
growth in customer installation, training and deployment of our products. We
expect cost of service revenues to increase in dollar amounts to the extent
existing and new customers install and deploy our products. We also expect the
cost of service revenues, as a percentage of service revenues, to fluctuate in
future periods. These costs may increase in the near-term due to continued
expansion of services as existing and new customers install and deploy our
products and we continue to provide and support limited trial installations of
our products at discounted prices to network operators in order to continue to
increase our market share.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased
65% from $12.9 million in the nine months ended February 28, 1999 to $21.3
million in the nine months ended February 29, 2000. These amounts represented
113% and 106% of total revenues over the respective periods. The
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increase in dollar amounts and as a percentage of total revenues was due
primarily to higher personnel and related expenses resulting from increased
staffing, as well as an outsourced development project with General Instrument.
SALES AND MARKETING. Sales and marketing expenses increased 50% from
$8.1 million in the nine months ended February 28, 1999 to $12.1 million in the
nine months ended February 29, 2000. These amounts represented 64% and 66% of
total revenues over the respective periods. The increase in dollar amounts was
due primarily to increased employee-related expenses, increased marketing
activities such as our PopTV program, increased trade show presence, as well as
higher commission costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 117% from $2.6 million in the nine months ended February 28, 1999 to
$5.6 million in the nine months ended February 29, 2000. These amounts
represented 29% and 21% of total revenues over the respective periods. The
increase in both dollar amounts and as a percentage of total revenues was due
primarily to increased staffing, including the formation of our corporate
development organization and the establishment of the infrastructure necessary
to support our obligations as a public company. In addition, we increased
spending for outside legal and accounting services, and during the three months
ended February 29, 2000 incurred $624,000 of merger termination costs.
AMORTIZATION OF PURCHASED INTANGIBLES. Purchased intangibles represent
the purchase price of Navio in excess of identified tangible and intangible
assets and is amortized over three years. In August 1997, we recorded
approximately $18.3 million of purchased intangibles, which is being amortized
on a straight-line basis over an estimated useful life of three years. We
recorded approximately $4.6 million of amortization expense for each of the nine
months ended February 29, 2000 and February 28, 1999.
INTEREST AND OTHER INCOME, NET
Net interest and other income increased from approximately $139,000 for
the nine months ended February 28, 1999, to $4.4 million for the nine months
ended February 29, 2000. The increase was due to interest income on proceeds
from our private placement offerings as well as our initial public offering of
common stock in August, 1999, and our secondary offering in February, 2000. This
was partially offset by losses on disposals of fixed assets.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) includes income tax benefit and foreign
withholding tax expense. Income tax provision of approximately $61,000 for the
nine months ended February 29, 2000, consisted primarily of foreign withholding
tax expense for royalty revenue. Income tax benefit of approximately $887,000
for the nine months ended February 28, 1999 was comprised of the benefits
received under a tax-sharing agreement with Oracle that provides for our
consolidation into Oracle's tax group for certain state income tax payment
purposes. Since the effective date of our initial public offering, upon which
Oracle's ownership percentage was reduced to less than 50%, our results are no
longer included in any of Oracle's consolidated state tax returns and we will no
longer receive a tax benefit from Oracle.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. We will adopt SAB 101 as required in the first quarter of fiscal
2001 and is evaluating the effect that such adoption may have on its
consolidated results of operations and financial position.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity was cash, cash equivalents and
short-term investments, which were approximately $427.2 million as of
February 29, 2000. On February 17, 2000, we completed a secondary stock
offering in which we sold 2,890,000 shares of our common stock at $108 per
share. Proceeds from this transaction after underwriters' discounts and other
related costs of $14.9 million, were $297.2 million. The net proceeds were
predominately held in cash, cash equivalents and short-term investments at
February 29, 2000.
In addition, on August 2, 1999, we completed an initial public
offering in which we sold 12,500,000 shares of our common stock at $8 per
share. We sold an additional 902,100 shares of common stock at $8 per share
related to the exercise of the underwriters' over-allotments. Proceeds from
these transactions after underwriters' discounts and other related costs of
$9.2 million, were $98.0 million. Immediately following the closing of the
offering, Liberate also sold 1,627,604 shares of common stock in a private
placement to Lucent Technologies for an aggregate of $12.1 million, net of
underwriters' discounts. The net proceeds were also predominately held in
cash, cash equivalents and short-term investments at February 29, 2000. In
addition, following the closing of the offering, we issued 843,880 shares of
common stock to Middlefield Ventures, an affiliate of Intel, in connection
with the cancellation of a convertible promissory note for $4.0 million
payable to Middlefield. Related to this transaction, the accrued interest on
the convertible promissory note was charged to paid-in capital.
Cash used in operations was approximately $28.7 million and $11.1
million for the nine months ended February 29, 2000 and February 28, 1999, an
increase of $17.6 million from year to year. This increase was primarily due to
a higher net loss related primarily to increased staffing and an increase in
restricted cash, partially offset by an increase in deferred revenues and
amortization expense for the nine months ended February 29, 2000.
Net cash used in investing activities was approximately $82.9 million
and $781,000 for the nine months ended February 29, 2000 and February 28, 1999.
This increase was primarily due to the purchase of short-term investments
combined with purchases of property and equipment for our new facilities.
Net cash provided by financing activities was approximately $410.7
million and $5.2 million for the nine months ended February 29, 2000 and
February 28, 1999. The secondary offering, initial public offering and the
private stock placement contributed $407.7 million of the increase in cash
generated by financing activities from year to year.
At February 29, 2000, we had $332.7 million in cash and cash
equivalents and did not have any material commitments for capital expenditures.
At February 29, 2000, we also had $94.5 million in short-term investments and
$8.8 million in restricted cash. 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 provided by General Instrument.
These fees will be paid out in quarterly installments over a three-year period.
During the first quarter of fiscal 2000, we signed an amendment to the
Technology License and Distribution Agreement with Sun Microsystems. This
amendment called for us to pay certain minimum royalties in exchange for the
right to certain Sun technology and to maintain the status as a preferred vendor
of Sun. Minimum guaranteed royalties of approximately $3.8 million are to be
paid to Sun through the period ended December 31, 2004. Approximately $406,000
of expense related to this contract was recorded for the nine months ended
February 29, 2000. See Note 5 of Notes to Condensed Consolidated Financial
Statements.
We currently anticipate that our current cash, cash equivalents and
short-term investments 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
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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.
YEAR 2000 READINESS DISCLOSURE
On January 1, 2000, computer systems and software products that were
not upgraded to comply with "Year 2000" requirements could have failed or
malfunctioned because they were not able to distinguish 21st century dates
from 20th century dates. In response to the Year 2000 changeover, we
undertook a Year 2000 readiness program that included the review, inventory,
testing and evaluation of our IT and non-IT systems, our client and server
software products, and the readiness of third parties with whom we do
business.
To date, we have experienced no material problems as a result of the
Year 2000 changeover nor have we received any reports from customers, vendors or
other third parties with whom we do business of problems resulting from the Year
2000 changeover. However, 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 compliant could materially disrupt our operations, which
could seriously harm our business.
Because our Year 2000 compliance efforts were 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. While we may incur additional costs related to Year 2000
compliance for administrative personnel to manage the continued testing, review
and remediation, and outside vendor and contractor assistance, if necessary, we
currently do not expect future Year 2000 compliance costs to be material. If we
were to experience material problems and costs with Year 2000 compliance, such
problems 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.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
We were incorporated in April 1996 and began shipping our initial
products to customers in the last quarter of fiscal 1997. Our limited operating
history makes evaluation of our business and prospects difficult. Companies in
an early stage of development frequently encounter heightened risks and
unexpected expenses and difficulties. For us, these risks include the:
- Limited number of network operators that have deployed products
and services incorporating our technology;
- Limited number of information appliance manufacturers that have
incorporated our technology into their products;
- Delays in deployment of high speed networks and Internet-enhanced
services and applications by our network operator customers; and
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- Our unproven long-term business model, which depends on generating
the majority of our revenues from royalty fees paid by network
operators and information appliance manufacturers.
These risks, expenses and difficulties apply particularly to us because
our market, the information appliance software market, is new and rapidly
evolving.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We incurred net losses of approximately $3.3 million in fiscal 1996,
$19.0 million in fiscal 1997, $94.4 million in fiscal 1998, $33.1 million in
fiscal 1999 and $43.8 million during the nine months ended February 29, 2000.
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
February 29, 2000, we had an accumulated deficit of approximately $193.5
million. Since our inception, we have not had a profitable quarter and may
never achieve or sustain profitability. Although our revenues increased from
fiscal 1997 to fiscal 1998 and from fiscal 1998 to fiscal 1999, we may not be
able to sustain our historical revenue growth rates. We also expect to
continue to incur increasing cost of revenues, research and development,
sales and marketing and general and administrative expenses. If we are to
achieve profitability given our planned expenditure levels, we will need to
generate and sustain substantially increased license and royalty revenues;
however, we are unlikely to be able to do so for the foreseeable future. As a
result, we expect to incur significant and increasing losses and negative
cash flows for the foreseeable future. In addition, from the beginning of
fiscal 1997 through February 29, 2000, approximately 65% of our revenues have
been derived from services provided by us and not from license and royalty
fees paid by network operators and information appliance manufacturers in
conjunction with the deployment of products and services incorporating our
software products. If we are unable to derive a greater proportion of our
revenues from these license and royalty fees, our losses will likely continue
indefinitely.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE
Our quarterly operating results have varied in the past and are likely
to vary significantly from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not a good indication
of our future performance. Moreover, we expect to derive substantially all of
our revenues for the near term from license fees and related consulting and
support services. Over the longer term, to the extent deployments increase, we
expect to derive an increasing portion of our revenues from royalties paid by
network operators and information appliance manufacturers. If deployments do not
increase or this transition otherwise does not occur, we are unlikely to be able
to generate or sustain substantially increased revenue and our operating results
will be seriously harmed.
In the short term, we expect our quarterly revenues to be significantly
dependent on 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, in the past we have
experienced seasonality in our quarter ending August 31. These seasonal trends
may continue to affect our quarter-to-quarter revenues.
THE MARKET FOR INFORMATION APPLIANCES IS NEW AND MAY NOT DEVELOP AS WE
ANTICIPATE
Because the information appliance market is newly emerging, the
potential size of this new market opportunity and the timing of its development
are uncertain. As a result, our profit potential is unproven. We are dependent
upon the commercialization and broad acceptance by consumers and businesses of a
wide variety of information appliances including, among others, television
set-top boxes, game consoles,
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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 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
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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, and
OpenTV and Spyglass, who announced plans to merge recently. On the server side,
our primary competitor is Microsoft. We expect additional competition from other
established and emerging companies. We expect competition to persist and
intensify as the information appliance market develops and competitors focus on
additional product and service offerings. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins, longer sales
cycles, reduced revenues and loss of market share.
Many of our existing and potential competitors, particularly Microsoft,
have longer operating histories, a larger customer base, greater name
recognition and significantly greater financial, technical, sales and marketing
and other resources than we do. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives. In
addition, many of our competitors have well-established relationships with our
current and potential customers. Moreover, some of our competitors, particularly
Microsoft, have significant financial resources, which have enabled them in the
past and may enable them in the future to make large strategic investments in
our current and potential customers. Such investments may enable competitors to
strengthen existing relationships or quickly establish new relationships with
our current or potential customers. For example, as a result of an investment in
AT&T, Microsoft obtained a nonexclusive licensing agreement under which AT&T
will purchase at least 7.5 million licenses of Microsoft software for television
set top boxes. Investments such as this may discourage our potential or current
customers who receive the investment from deploying our information appliance
software, regardless of their views of the relative merits of our products and
services.
ORACLE'S OWNERSHIP OF OUR STOCK AND OTHER RELATIONSHIPS WITH US COULD LIMIT THE
ABILITY OF OTHER STOCKHOLDERS TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND
OTHER TRANSACTIONS SUBMITTED FOR A VOTE OF OUR STOCKHOLDERS
Based on 88,166,261 shares outstanding on February 29, 2000, Oracle
beneficially owns 35,374,843 shares, approximately 40.1% of our outstanding
common stock. In addition, in May 1999, we entered into a voting agreement with
Oracle, Comcast, Cox Communications, MediaOne, Rogers and Shaw. 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, one of our eight
directors are directors and officers of Oracle. As a result, Oracle, acting both
through our board of directors and through its ownership of our capital stock,
may exert significant influence over us. This concentration of ownership could
also have the effect of delaying or preventing a third party from acquiring
control over us at a premium over the then current market price of our common
stock.
In addition, Oracle provides us with a distribution channel for our
products in Asia/Pacific and assists us in providing our customers with support.
We have also entered into several commercial, technological and financial
arrangements with Oracle on which our business depends. If Oracle terminates
these arrangements, if Oracle does not fulfill its obligations under these
arrangements, if Oracle ever acts in a way that is adverse to our interests, or
if we are no longer eligible to receive the benefits of these arrangements, we
may need to find alternative distribution channel partners, seek alternative
technologies for our products and services and find alternative financial
resources.
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WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES
We currently derive, and we expect to continue to derive, a
significant portion of our revenues from a limited number of customers. For
the nine months ended February 29, 2000, our five largest customers accounted
for approximately 53% of our revenues, with Cable & Wireless accounting for
18% of our total revenues and Wind River accounting for 17% of our total
revenues. For the nine months ended February 28, 1999, our five largest
customers accounted for approximately 54% of our total revenues, with Wind
River Systems accounting for 24% of our total revenues. We expect that we
will continue to be dependent upon a limited number of customers for a
significant portion of our revenues in future periods, although the customers
may vary from period to period. As a result, if we fail to successfully sell
our products and services to one or more customers in any particular period,
or a large customer purchases less of our products or services, defers or
cancels orders, or terminates its relationship with us, our revenues could
decline significantly.
OUR LENGTHY SALES CYCLE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE
We believe that the purchase of our products and services involves a
significant commitment of capital and other resources by a customer. In many
cases, the decision for our customers to use our products and services requires
them to change their established business practices and conduct their business
in new ways. As a result, we may need to educate our potential customers on the
use and benefits of our products and services. In addition, our customers
generally must consider a wide range of other issues before committing to
purchase and incorporate our technology into their offerings. As a result of
these and other factors, including the approval at a number of levels of
management within a customer's organization, our sales cycle averages from six
to twelve months and may sometimes be significantly longer. Because of the
length of our sales cycle, we have a limited ability to forecast the timing and
amount of specific sales.
In addition, we base our quarterly revenue projections, in part, upon
our expectation that specific sales will occur in a particular quarter. In the
past, our sales have occurred in quarters other than those anticipated by us. If
our expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of financial analysts and investors.
DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS
Despite frequent testing of our software's scalability in a laboratory
environment, the ability of our software platform to support and manage a
substantial number of users in an actual deployment is uncertain. If our
software platform does not efficiently scale to support and manage a substantial
number of users while maintaining a high level of performance, demand for our
products and services and our ability to sell additional products to our
existing customers will be significantly reduced.
INTERNATIONAL REVENUES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES;
ACCORDINGLY, IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS IN A TIMELY
MANNER, OUR GROWTH IN INTERNATIONAL REVENUES WILL BE LIMITED
International revenues accounted for approximately 52% of our total
revenues for both the nine months ended February 29, 2000 and February 28, 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 successfully expand international sales, we
must establish additional foreign operations, hire additional personnel and
increase our foreign direct and
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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.
WE MAY HAVE TO CEASE OR DELAY PRODUCT SHIPMENTS IF WE ARE UNABLE TO OBTAIN KEY
TECHNOLOGY FROM THIRD PARTIES
We rely on technology licensed from third parties, including
applications that are integrated with internally developed software and used in
our products. Most notably, we license certain Java and Jini technologies from
Sun Microsystems, VxWorks real time operating system from Wind River Systems,
font technology from BitStream and multimedia architecture from RealNetworks.
These third party technology licenses may not continue to be available to us on
commercially reasonable terms, or at all, and we may not be able to obtain
licenses for other existing or future technologies that we desire to integrate
into our products. If we cannot maintain existing third party technology
licenses or enter into licenses for other existing or future technologies needed
for our products we would be required to cease or delay product shipments while
we seek to develop alternative technologies.
WE DO NOT CURRENTLY HAVE LIABILITY INSURANCE TO PROTECT AGAINST THIRD PARTY
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE EXPENSIVE TO DEFEND
We expect that, like other software product developers, we will
increasingly be subject to infringement claims as the number of products and
competitors developing information appliance software grows and the
functionality of products in different industry segments overlaps. From time to
time, we hire or retain employees or external 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;
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- Require us to redesign our products; or
- Require us to enter into royalty or licensing agreements.
WE COULD SUFFER LOSSES AND NEGATIVE PUBLICITY IF OUR TECHNOLOGY CAUSES A FAILURE
OF OUR NETWORK OPERATOR CUSTOMERS' SYSTEMS
Our technology is integrated into the products and services of our
network operator customers. Accordingly, a defect, error or performance
problem with our technology could cause our customers' telecommunication,
cable and satellite television or Internet service systems to fail for a
period of time. Any such failure will cause severe customer service and
public relations problems for our customers. As a result, any failure of our
network operator customers' systems caused by our technology could result in:
- Delayed or lost revenue due to adverse customer reaction;
- Negative publicity regarding us and our products and services; and
- Claims for substantial damages against us, regardless of our
responsibility for such failure.
Any claim could be expensive and require the expenditure of a
significant amount of resources regardless of whether we prevail. We currently
do not have liability insurance to protect against this risk.
OUR SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH THE LATEST TECHNOLOGICAL
CHANGES BUT WE HAVE EXPERIENCED AND MAY IN THE FUTURE EXPERIENCE DELAYS IN
COMPLETING DEVELOPMENT AND INTRODUCTION OF NEW SOFTWARE PRODUCTS
The market for information appliance software is characterized by
evolving industry standards, rapid technological change and frequent new product
introductions and enhancements. Our technology enables network operators to
deliver content and applications to information appliances over the Internet.
Accordingly, our success will depend in large part upon our ability to adhere to
and adapt our products to evolving Internet protocols and standards. Therefore,
we will need to develop and introduce new products that meet changing customer
requirements and emerging industry standards on a timely basis. In the past, we
have experienced delays in completing the development and introduction of new
software products. We may encounter such delays in the development and
introduction of future products as well. In addition, we may:
- Fail to design our current or future products to meet customer
requirements;
- Fail to develop and market products and services that respond to
technological changes or evolving industry standards in a timely or
cost effective manner; and
- Encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or
that shorten the life cycles of our existing products and services.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
MAY HARM OUR COMPETITIVENESS
Our ability to compete and continue to provide technological innovation
is substantially dependent upon internally developed technology. We rely
primarily on a combination of patents, trademark laws, copyright laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. In addition, we have acquired or have been awarded 16
patents and have 26 patent applications pending in the U. S. Patent & Trademark
Office. 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.
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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 ABILITY TO DELIVER PRODUCTS
IN A TIMELY MANNER, FULFILL EXISTING CUSTOMER COMMITMENTS AND ATTRACT AND RETAIN
NEW CUSTOMERS
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources,
especially as more network operators and information appliance manufacturers
incorporate our software into their products and services. This potential for
rapid growth is particularly significant in light of the large customer bases of
network operators and information appliance manufacturers and the frequent need
to tailor our products and services to our customers' unique needs. To the
extent we add several customers simultaneously or add customers whose product
needs require extensive customization, we may need to significantly expand our
operations. Moreover, we expect to significantly expand our domestic and
international operations by, among other things, expanding the number of
employees in professional services, research and development and sales and
marketing.
This additional growth will place a significant strain on our limited
personnel, financial and other resources. Our future success will depend, in
part, upon the ability of our senior management to manage growth effectively.
This will require us to implement additional management information systems, to
further develop our operating, administrative, financial and accounting systems
and controls, to hire additional personnel, to develop additional levels of
management within the corporation, to locate additional office space in the
United States and internationally and to maintain close coordination among our
development, accounting, finance, sales and marketing, consulting services and
customer service and support organizations. Failure to accomplish any of these
requirements would seriously harm our ability to deliver products in a timely
fashion, fulfill existing customer commitments and attract and retain new
customers.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS
We believe that our success will depend on the continued employment of
our senior management team and key technical personnel, none of whom, except
Mitchell E. Kertzman, our President and Chief Executive Officer, and Coleman
Sisson, our Chief Operating Officer, has an employment agreement with us. If one
or more members of our senior management team or key technical personnel were
unable or unwilling to continue in their present positions, these individuals
would be very difficult to replace and our ability to manage day-to-day
operations, develop and deliver new technologies, attract and retain customers,
attract and retain other employees and generate revenues, would be seriously
harmed.
OUR PLANNED EXPANSION OF OUR INDIRECT DISTRIBUTION CHANNELS WILL BE EXPENSIVE
AND MAY NOT SUCCEED
To date, we have sold our products and services principally through our
direct sales force. In the future, we intend to expand the number and reach of
our indirect channel partners, primarily overseas, through distribution
agreements similar to the one we have with Oracle. The development of these
indirect channels will require the investment of significant company resources,
which could seriously harm our business if our efforts do not generate
significant revenues. Moreover, we may not be able to attract indirect channel
partners that will be able to effectively market our products and services. The
failure to recruit indirect channel partners that are able to successfully
market our products and services could seriously hinder the growth of our
business.
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WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET
AND ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND
DILUTE STOCKHOLDER VALUE
In addition to our acquisition of SourceSuite and our pending
acquisition of MoreCom, we may acquire other businesses in the future in
order to remain competitive or to acquire new technologies. As a result of
future acquisitions, we may need to integrate product lines, technologies,
widely dispersed operations and distinct corporate cultures. In addition, the
product lines or technologies of future acquisitions may need to be altered
or redesigned in order to be made compatible with our software products or
the software architecture of our customers. These integration efforts may not
succeed or may distract our management from operating our existing business.
Our failure to successfully manage future acquisitions could seriously harm
our operating results. In addition, our stockholders would be diluted if we
finance acquisitions by incurring convertible debt or issuing equity
securities.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES INTO OUR BUSINESS
OR ACHIEVE THE EXPECTED BENEFITS OF THOSE ACQUISITIONS
Our acquisition of SourceSuite and our pending acquisition of
MoreCom, will require integrating our business with theirs, including
integrating product lines, technologies, widely dispersed operations and
distinct corporate cultures. We may not be able to successfully assimilate
the personnel, operations and customers of SourceSuite or MoreCom into our
business. Additionally, we may fail to achieve the anticipated synergies from
the acquisition of SourceSuite and the pending acquisition of MoreCom,
including product development and other operational synergies. The
integration process may further strain our existing financial and managerial
controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from our core business
objectives. In addition, we are not experienced in managing significant
facilities or operations in geographically distant areas. We may not be able
to retain various individuals who provide services to SourceSuite or MoreCom
that we intend to hire in connection with these acquisitions. Our failure to
successfully manage the SourceSuite acquisition and the pending MoreCom
acquisition could seriously harm our operating results. In addition, the
1,772,000 shares of our common stock issued in connection with the closing of
the SourceSuite acquisition resulted in dilution to existing stockholders.
Similarly, the future issuance of up to 8,030,059 shares of our common stock
in connection with the pending closing of the MoreCom acquisition will result
in dilution to existing stockholders.
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
In April and May 1999, the Company entered into agreements with several
network operators that require Liberate to issue warrants to purchase up to an
aggregate of 4,599,992 shares of common stock if those network operators satisfy
commercial milestones. In the event the milestones are met, we will be required
to record a significant non-cash accounting expense over the estimated economic
life of the arrangements with the network operators, which would be equal to 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 February 29, 2000,
warrants to purchase 1,303,330 shares of common stock at a range of $4.80 to
$6.90 per share have been issued, net of warrants exercised and expired, under
the terms of these agreements. Of these warrants, 983,330 warrants were fully
vested. The remaining warrants continue to vest through May 31, 2003 as these
network operators satisfy certain commercial milestones. The value of these
warrants on the balance sheet as of February 29, 2000 was $94.2 million, net of
amortization. Amortization for the first nine months of fiscal 2000 was $5.1
million.
DEMAND FOR OUR PRODUCTS AND SERVICES WILL NOT INCREASE IF THE INTERNET DOES NOT
CONTINUE TO GROW AND IMPROVE
Acceptance of our software platform depends substantially upon the
widespread adoption of the Internet for commerce, communications and
entertainment. As is typical in the case of an emerging industry characterized
by rapidly changing technology, evolving industry standards and frequent new
27
<PAGE>
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 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.
WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO FUND
OUR CONTINUED OPERATIONS
Since our inception, cash used in our operations has substantially
exceeded cash received from our operations, and we expect this trend to continue
for the foreseeable future. We expect that the net proceeds from this offering
and our initial public offering will be sufficient to meet our working capital
and capital
28
<PAGE>
expenditure needs for at least the 12 months following this offering. After
that, we may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms, or at all. If
we need additional capital and cannot raise it on acceptable terms, we may
not be able to, among other things:
- Develop or enhance our products and services;
- Acquire complementary technologies, products or businesses;
- Open new offices, in the United States or internationally;
- Hire, train and retain employees; or
- Respond to competitive pressures or unanticipated requirements.
PROVISIONS OF OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DETER TAKEOVERS AND
PREVENT YOU FROM RECEIVING A PREMIUM FOR YOUR SHARES
Provisions of our certificate of incorporation and bylaws as well as
provisions of Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. This risk is especially acute for us because technology companies
have experienced greater than average stock price volatility in recent years
and, as a result, have been subject to, on average, a greater number of
securities class action claims than companies in other industries. Due to the
potential volatility of our stock price, we may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and
divert management's attention and resources.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
INTEREST RATE RISK
As of February 29, 2000, our investments consisted of $201.2 million of
short-term money market securities and $223.3 million of debt securities. These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% prior to maturity, from
levels as of February 29, 2000, the decline of the fair value of the portfolio
would not be material.
FOREIGN CURRENCY
We transact business in various foreign currencies and, accordingly, we
are subject to exposure from adverse movements in foreign currency exchange
rates. To date, the effect of changes in foreign currency exchange rates on
revenues and operating expenses have not been material. Substantially all of our
revenues are earned in U.S. dollars. Operating expenses incurred by our foreign
subsidiaries are denominated primarily in European currencies. We currently do
not use financial instruments to hedge these operating expenses. We intend to
assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis.
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<PAGE>
Part II. Other Information
Item 1. Legal proceedings
In December 1998, a former employee of Liberate filed an action in the
California Superior Court for the County of San Mateo against us for, among
other things, unpaid commissions of approximately $1.5 million, constructive
employment termination, intentional misrepresentation and negligent
misrepresentation. In October 1999, the plaintiff amended his complaint against
us, adding claims for damages for failure to pay wages under the California
Labor Code and common law retaliation, and sought to impose a constructive trust
on the allegedly withheld commissions and any enhancement in value of that
money. In December 1999, we filed a motion for summary judgment/summary
adjudication to dismiss all of the claims brought by the plaintiff. In January
2000, the Court dismissed eight of the ten claims brought against us leaving
only the claims of intentional and negligent misrepresentation for trial. In
February 2000, we settled this matter, obtaining the complete dismissal of all
claims against Liberate in exchange for the payment of a nominal amount of cash
and the issuance of a nominal number of shares of Liberate's common stock.
As part of our acquisition of the VirtualModem software product and
related assets and technology of SourceSuite described in Note 7 of Notes to
Condensed Consolidated Financial Statements, we acquired certain patents that
were the subject of a patent infringement lawsuit brought by Interactive
Channel Technologies, Inc. and SMI Holdings, Inc., affiliated companies of
SourceSuite LLC, against Worldgate Communications, Inc. in May 1998. The
patent infringement claims have been assigned to us as a result of our merger
with SourceSuite. In June 1998, Worldgate filed a counterclaim against the
plaintiffs and Source Media, Inc., alleging among others violations of the
Lanham Act and Delaware's Uniform Deceptive Trade Practices Act, common law
unfair competition, tortious interference with existing and prospective
business relationships and misappropriation of confidential information and
trade secrets. The case is still in the discovery stage. We believe that the
patent infringement claims against Worldgate are valid and intend to continue
vigorously prosecuting this action. In addition, we have agreed to defend
Interactive Channel, SMI Holdings and Source Media against the
cross-complaint brought by Worldgate.
Item 2. Changes in Securities and Use of Proceeds
(c) Changes in Securities.
On March 3, 2000, we issued 1,772,000 shares of common stock to Source
Media and Insight Interactive to complete the acquisition of the interactive TV
software product known as VirtualModem and related assets owned by SourceSuite
LLC, a joint venture of Source Media and Insight Interactive. The issuance of
these shares were deemed to be exempt from registration under the Securities Act
of 1933 in reliance on Section 3(a)(10) of the Securities Act of 1933, as
amended.
During the nine months ended February 29, 2000, and prior to the
closing of our initial public offering, we granted options to purchase 1,740,040
shares of common stock to employees, external consultants and other service
providers of Liberate under our 1996 Stock Plan. During the nine months ended
February 29, 2000, we granted 1,380,430 options to purchase shares of common
stock to employees, external consultants or other service providers of Liberate
under our 1999 Equity Incentive Plan. The issuances described in this paragraph
were deemed exempt from registration under the Securities Act of 1933, as
amended, in reliance upon Rule 701 promulgated under such Act.
During the nine months ended February 29, 2000, employees, external
consultants and other service providers of Liberate exercised options for
1,997,201 shares of common stock under all plans (including preferred shares
that converted to common upon the initial public offering). The issuances
described in this paragraph were deemed exempt from registration under the
Securities Act of 1933, as amended, in reliance upon Rule 701 promulgated
under such Act.
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On December 21, 1999, we announced a two-for-one stock split in the
form of a special stock dividend, effective after January 14, 2000. The stock
split increased the number of shares of our common stock outstanding to
83,975,388 shares.
(d) Use of Proceeds.
On February 17, 2000 we completed a secondary stock offering in
which we sold 2,890,000 shares of common stock at $108 per share. The total
aggregate proceeds from this transactions was $312.1 million. Underwriters'
discounts and other related costs were $14.9 million resulting in net
proceeds of $297.2 million. On August 2, 1999, we completed the initial
public offering, in which we sold 12,500,000 shares of common stock at $8 per
share. Additionally, we sold 902,100 shares of common stock at $8 per share
in connection with the exercise of the underwriters' overallotment. The total
aggregate proceeds from these transactions were $107.2 million. Underwriters'
discounts and other related costs were $9.2 million resulting in net proceeds
of $98.0 million. The net proceeds were predominately held in cash, cash
equivalents and short-term investments at February 29, 2000. Immediately
following the closing of the offering, we also sold 1,627,604 shares of
common stock in a private placement to Lucent Technologies for an aggregate
of $12.1 million, net of underwriters' discounts. The net proceeds will be
used and have been applied to working capital and were predominantly held in
cash, cash equivalents, short-term investments at February 29, 2000.
Item 3. Defaults in Securities
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NO. EXHIBIT
10.40 Sublease Agreement for One Circle Star Way office space, dated
December 22, 1999 between Liberate and ThirdVoice, Inc.
10.41 Sublease Agreement for One Circle Star Way office space, dated
February 17, 2000 between Liberate and Charitableway.com.
10.42 Amendment to Employment Agreement between Liberate and Coleman
Sisson, dated February 28, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
1.) On March 16, 2000, Liberate filed a report on Form 8-K relating
to the acquisition of the VirtualModem software product and
related assets and technology of SourceSuite LLC, a joint venture
owned by Source Media, Inc. and Insight Interactive, LLC.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
undersigned, thereunto duly authorized.
Liberate Technologies
Date: April 13, 2000 by: /s/ Nancy J. Hilker
----------------------
Nancy J. Hilker,
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
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SUBLEASE
THIS SUBLEASE ("Sublease"), is entered into by and between Liberate
Technologies, a Delaware corporation ("Sublandlord"), and ThirdVoice, Inc., a
Delaware corporation ("Subtenant") as of December __, 1999.
RECITALS
A. Sublandlord leases certain premises (the "Master Lease Premises")
located in that certain building ("Building") at One Circle Star Way, San
Carlos, California, from Circle Star Center Associates, L.P., a California
limited partnership (the "Master Landlord"), pursuant to that certain Lease
dated April 27, 1999 (the "Master Lease"). Capitalized terms used but not
defined herein have the same meanings as they have in the Master Lease. The
Master Lease is attached hereto as Exhibit A and, except as set forth in
Paragraph 6 below, is incorporated by reference herein.
B. Sublandlord desires to sublease a portion of the Master Lease
Premises to Subtenant, and Subtenant desires to sublease a portion of the Master
Lease Premises from Sublandlord on the terms and provisions hereof.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Sublandlord and Subtenant covenant and agree as follows:
AGREEMENT
1. SUBLEASED PREMISES. On and subject to the terms and conditions below,
Sublandlord hereby leases to Subtenant, and Subtenant hereby leases from
Sublandlord, the space comprising the Third (3rd) floor of the Building,
consisting of approximately 26,561 rentable square feet and shown by
crosshatching on the attached Exhibit B (the "Subleased Premises").
2. TERM. This Sublease shall commence on the later of (1) substantial
completion of any tenant improvements installed by Master Landlord pursuant
to the Master Lease (the "Initial Tenant Improvements") and substantial
completion of the Wiring (defined below), and (2) March 1, 2000 (the
"Commencement Date"). The term shall expire on the day prior to the
nineteenth (19th) month anniversary of the Commencement Date ("Expiration
Date") unless sooner terminated pursuant to any provision hereof.
Notwithstanding anything to the contrary contained in this Sublease, if
Sublandlord has not delivered the Subleased Premises to Subtenant in the
condition required by May 1, 2000, Subtenant shall have the right to
terminate this Sublease, and Sublandlord promptly shall return to Subtenant
the prepaid first month's Rent and the Security Deposit.
3. RENT; DEPOSITS. Commencing on the Commencement Date and continuing for
twelve (12) months, Subtenant shall pay monthly rent ("Rent") to Sublandlord
in the monthly amount of Eighty-eight Thousand Nine Hundred Seventy-nine and
35/00 Dollars ($88,979.35) per month. Rent shall be payable to Sublandlord in
lawful money of the United States, in advance, without prior notice, demand,
or offset, on or before the first day of each calendar
1.
<PAGE>
month during the term hereof. All Rent shall be paid to Sublandlord at the
address specified for notice to Sublandlord, below. If the Commencement Date, or
termination date does not fall on the first day of a calendar month, Rent for
any partial month shall be prorated on a daily basis based upon a thirty day
calendar month.
(A) SUBTENANT'S SHARE OF EXPENSES AND TAXES. Subtenant shall pay, in
advance on the first day of each calendar month, together with Tenant's payment
of monthly Rent, Twenty-five and eight tenths percent (25.8%) of Expenses and
Taxes ("Subtenant's Allocable Share of Expenses and Taxes"), as the terms
"Expenses" and "Taxes" are defined and due under the Master Lease, allocable to
the Building. For the first twelve calendar months of the term, Tenant's
Allocable Share of Taxes and Expenses is estimated to be Nineteen Thousand Three
Hundred Eighty-nine and 53/100 Dollars ($19,389.53) per month. Sublandlord may
adjust the amount of Subtenant's Allocable Share of Expenses and Taxes at any
time the amount of Expenses and Taxes being charged to Sublandlord under the
Master Lease is adjusted in accordance with the terms thereof. Promptly
following reconciliation of the amounts charged to Sublandlord under Sections
3(c)(2) and 3(c)(3) of the Master Lease, the amounts charged to Subtenant
pursuant to this Section 3(a) shall be reconciled in accordance with the
provisions of Sections 3(c)(2) and 3(c)(3) of the Master Lease, which are
incorporated herein by Section 6, below.
(B) FIRST PAYMENT OF RENT AND SUBTENANT'S ALLOCABLE SHARE OF EXPENSED AND
TAXES. Upon execution of this Sublease, Subtenant shall pay to Sublandlord the
sum of One Hundred Eight Thousand Three Hundred Sixty-eight and 88/100 Dollars
($108,368.88), constituting payment in advance of the first month's Rent and the
first month's payment of Subtenant's Allocable Share of Expenses and Taxes.
(C) SECURITY DEPOSIT. Upon execution of this Sublease, Subtenant shall
provide to Sublandlord a letter of credit in the amount of Two Hundred Sixty-six
Thousand Nine Hundred and Thirty-eight and 05/100 Dollars ($266,938.05) ("LC")
constituting the Security Deposit in form reasonably satisfactory to
Sublandlord. The Security Deposit is not advance rental, nor a measure of
Sublandlord's damages. Sublandlord shall not be required to keep the Security
Deposit separate from its general accounts. Upon the occurrence of any default,
beyond applicable notice and cure periods, by Subtenant, Sublandlord may, from
time to time and without prejudice to any other remedy available to Sublandlord
provided herein or by law, use the Security Deposit to the extent necessary to
make good any arrears in Rent or other payments due hereunder, or other damage,
injury, expense or liability caused by such default. Subtenant shall pay to
Sublandlord, within five (5) days after receipt of demand, the amount so applied
to restore the Security Deposit to the original amount. The LC or any remaining
balance shall be returned to Subtenant not more than thirty (30) days after
Subtenant has surrendered the Subleased Premises in the condition required and
all Subtenant's other obligations under this Sublease have been fulfilled.
Notwithstanding anything to the contrary contained in this Sublease, the LC
shall be in effect until the sixtieth (60th) day after the Expiration Date. The
LC shall provide (i) that partial draws may be permitted, and (ii) that any draw
thereunder shall be accompanied by a certificate of an officer of Sublandlord
stating that Subtenant is in default, beyond applicable notice and cure periods,
under this Sublease, and that Sublandlord or its authorized agent is entitled to
draw down on the LC the amount requested pursuant to the terms of this Sublease.
Sublandlord shall be entitled to draw down the entire amount of the LC at any
2.
<PAGE>
time an event of default has occurred and continued beyond any applicable notice
and cure period. Any proceeds of the LC in excess of the amount necessary to
cure Subtenant's default and reimburse Sublandlord's damages shall be held by
Sublandlord as a cash security deposit.
4. TENANT IMPROVEMENTS; WIRING COSTS. Subtenant acknowledges that Master
Landlord is obligated to install the Initial Tenant Improvements pursuant to the
Master Lease. Sublandlord covenants to use good faith reasonable efforts to
cause Master Landlord to install the Initial Tenant Improvements pursuant to the
Master Lease on or before the Commencement Date and in the condition
substantially similar to the build-out of Sublandlord's space in building
located at Two Circle Star Way. Prior to Master Landlord's completion of the
Initial Tenant Improvements, Sublandlord and Subtenant shall mutually coordinate
color schemes and other minor adjustments to the floor plan for the Subleased
Premises as reasonably may be required by Subtenant. Sublandlord shall contract
with an electrical subcontractor of its choice (the "Wiring Subcontractor") and
shall use good faith reasonable efforts to cause the Wiring Subcontractor to
install with Subleased Premises Cat 5, Gigabit bandwidth certifiable wiring on
each floor, at a rate of 120 drops in hardwall locations and 80 drops in cubicle
locations (evenly distributed), all wired to a central IDF on each floor (the
"Wiring"). A "drop" is defined as two Ethernet connections and two telephone
connections. Sublandlord makes no representation or warranty with respect to the
condition of Subleased Premises and shall not be subject to any liability
arising out of the condition of the Subleased Premises. Subtenant agrees to look
solely to the Wiring Subcontractor for any claims arising out of the
installation of the Wiring referred to above.
Notwithstanding anything to the contrary contained in this Sublease,
with respect to the Initial Tenant Improvements, Sublandlord acknowledges that
Sublandlord has certain rights pursuant to Exhibit B of the Master Lease with
respect to Master Landlord's obligations in connection with construction of the
Initial Tenant Improvements, and Sublandlord shall exercise all such rights and
enforce all of Master Landlord's obligations on behalf of Subtenant with respect
to the Subleased Premises, including, without limitation, providing Master
Landlord with a punch list of items to be corrected and requiring Master Lessor
to repair any non-operational building systems. In addition, Sublandlord shall
enforce any warranties available to Sublandlord in connection with the
completion of the Initial Tenant Improvements to the Subleased Premises.
With respect to the Wiring, Sublandlord acknowledges that Sublandlord
is contracting with the Wiring subcontractor, and Sublandlord shall exercise all
rights it has with respect to the installation of the Wiring pursuant to
Sublandlord's contract with the subcontractor. In addition, Sublandlord shall
enforce any warranties available to Sublandlord in connection with the Wiring
for the Subleased Premises.
5. USE. Subtenant may use the Subleased Premises only for uses permitted
by the Master Lease. Subtenant shall not use or permit the use of the Subleased
Premises in a manner that will create waste or a nuisance, interfere with or
disturb other tenants in the Building or violate the provisions of the Master
Lease.
6. INCORPORATION OF MASTER LEASE. All of the terms and provisions of the
Master Lease, except as provided in this Paragraph 6, are incorporated into and
made a part of this Sublease and the rights and obligations of the parties under
the Master Lease are hereby imposed
3.
<PAGE>
upon the parties hereto with respect to the Subleased Premises, Sublandlord
being substituted for the "Landlord" in the Master Lease (except in Sections 7,
12, 20, 21 and 39 in which references to "Landlord" shall continue to be deemed
to refer to the Master Landlord) and Subtenant being substituted for the
"Tenant" in the Master Lease. It is further understood that where reference is
made in the Master Lease to the "Premises," the same shall mean the Subleased
Premises as defined herein; where reference is made to the "Commencement Date,"
the same shall mean the Commencement Date as defined herein; and where reference
is made to "this Lease," the same shall mean this Sublease. Notwithstanding the
foregoing, Sublandlord shall have no obligation to perform any of Master
Landlord's obligations under the Master Lease. The following Sections of the
Master Lease are not incorporated herein: Basic Lease Information (except for
"Tenant's Use"), Sections 2, 3(a), 3(b), 3(c)(1)(B), the second paragraph of
9(a), 9(h), the second paragraph of 26, 32, 33, 37, 38, 40, 41, 42, 43, 44, 45
(except for subsections (C)(3)(A) and (D)), Exhibit B (Work Letter), Exhibit F
Form of Letter of Credit), and Exhibit G (Description of Second Building). In
addition, with respect to any right of "Tenant" to terminate the Master Lease
pursuant to Sections 20 or 21 of the Master Lease, Sublandlord shall not
exercise such rights with respect to the Subleased Premises without the prior
written consent of Subtenant, which shall not be unreasonably withheld or
delayed.
Section 6 of the Master Lease, which is incorporated herein, requires that
Sublandlord notify Subtenant whether any Alterations will be required to be
removed and the Subleased Premises restored to its condition upon delivery to
Subtenant. Sublandlord hereby notifies Subtenant that at the expiration or
earlier termination of this Sublease, any alterations to the Wiring or any other
portion of the Subleased Premises performed by Subtenant must be removed and the
Subleased Premises returned to the condition in which they were first delivered
to Subtenant, at Subtenant's sole cost and expense.
7. ASSIGNMENT AND SUBLETTING. Except in accordance with the provisions of
Section 9 of the Master Lease (to the extent incorporated into this Sublease by
Paragraph 6 hereof), Subtenant may not assign, sublet, transfer, pledge,
hypothecate or otherwise encumber the Subleased Premises, in whole or in part,
or permit the use or occupancy of the Subleased Premises by anyone other than
Subtenant unless Sublandlord has obtained Sublandlord's consent thereto (which
shall not be unreasonably withheld, conditioned or delayed) and the consent of
Master Landlord. Regardless of Sublandlord's consent, no subletting or
assignment shall release Subtenant from its obligations hereunder.
8. PARKING. Subtenant shall have the right to use its pro-rata share of
parking spaces in common with other occupants of the Building and the project of
which the Building is a part. Subtenant will provide to Sublandlord, within a
reasonable period after receipt of request, the license plate number, make,
model and color of each vehicle of any of Subtenant's employees who are
authorized to use the parking lot. In the event that the number of Subtenant's
employees and invitees using the parking lot exceeds the number of parking
spaces allotted to Subtenant more than two times in each month for a two
consecutive month period, Sublandlord may upon 12 hours' prior notice, tow any
vehicles which have not been identified to Sublandlord by Subtenant and which
appear for a second time in the parking lot following notice from Sublandlord to
Subtenant of unauthorized parking. All costs and expenses of towing shall be
borne by Subtenant, and Subtenant shall indemnify, defend and hold Sublandlord
harmless from
4.
<PAGE>
and against any and all damages, claims, losses, liabilities, costs and expenses
incurred in connection with the enforcement of this Section.
9. NOTICES. The addresses specified in the Master Lease (except for
Master Landlord's address) for receipt of notices to each of the parties are
deleted and replaced with the following:
TO SUBLANDLORD AT: the Master Lease Premises
Attn: Director of Operations
TO SUBTENANT AT: the Subleased Premises
Attn: Chief Financial Officer
10. BROKERS. Each party hereto represents and warrants that Cornish &
Carey represents Sublessor and BT Commercial represent Sublessee in this
transaction and both parties consent thereto. Each party agrees to hold the
other party harmless from and against all claims for brokerage commissions,
finder's fees, or other compensation made by any other agent, broker, salesman
or finder as a consequence of said party's actions or dealings with such agent,
broker, salesman, or finder. All commissions shall be paid by Sublessor per a
separate agreement between Sublessor and Cornish & Carey.
11. AUTHORITY. Sublandlord hereby warrants and represents that it is a
corporation, duly authorized and in good standing under the laws of the state of
Delaware and has the power to execute and deliver this Sublease. The persons
signing on behalf of the Sublandlord hereby represent and warrant that they are
the duly authorized representatives of the Sublandlord and have the power and
authority to bind the Sublandlord. Subtenant hereby warrants and represents that
it is a corporation, duly authorized and in good standing under the laws of the
state of Delaware and has the power to execute and deliver this Sublease. The
persons signing on behalf of the Subtenant hereby represent and warrant that
they are the duly authorized representatives of the Subtenant and have the power
and authority to bind the Subtenant.
12. NO ANIMALS. Subtenant shall not permit any animals, except for
animals assisting disabled persons, to be brought into the Premises, or the
Building, or the common areas of the project of which the Building is a part.
13. SUBLANDLORD'S OBLIGATIONS.
(a) SUBLANDLORD'S REMAINING OBLIGATIONS. The obligations that
Subtenant has agreed to perform hereunder are hereinafter referred to as the
"Subtenants Obligations", and all other obligations of the "Tenant" under the
Master Lease are herein referred to as the "Sublandlord's Remaining
Obligations." Sublandlord agrees to maintain the Master Lease in force during
the entire Term of this Sublease and to pay rent to Master Landlord in
accordance with the terms of the Master Lease, subject, however, to any earlier
termination of the Master Lease without the fault of the Sublandlord. Further,
Sublandlord agrees to comply with and perform Sublandlord's Remaining
Obligations and to indemnify, defend with counsel reasonably acceptable to
Subtenant and hold Subtenant free and harmless from and against all liability,
judgments, costs, damages, claims or demands arising out of (i) any default by
Sublandlord under this Sublease; (ii) any default by Sublandlord of
Sublandlord's Remaining Obligations
5.
<PAGE>
under the Master Lease; (iii) any breach of any representation or warranty made
by Sublandlord in this Sublease; or (iv) the negligence or willful misconduct of
Sublandlord, its agents, employees, contractors or invitees.
(b) SUBLANDLORD'S ADDITIONAL OBLIGATIONS. With respect to any obligation to
be performed by Master Landlord under the Master Lease, Sublandlord shall be
obligated, upon receipt of notice from Subtenant, to use good faith efforts
to obtain Master Landlord's performance of such obligation. If, after receipt
of request from Subtenant, Sublandlord shall fail or refuse to take action to
obtain Master Landlord's performance or to enforce Sublandlord's rights
against Master Landlord with respect to the Subleased Premises ("Action"),
Subtenant shall have the right to take such Action it its own name, and for
that purpose and only to such extent, all of the rights of Sublandlord as
"Tenant" under the Master Lease hereby are conferred upon and assigned to
Subtenant, and Subtenant hereby is subrogated to such rights to the extent
that the same shall apply to the Subleased Premises. If any such Action
against Master Landlord in Subtenant's name shall be barred by reason of lack
of privity, nonassignability or otherwise, Subtenant may take such Action in
Sublandlord's name; provided that Subtenant shall indemnify, protect, defend
by counsel reasonably satisfactory to Sublandlord and hold Sublandlord
harmless from and against any and all liability, loss claims, demands, suits,
penalties or damage (including reasonable attorneys' and experts fees) which
Sublandlord may incur or suffer by reason of such Action except to the extent
any such liability, loss, claims, demands, suits, penalties or damage arises
out of Sublandlord's negligence or willful misconduct.
(c) NOTICES. Sublandlord promptly shall deliver to Subtenant copies of all
notices, demands and requests that Sublandlord may receive from Master Landlord
under the Master Lease.
14. INDEMNIFICATION.
(a) SUBTENANT'S INDEMNIFICATION. In addition to the
indemnification set forth in Section 10(c) of the Master Lease, Subtenant shall
indemnify, protect, defend with counsel reasonably acceptable to Sublandlord and
hold harmless Sublandlord from and against any and all claims, liabilities,
judgments, causes of action, damages, costs and expenses (including reasonable
attorneys' and experts' fees), caused by or arising in connection with: (i) a
breach of Subtenant's obligations under this Sublease; or (ii) a breach of
Subtenant's obligations under the Master Lease to the extent incorporated into
this Sublease.
(b) SUBLANDLORD'S INDEMNIFICATION. In addition to the
indemnification set forth in Section 10(a) of the Master Lease, Sublandlord
shall indemnify, protect, defend with counsel reasonably acceptable to Subtenant
and hold Subtenant harmless from and against any and all claims, liabilities,
judgments, causes of action, damages, costs, and expenses (including reasonable
attorneys' and experts' fees), caused by or arising in connection with: (i) a
breach of Sublandlord's obligations under this Sublease; or (ii) a breach of
Sublandlord's Remaining Obligations under the Master Lease; or (iii) a
termination of the Master Lease or this Sublease arising out of or in any way
connected with Sublandlord's default and/or any resulting termination of this
Sublease.
6.
<PAGE>
The foregoing indemnifications, together with the indemnifications set
forth in Section 10 of the Master Lease, shall survive the expiration or earlier
termination of this Sublease.
15. NO VOLUNTARY TERMINATION. Sublandlord shall not voluntarily
terminate the Master Lease during the Term unless and until Master Landlord has
agreed in writing to continue this Sublease in full force and effect as a direct
lease between Master Landlord and Subtenant upon and subject to all of the
terms, covenants and conditions of this Sublease for the balance of the Term
hereof. If Master Landlord so consents, Subtenant shall attorn to Master
Landlord in connection with any such voluntary termination and shall execute an
attornment agreement in such form as may reasonably be requested by Master
Landlord; provided, however, that the attornment agreement does not materially
adversely affect the use by Subtenant of the Subleased Premises in accordance
with the terms of this Sublease, materially increase Subtenant's obligations
under this Sublease or materially decrease Subtenant's rights under this
Sublease. The prohibition against voluntary termination set forth in this
Paragraph shall apply to the "Tenant's" termination rights as set forth in
Section 2 of the Master Lease.
16. HAZARDOUS MATERIALS. Notwithstanding anything to the contrary
contained in this Sublease, except to the extent that the Hazardous Substance in
question was released, emitted, used, stored, manufactured, transported or
discharged by Subtenant, or its agents, employees, contractors or assigns, in
violation of environmental laws, Subtenant shall not be responsible for, and
hereby is released from, losses, costs (including attorneys' fees), damages,
claims, suits, actions and causes of action with respect to any Hazardous
Substance present on or about the Subleased Premises, the Building or the
Project, or the surrounding property, or the soil, groundwater or surface water
thereof, without regard to whether the Hazardous Substance were present on the
Subleased Premises, the Building or the Project as of the Commencement Date. To
the extent that Sublandlord is indemnified by Master Landlord with respect to
Hazardous Substances pursuant to Section 39(c) of the Master Lease, Subtenant
shall have no responsibility in connection with substances with respect to which
Sublandlord is indemnified.
17. SIGNAGE. At Subtenant's cost, Subtenant shall have the right
to standard building signage in the lobby directory for the Building and
standard building signage outside or on the entry door to the Subleased
Premises.
18. AMENDMENT OR MODIFICATION. Sublandlord and Master Landlord
shall not amend or modify the Master Lease in any way so as to materially or
adversely affect Subtenant or its interest hereunder, materially increase
Subtenant's obligations hereunder or materially restrict Subtenant's rights
hereunder, without the prior written consent of Subtenant, which may be withheld
in Subtenant's sole but reasonable discretion.
19. SURRENDER. Notwithstanding anything to the contrary contained
in this Sublease or the Master Lease, Subtenant's obligation to surrender the
Subleased Premises shall be fulfilled if Subtenant surrenders possession of the
Subleased Premises in the condition existing at the Commencement Date, ordinary
wear and tear, acts of God, casualties, Hazardous Materials not placed on or
about the Subleased Premises by Subtenant, its agents, employees, contractors or
invitees, condemnation, alterations or improvements which Master Landlord and
Sublandlord state in writing may be surrendered at the termination of this
Sublease and any additions, alterations or improvements (including, without
limitation, the Initial Tenant Alterations and the
7.
<PAGE>
Wiring) made to the Subleased Premises by Sublandlord or Master Landlord prior
to the Commencement Date excepted.
20. SUBLANDLORD'S REPRESENTATIONS AND WARRANTIES. As an inducement to
Subtenant to enter this Sublease, to the best of Sublandlord's knowledge,
Sublandlord represents and warrants with respect to the Subleased Premises that:
(a) The Master Lease is in full force and effect, the copy
attached hereto is a true and correct copy thereof, and there exists under the
Master Lease no default or event of default, nor has there occurred any. event
which, with the giving of notice or passage of time or both, could constitute
such a default or event of default.
(b) There are no pending or threatened actions, suits or
proceedings before any court or administrative agency against Sublandlord or
against Master Landlord or third parties which could, in the aggregate,
adversely affect the Subleased Premises or any part thereof or the ability of
Master Landlord to perform its obligations under the Master Lease or of
Sublandlord to perform its obligations under this Sublease, and Sublandlord is
not aware of any facts which might result in any such actions, suits or
proceedings.
(c) Sublandlord has not received any notice from any insurance
company of any defects or inadequacies in the Subleased Premises or any part
thereof which could adversely affect the insurability of the Subleased Premises
or the premiums for the insurance thereof.
21. QUIET ENJOYMENT; RIGHT TO CURE. Subtenant shall peacefully have, hold
and enjoy the Subleased Premises, subject to the terms and conditions of this
Sublease, provided that Subtenant pays all Rent and Subtenant's Allocable Share
of Expenses and Taxes and performs all of Subtenant's covenants and agreements
contained herein. In the event, however, that Sublandlord defaults in the
performance or observance of any of Sublandlord's Remaining Obligations or fails
to perform Sublandlord's stated obligations under this Sublease to enforce, for
Subtenant's benefit, Master Landlord's obligations under the Master Lease, then
Subtenant shall give Sublandlord notice specifying in what manner Sublandlord
has defaulted, and if such default shall not be cured by Sublandlord within
thirty (30) days thereafter (except that if such default cannot be cured within
said thirty (30)-day period, this period shall be extended for an additional
reasonable time, provided that Sublandlord commences to cure such default within
such thirty (30)-day period and proceeds diligently thereafter to effect such
cure as quickly as possible), then in addition, Subtenant shall be entitled, at
Subtenant's option, to cure such default and promptly collect from Sublandlord
Subtenant's reasonable expenses in so doing (including, without limitation,
reasonable attorneys' fees and court costs). Subtenant shall not be required,
however, to wait the entire cure period described herein if earlier action is
required to comply with the Master Lease or with any applicable governmental
law, regulation or order.
22. CONDITION PRECEDENT. This Sublease and Subtenant's and Sublandlord's
obligations hereunder are conditioned upon Sublandlord's obtaining the written
consent of Master Landlord. If Sublandlord fails to obtain the Master Landlord's
consent within fifteen (15) days after execution of this Sublease by
Sublandlord, then Subtenant may terminate this Sublease by giving Sublandlord
written notice, and Sublandlord shall return to Subtenant the prepaid first
month's Rent and the Security Deposit.
8.
<PAGE>
23. AUTHORIZATION TO DIRECT SUBLEASE PAYMENTS. Sublandlord hereby
acknowledges that Sublandlord's failure to pay the Rent and other sums owing by
Sublandlord to Master Landlord under the Master Lease will cause Subtenant to
incur damages, costs and expenses not contemplated by this Sublease, especially
in those cases where Subtenant has paid sums to Sublandlord hereunder which
correspond in whole or in part to the amounts owing by Sublandlord to Master
Landlord under the Master Lease. Accordingly, Subtenant shall have the right to
pay all Rent and other sums owing by Subtenant to Sublandlord hereunder for
those items which also are owed by Sublandlord to Master Landlord under the
Master Lease directly to Master Landlord on the following terms and conditions:
(a) Subtenant reasonably believes that Sublandlord has failed to
make any payment required to be made by Sublandlord to Master Landlord under the
Master Lease and Sublandlord fails to provide adequate proof of payment within
ten (10) business days after Subtenant's written demand requesting such proof.
(b) Subtenant shall not prepay any amounts owing by Subtenant
without the consent of Sublandlord.
(c) Subtenant shall provide to Sublandlord concurrently with any
payment to Master Landlord reasonable evidence of such payment.
(d) If Sublandlord notifies Subtenant that it disputes any amount
demanded by Master Landlord, Subtenant shall not make any such payment to Master
Landlord unless Master Landlord has provided a three-day notice to pay such
amount or forfeit the Master Lease.
Any sums paid directly by Subtenant to Master Landlord in accordance with this
Paragraph shall be credited toward the amounts payable by Subtenant to
Sublandlord under this Sublease. In the event Subtenant tenders payment directly
to Master Landlord in accordance with this Paragraph and Master Landlord refuses
to accept such payment, Subtenant shall have the right to deposit such funds in
an account with a national bank for the benefit of Master Landlord and
Sublandlord, and the deposit of said funds in such account shall discharge
Subtenant's obligation under this Sublease to make the payment in question.
9.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
date first written above.
SUBLANDLORD:
LIBERATE TECHNOLOGIES
By: /s/ Mitchell E. Kertzman
--------------------------------------------------
Its: President, Chief Executive Officer and Director
-------------------------------------------------
Date: 12/22/99
------------------------------------------------
SUBTENANT:
THIRDVOICE, INC.,
a Delaware corporation
By: /s/ Eng-Siong Tan
--------------------------------
Name: /s/ Eng-Siong Tan
------------------------------
Its: President
By: /s/ Wendy Olszewski
-------------------------------
Name: Wendy Olszewski
-----------------------------
Its: Secretary
10.
<PAGE>
CONSENT OF MASTER LANDLORD
The undersigned hereby consents to the Sublease dated December __,
1999, by and between Liberate Technologies, as Sublandlord, and Third Voice,
Inc., as Subtenant, attached hereto, and all of the terms and conditions
contained therein. Master Landlord hereby extends to Subtenant the provisions of
Section 11 of the Master Lease, "Waiver of Subrogation," and Master Landlord,
Sublandlord and Subtenant shall be bound thereby.
CIRCLE STAR ASSOCIATES, L.P.,
a California limited partnership
By: M-D Ventures, Inc.
Its: General Partner
By:
------------------------
Michael Wilson
Its: Vice President
<PAGE>
EXHIBIT A
MASTER LEASE
<PAGE>
EXHIBIT B
SUBLEASED PREMISES
2.
<PAGE>
SUBLEASE
THIS SUBLEASE ("Sublease") is entered into by and between LIBERATE
TECHNOLOGIES, a Delaware corporation ("Sublandlord"), and CHARITABLEWAY.COM,
INC., a Delaware corporation ("Subtenant") as of February 17, 2000.
RECITALS
A. Sublandlord, as successor-in-interest to Network Computer, Inc., a
Delaware corporation, leases certain premises (the "Master Lease Premises")
located in that certain building ("Building") at One Circle Star Way, San
Carlos, California, from Circle Star Center Associates, L.P., a California
limited partnership (the "Master Landlord"), pursuant to that certain Lease
dated April 27, 1999, a complete copy of which is attached hereto as EXHIBIT
A (the "Master Lease"). Capitalized terms used but not defined herein have
the same meanings as they have in the Master Lease.
B. Sublandlord desires to sublease a portion of the Master Lease
Premises to Subtenant, and Subtenant desires to sublease a portion of the
Master Lease Premises from Sublandlord on the terms and provisions hereof.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Sublandlord and Subtenant covenant and agree as follows:
AGREEMENT
1. SUBLEASED PREMISES. On and subject to the terms and conditions
below, Sublandlord hereby leases to Subtenant, and Subtenant hereby leases
from Sublandlord, the space located on the fourth floor of the Building shown
by crosshatching on EXHIBIT B attached hereto and incorporated herein by this
reference (the "Subleased Premises").
2. TERMS. This Sublease shall commence on the later of (1)
substantial completion of any tenant improvements installed by Master
Landlord pursuant to the Master Lease (the "Initial Tenant Improvements") and
substantial completion of the Wiring (defined below) and issuance of all
governmental permits required for occupancy of the Subleased Premises, and
(2) March 1, 2000 (the "Commencement Date"). Subtenant shall have the right
to terminate this Sublease if the Commencement Date has not occurred by June
1, 2000. The term shall expire on the last day of the twenty-ninth full
calendar month following the Commencement Date, unless sooner terminated
pursuant to any provision hereof. For example, if the Commencement Date is
March 15, 2000, the term shall expire on August 30, 2002.
3. RENT; DEPOSITS. Commencing on the Commencement Date and continuing
throughout the term of this Sublease, Subtenant shall pay monthly rent
("Rent") to Sublandlord in the monthly amount of Ninety-two Thousand Nine
Hundred Sixty-three Dollars and Fifty Cents ($92,963.50) per month. Rent
shall be payable to Sublandlord in lawful money of the United States, in
advance, without prior notice, demand, or offset, on or before the first day
of each calendar month during the term hereof. All Rent shall be paid to
Sublandlord at the address specified for notice to Sublandlord, below. If
the Commencement Date, or termination date does
<PAGE>
not fall on the first day of a calendar month, Rent for any partial month
shall be prorated on a daily basis based upon a thirty (30) day calendar
month. On each anniversary of the Commencement Date the amount of Rent then
in effect shall be increased by three percent (3%) per annum.
(a) SUBTENANT'S SHARE OF EXPENSES AND TAXES. Subtenant shall
pay, in advance on the first day of each calendar month, together with
Tenant's payment of monthly Rent, twenty-five and eight tenths percent
(25.8%) of Expenses and Taxes ("Subtenant's Allocable Share of Expenses and
Taxes") as the terms "Expenses" and "Taxes" are defined and due under the
Master Lease, allocable to the Building. For the first twelve (12) calendar
months of the term, Tenant's Allocable Share of Taxes and Expenses is
estimated to be Nineteen Thousand Three Hundred Eighty-nine and 53/100
Dollars ($19,389.53) per month. Sublandlord may adjust the amount of
Subtenant's Allocable Share of Expenses and Taxes at any time the amount of
Expenses and Taxes being charged to Sublandlord under the Master Lease is
adjusted in accordance with the terms thereof. Promptly following
reconciliation of the amounts charged to Sublandlord under Sections 3(c)(2)
and 3(c)(3) of the Master Lease, the amounts charged to Subtenant pursuant to
this Section 3(a) shall be reconciled in accordance with the provisions of
Sections 3(c)(2) and 3(c)(3) of the Master Lease, which are incorporated
herein by Section 6, below.
(b) FIRST PAYMENT OF RENT AND SUBTENANT'S ALLOCABLE SHARE OF
EXPENSES AND TAXES. Upon execution of this Sublease, Subtenant shall pay to
Sublandlord the sum of One Hundred Twelve Thousand Three Hundred Fifty-three
and 03/10 Dollars ($112,353.03), constituting payment in advance of the first
month's Rent and the first month's payment of Subtenant's Allocable Share of
Expenses and Taxes.
(c) SECURITY DEPOSIT. Upon execution of this Sublease, Subtenant
shall pay to Sublandlord the sum equal to three months Rent, Two Hundred
Seventy-eight Thousand Eight Hundred Ninety Dollars and Fifty Cents
($278,890.50), constituting the Security Deposit. The Security Deposit is
not advance rental, nor a measure of Sublandlord's damages. Sublandlord
shall not be required to keep the Security Deposit separate from its general
accounts. Upon the occurrence of any default by Subtenant, Sublandlord may,
from time to time and without prejudice to any other remedy available to
Sublandlord provided herein or by law, use the Security Deposit to the extent
necessary to make good any arrears in Rent or other payments due hereunder,
or other damage, injury, expense or liability caused by such default.
Subtenant shall pay to Sublandlord, upon demand, the amount so applied to
restore the Security Deposit to the original amount. Any remaining balance
shall be returned to Subtenant after Subtenant has surrendered the Subleased
Premises in the condition required and all Subtenant's other obligations
under this Sublease have been fulfilled.
4. TENANT IMPROVEMENTS; WIRING COSTS. Subtenant acknowledges that
Master Landlord is obligated to install the Initial Tenant Improvements
pursuant to the Master Lease. Sublandlord covenants to use reasonable
efforts to cause Master Landlord to install the Initial Tenant Improvements
pursuant to the Master Lease. Sublandlord shall contract with an electrical
subcontractor of its choice (the "Wiring Subcontractor") pursuant to a
contract reasonably approved by Subtenant, and shall use reasonable efforts
to cause the Wiring Subcontractor to install Cat 5, Gigabit band-width
certifiable wiring, at a rate of 120 drops in hardwall locations
<PAGE>
and 80 drops in cubicle locations (evenly distributed), all wired to a
central IDF (the "Wiring"). A "drop" is defined as two Ethernet connections
and two telephone connections. All costs and expenses incurred in the
installation of such Wiring are referred to herein as the "Wiring Costs."
Subtenant agrees to look solely to the Wiring Contractor for any claims
arising out of the installation of the Wiring referred to above. Subtenant
shall have the right to approve, in its reasonable discretion, within three
(3) business days following its receipt thereof, the plans for the Initial
Tenant Improvements and the Wiring. Subtenant's failure to approve or
disapprove such plans in writing within three (3) days of Sublandlord's
delivery thereof to Subtenant shall be deemed Subtenant's approval of such
plans.
Sublandlord makes no representation or warranty with respect to the condition
of Subleased Premises and shall not be subject to any liability arising out
of the condition of the Subleased Premises. Subtenant agrees to look solely
to the Wiring Subcontractor for any claims arising out of the installation of
the Wiring referred to above.
Sublandlord shall use reasonable efforts to give Subtenant thirty (30) days
notice prior to the anticipated completion of the Tenant Improvements and
following such notice Subtenant may enter the Subleased Premises for the
purposes of making the Subleased Premises ready for occupancy.
5. USE. Subtenant may use the Subleased Premises only for uses
permitted by the Master Lease. Subtenant shall not use or permit the use of
the Subleased Premises in a manner that will create waste or a nuisance,
interfere with or disturb other tenants in the Building or violate the
provisions of the Master Lease.
6. INCORPORATION OF SUBLEASE. All of the terms and provisions of
the Master Lease, except as provided below, are incorporated into and made a
part of this Sublease and the rights and obligations of the parties under the
Master Lease are hereby imposed upon the parties hereto with respect to the
Subleased Premises, Sublandlord being substituted for the "Landlord" in the
Master Lease (except in Sections 1 (excluding the first two sentences
thereof), 3(c)(5), 7, 12, 20, 21 and 39 in which references to "Landlord"
shall continue to be deemed to refer to the Master Landlord) and Subtenant
being substituted for the "Tenant" in the Master Lease. It is further
understood that where reference is made in the Master Lease to the
"Premises," the same shall mean the Subleased Premises as defined herein;
where reference is made to the "Commencement Date," the same shall mean the
Commencement Date as defined herein; and where reference is made to "this
Lease," the same shall mean this Sublease. Notwithstanding the foregoing,
Sublandlord shall have no obligation to perform any of Master Landlord's
obligations under the Master Lease. The following Sections of the Master
Lease are not incorporated herein: Sections 2, 3(a), 3(b), 3(c)(1)(B), 9, 32,
33, 34, 36 (third sentence only) 37, 38, 40, 41, 42, 43, 44, 45, Exhibit B
(Work Letter), Form of Letter of Credit, and Exhibit G (Description of Second
Building).
Section 6 of the Master Lease, which is incorporated herein, requires that
Sublandlord notify Subtenant whether any Alterations will be required to be
removed and the Subleased Premises restored to its condition upon delivery to
Subtenant. Sublandlord hereby notifies Subtenant that at the expiration or
earlier termination of this Sublease, any alterations to the Wiring or any
other portion of the Subleased Premises performed by Subtenant must be
removed and the Subleased
<PAGE>
Premises returned to the condition in which they were first delivered to
Subtenant, at Subtenant's sole cost and expense.
7. SUBLANDLORD'S OBLIGATIONS. Except as expressly otherwise provided
herein, Sublandlord shall have no obligation to Subtenant with respect to the
Subleased Premises or the performance by Master Landlord of any obligations
of Master Landlord under the Master Lease, except for enforcement of Master
Landlord's obligations under the Master Lease. Such efforts shall include,
without limitation, upon Subtenant's request (a) notifying Master Landlord of
its non-performance under the Master Lease and requesting that Master
Landlord perform its obligations under the Master Lease and/or (b) assigning
Sublandlord's rights under the Master Lease to Subtenant to the extent
necessary to permit Subtenant to institute legal proceedings against Master
Landlord in order to obtain the performance of Master Landlord's obligations
under the Master Lease.
8. ASSIGNMENT AND SUBLETTING. Subtenant may not assign, sublet,
transfer, pledge, hypothecate or otherwise encumber the Subleased Premises,
in whole or in part, or permit the use or occupancy of the Subleased Premises
by anyone other than Subtenant unless Sublandlord has obtained Sublandlord's
consent thereto (which shall not be unreasonably withheld) and the consent of
Master Landlord. Regardless of Sublandlord's consent, no subletting or
assignment shall release Subtenant from its obligations hereunder.
9. PARKING. Subtenant shall have the right to use one hundred
eighty-four (184) parking spaces in common with other occupants of the
Building and the project of which the Building is a part.
10. NOTICES. The addresses specified in the Master Lease for receipt
of notices to each of the parties are deleted and replaced with the following:
TO SUBLANDLORD AT: the Master Lease Premises
Attn: Director of Operations
TO SUBTENANT AT: the Subleased Premises
Attn: General Counsel
11. BROKERS. Each party hereto represents and warrants that it has
dealt with no broker in connection with this Sublease and the transactions
contemplated herein other than Cornish & Carey. Each party shall indemnify,
protect, defend and hold the other party harmless from all costs and expenses
(including reasonable attorneys' fees) arising from or relating to a breach
of the foregoing representation and warranty.
12. AUTHORITY. Sublandlord hereby warrants and represents that it is
a corporation, duly authorized and in good standing under the laws of the
State of Delaware and has the power to execute and deliver this Sublease.
The persons signing on behalf of the Sublandlord hereby represent and warrant
that they are the duly authorized representatives of the Sublandlord and have
the power and authority to bind the Sublandlord. Subtenant hereby warrants
and represents that it is a corporation, duly authorized and in good standing
under the laws of the State of
<PAGE>
Delaware and has the power to execute and deliver this Sublease. The persons
signing on behalf of the Subtenant hereby represent and warrant that they are
the duly authorized representatives of the Subtenant and have the power and
authority to bind the Subtenant.
13. NO ANIMALS. Subtenant shall not permit any animals to be brought
into the Premises, the Building or the common areas of the project of which
the Building is a part.
14. COUNTERPARTS. This Sublease may be executed in two (2) or more
counterparts, each of which shall be deemed an original but when taken
together shall constitute one and the same instrument.
(Remainder of Page Intentionally Left Blank)
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
date first written above.
SUBLANDLORD:
LIBERATE TECHNOLOGIES,
a Delaware corporation
By: /S/ MITCHELL KERTZMAN
----------------------
Print Name: Mitchell Kertzman
[CORPORATE APPROVAL STAMP]
Its: President
By: /S/ GORDON YAMATE
----------------------
Gordon Yamate
Its: Secretary
[CORPORATE APPROVAL STAMP]
<PAGE>
SUBTENANT:
CHARITABLEWAY.COM, INC.,
a Delaware corporation
By: /s/ WILLIAM P. MOUNTALOS
----------------------
Print Name: William P. Mountalos
Its: President
By: /s/ JAMES C. REDMOND
----------------------
Print Name: James C. Redmond
Its: Secretary
<PAGE>
EXHIBIT A
MASTER LEASE
<PAGE>
February 28, 2000
Mr. Coleman Sisson
[CONFIDENTIAL DATA]
HOUSING SUPPLEMENT AND LOAN ARRANGEMENT
Dear Coleman:
This letter confirms our agreement to make certain financial
accommodations available to you in connection with your purchase of a new
home in Northern California (the "New Residence"), which will modify the
terms of your employment letter dated November 5, 1999 (the "Employment
Agreement"). We have agreed as follows:
(1) We agree to accelerate the payment of a prorata portion (calculated
through May 31, 2000) of your guaranteed $125,000 target annual
bonus, provided that you agree to repay to Liberate such
accelerated payments if you voluntarily terminate your employment
prior to the first anniversary of your hire date or you are
terminated for "Cause" (as defined in the Employment Agreement)
before such date.
(2) Liberate will pay you a supplemental monthly housing expense
allowance equal to the difference between your monthly mortgage
payment (currently estimated to be roughly $9,000 per month) for
your new residence less the amount of your current monthly mortgage
payment on your residence in Washington (the "Monthly Supplement"),
plus a "grossed up" amount to cover taxes on the Monthly
Supplement based on the maximum applicable federal and state
income tax rates (the "Grossed-up Amount"). Liberate will be
responsible for paying all FICA, SDI, FUTA, SUTA and other
applicable withholding amounts in connection with the foregoing
payments. Liberate will make these payments to you commencing for
the month in which you begin mortgage payments on the New
Residence, and such payments will continue until you notify
Liberate that you no longer need the Monthly Supplement, but in no
event beyond
<PAGE>
January 2001. The Grossed-up Amount will be treated as an
interest-free advance to you, which will be repayable by you to
Liberate on or before April 16, 2001.
(3) If you terminate your employment with us, all advanced amounts set
forth above will become immediately due and payable by you to
Liberate, and Liberate will have the option to terminate the
payment of the Monthly Supplement (together with the Grossed-up
Amount) to you.
In all other respects, the terms of the Employment Agreement are
unchanged and remain in full force and effect.
You are a very critical and important member of Liberate's executive
team, and we are pleased to be able to offer the foregoing financial
arrangement to you. Please confirm your understanding of the foregoing
arrangement to Liberate by signing below.
Sincerely,
Mitchell E. Kertzman,
President and Chief Executive Officer
Acknowledged and agreed:
- ----------------------------------
Coleman Sisson
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 332,735
<SECURITIES> 94,474
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0
0
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