<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1997.
REGISTRATION NO. 333-26411
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MICROSOFT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
WASHINGTON 7373 91-1144442
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ONE MICROSOFT WAY ROBERT A. ESHELMAN, ESQ.
REDMOND, WASHINGTON 98052-6399 ONE MICROSOFT WAY
(425) 882-8080 REDMOND, WASHINGTON 98052-6399
(ADDRESS, INCLUDING ZIP CODE, AND (425) 882-8080
TELEPHONE NUMBER,INCLUDING AREA CODE, (NAME, ADDRESS, INCLUDING ZIP CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE AND TELEPHONE NUMBER,INCLUDING AREA
OFFICES) CODE, OF AGENT FOR SERVICE)
---------------
WEBTV NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
CALIFORNIA 5065 77-0406905
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
305 LYTTON AVENUE ALBERT A. PIMENTEL
PALO ALTO, CALIFORNIA 94301 CHIEF FINANCIAL OFFICER
(415) 326-3240 WEBTV NETWORKS, INC.
(ADDRESS, INCLUDING ZIP CODE, AND 305 LYTTON AVENUE
TELEPHONE NUMBER,INCLUDING AREA CODE, PALO ALTO, CALIFORNIA 94301
OF REGISTRANT'S PRINCIPAL EXECUTIVE (415) 326-3240
OFFICES) (ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER,INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES OF ALL COMMUNICATIONS TO:
JOSHUA PICKUS, ESQ. RICHARD B. DODD, ESQ.
STEVEN J. TONSFELDT, ESQ. RICHARD A. MONTFORT, ESQ.
VENTURE LAW GROUP PRESTON GATES & ELLIS LLP
A PROFESSIONAL CORPORATION 5000 COLUMBIA CENTER
2800 SAND HILL ROAD 701 FIFTH AVENUE
MENLO PARK, CALIFORNIA 94025 SEATTLE, WASHINGTON 98104-7078
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the recapitalization of WebTV Networks, Inc.,
which shall occur as soon as practicable after the effective date of this
registration statement and the satisfaction of the conditions to the
recapitalization.
If any of the securities to be registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [X]
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
WEBTV NETWORKS, INC.
305 LYTTON AVENUE
PALO ALTO, CALIFORNIA 94301
(415) 326-3240
, 1997
Dear WNI Shareholder:
A Special Meeting of Shareholders (the "Special Meeting") of WebTV Networks,
Inc., a California corporation ("WNI"), will be held at the principal
executive offices of WNI, 305 Lytton Avenue, Palo Alto, California, on ,
1997 at local time. At the Special Meeting you will be asked to consider and
vote upon the following proposals:
1. To approve an Agreement and Plan of Recapitalization dated as of April 5,
1997 (the "Recapitalization Agreement"), among WNI, Microsoft Corporation, a
Washington corporation ("Microsoft"), and certain WNI shareholders, pursuant
to which WNI will undergo a reorganization of its capital (the
"Recapitalization"). The details of the Recapitalization are set forth in the
accompanying Notice and Proxy Statement/Prospectus. In summary, if the
Recapitalization is consummated, the following will occur at the time of
closing of the Recapitalization:
. Holders of vested WNI Common Shares may elect to receive $12.841 per
share in cash directly from Microsoft or receive in the Recapitalization
the equivalent value per share in new WNI Class A Common Shares which
will be exchangeable for Microsoft Common Shares initially on a one-to-
one basis, in either case less approximately 11.4% of the cash or WNI
Class A Common Shares to be received by each holder of WNI Common
Shares, which amount (the "Common Escrow Withholding Amount") will be
withheld and placed in an escrow fund described below, for an effective
value per WNI Common Share of approximately $11.381 if none of the
Common Escrow Withholding Amount is ultimately paid out to the holders
of WNI Common Shares (such lesser amount, the "Adjusted Common Shares
Consideration");
. Holders of unvested WNI Common Shares will receive in the
Recapitalization the Adjusted Common Shares Consideration in new WNI
Class A Common Shares which will be exchangeable for Microsoft Common
Shares initially on a one-to-one basis, in each case with vesting terms
equivalent to the vesting terms of their existing WNI Common Shares;
. Holders of options to purchase WNI Common Shares will receive
replacement nonqualified options for Microsoft Common Shares on terms
and conditions described in the Proxy Statement/Prospectus;
. Holders of WNI Preferred Shares may elect to receive $13.686 per share
(determined on an as-if-converted to WNI Common Shares basis) in cash
directly from Microsoft or alternatively receive $13.686 per share
(determined on an as-if-converted to WNI Common Shares basis) in cash
from WNI in the Recapitalization, in either case less approximately
11.4% of the cash to be received by each holder of WNI Preferred Shares,
which amount (the "Preferred Escrow Withholding Amount") will be
withheld and placed in an escrow fund described below, for an effective
price per underlying WNI Common Share of approximately $12.130 if none
of the Preferred Escrow Withholding Amount is ultimately paid out to the
holders of WNI Preferred Shares (such lesser amount, the "Adjusted
Preferred Shares Consideration");
. Holders of WNI Common Shares or WNI Preferred Shares may exercise
dissenters' rights by not voting in favor of the Recapitalization and
strictly following the statutory procedures summarized in the Proxy
Statement/Prospectus and set forth in full in Appendix C to the Proxy
Statement/Prospectus; and
. Holders of WNI Warrants may elect to receive $13.686 per share
(determined on an as-if-net-exercised and an as-if-converted to WNI
Common Shares basis) in cash directly from Microsoft or alternatively
receive the same cash payment from WNI in the Recapitalization, in
either case less an amount equal
<PAGE>
to the Preferred Escrow Withholding Amount, for an effective price per
underlying WNI Preferred Share of approximately $12.130 if none of the
amount withheld is ultimately paid out to the holders of WNI Warrants
(such lesser amount, the "Adjusted Warrant Consideration").
Although holders of WNI Preferred Shares and WNI Warrants will receive the
same cash consideration whether they elect to sell to Microsoft or have such
shares or warrants converted into the right to receive cash from WNI, there
may be income tax advantages either to such holders or to other WNI
shareholders if they elect to sell such shares or warrants to Microsoft. Such
holders should consult their own tax advisors with respect to such election
and review discussion of "Certain U.S. Federal Income Tax Matters" in the
Proxy Statement/Prospectus.
Also as part of the Recapitalization, Microsoft will receive, in exchange
for the contribution to WNI of certain assets and other consideration, all of
the newly created Class B Common Shares of WNI at a ratio of four Class B
Common Shares for each Class A Common Share issued in connection with the
Recapitalization, which will represent not less than 80% of the voting power
of WNI. Microsoft has also agreed that after the Recapitalization is
consummated additional options to purchase Microsoft Common Shares will be
granted to certain WNI employees and consultants. The vesting and other terms
and conditions of these new Microsoft options are described in the Proxy
Statement/Prospectus.
2. To approve certain employee and consultant compensation matters as more
fully described herein under the heading "Proposal II--Option Grants, Option
Acceleration and Other Compensatory Matters," including specifically:
. Approval of various option grants previously made by WNI and grants to
be made by Microsoft on a discounted basis in connection with the
Recapitalization;
. Approval of rights previously granted to certain employees to additional
vesting of WNI options upon termination of employment without cause
following a change of majority ownership or control of WNI; and
. For certain other WNI shareholders and advisors, approval of various
option grants and payments to be made to such individuals and entities
in connection with the Recapitalization.
The Recapitalization Agreement provides that at the time of the closing of
the Recapitalization an aggregate of $50,000,000 will be deposited in an
escrow account to be held for a period of 18 months. This $50,000,000 amount
will be funded by withholding approximately 11.4% of the cash or Class A
Common Share consideration to be received by each WNI shareholder and warrant
holder in the Recapitalization. This escrow fund will be used to satisfy
claims that Microsoft may have following the closing with respect to potential
inaccuracies or misrepresentations made by WNI or its Principal Shareholders
(as defined in the accompanying Proxy Statement/Prospectus) in the
Recapitalization. Approval of the Recapitalization by the WNI shareholders
will result in these escrow arrangements being deemed applicable to all
shareholders. Should Microsoft successfully assert claims with respect to such
potential inaccuracies or misrepresentations, some or all of the escrowed
amount would not be released to WNI shareholders and warrant holders.
Following completion of the Recapitalization, WNI will be a controlled
subsidiary of Microsoft. At that time, the operations and management of WNI
will be under the direction of Microsoft.
Deutsche Morgan Grenfell Inc. ("DMG"), the investment banking firm retained
by the WNI Board of Directors to perform certain financial advisory services
in connection with the Recapitalization, has rendered its opinion that, as of
April 5, 1997, the consideration to be received by the holders of WNI Common
Shares and WNI Preferred Shares was fair from a financial point of view to the
holders of WNI Common Shares and WNI Preferred Shares, respectively.
2
<PAGE>
THE WNI BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE RECAPITALIZATION AND
THE TRANSACTIONS RELATED THERETO AND HAS UNANIMOUSLY DETERMINED THAT THEY ARE
FAIR TO AND IN THE BEST INTERESTS OF WNI AND ITS SHAREHOLDERS. AFTER CAREFUL
CONSIDERATION, THE WNI BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE WNI RECAPITALIZATION AND FOR THE APPROVAL OF THE
EMPLOYEE AND CONSULTANT COMPENSATION MATTERS DESCRIBED ABOVE.
In the materials accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to the actions
to be taken by WNI shareholders at the Special Meeting, a proxy card, a Letter
of Transmittal and the Escrow Agreement Signature Page. The Proxy
Statement/Prospectus more fully describes the Recapitalization and the employee
and consultant compensation matters described above and includes information
about WNI and Microsoft.
Holders of WNI Preferred Shares, WNI Warrants and vested WNI Common Shares
who elect to have their securities acquired for cash by Microsoft must complete
and return in the enclosed beige envelope the Letter of Transmittal (green
form), the Escrow Agreement Signature Page (yellow form) and their stock
certificates or warrants prior to the Closing Date provided for in
Recapitalization Agreement. The closing of the Recapitalization and the
acceptance of the securities to be acquired by Microsoft are subject to the
satisfaction or waiver of all of the conditions in the Recapitalization
Agreement. The closing could occur as early as the date of the Special Meeting.
Holders of vested and unvested WNI Common Shares who elect to receive Class A
Common Shares in the Recapitalization must complete and return in the enclosed
beige envelope the Letter of Transmittal and Election Form (green form), the
Escrow Agreement Signature Page (yellow form) and their stock certificates as
soon as possible. All certificates and documents will be returned if the
Recapitalization is not approved by the WNI shareholders or if other conditions
to the Recapitalization are not satisfied or waived.
ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED
BLUE ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT
THE SPECIAL MEETING.
SHAREHOLDERS SHOULD NOTE THAT NOTWITHSTANDING ANY SHAREHOLDER APPROVAL OF THE
MATTERS DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS, THE RECAPITALIZATION AND
RELATED TRANSACTIONS REMAIN SUBJECT TO, AND WILL NOT OCCUR UNTIL SATISFACTION
OF, ALL APPLICABLE REGULATORY REQUIREMENTS, INCLUDING THOSE IMPOSED BY THE
HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976.
Sincerely,
_____________________________________
Stephen G. Perlman
President and Chief Executive
Officer
3
<PAGE>
WEBTV NETWORKS, INC.
305 LYTTON AVENUE
PALO ALTO, CALIFORNIA 94301
(415) 326-3240
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON , 1997
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of WebTV Networks, Inc., a California corporation ("WNI"), will be
held at the principal executive offices of WNI, 305 Lytton Avenue, Palo Alto,
California, on , 1997 at local time. At the Special Meeting you will be
asked to consider and vote upon the following proposals:
1. To approve an Agreement and Plan of Recapitalization dated as of April 5,
1997 (the "Recapitalization Agreement"), among WNI, Microsoft Corporation, a
Washington corporation ("Microsoft"), and certain WNI shareholders, pursuant
to which WNI will undergo a reorganization of its capital (the
"Recapitalization") whereby (i) each WNI Common Share, other than WNI Common
Shares of holders who have perfected their dissenters' rights or have elected
to have their shares purchased by Microsoft in the manner contemplated by item
(iii) below, shall be converted into a number of Class A Common Shares of WNI
pursuant to an exchange ratio calculated by dividing $12.841 by the Microsoft
Closing Price (as defined in the Recapitalization Agreement), which shares are
exchangeable for Microsoft Common Shares, as further described herein; (ii)
each WNI Common Share subject to repurchase by WNI (i.e., "unvested shares")
pursuant to existing agreements in effect as of the effective time of the
Recapitalization shall be converted into Class A Common Shares of WNI pursuant
to such exchange ratio; (iii) each vested WNI Common Share of holders who have
returned a completed letter of transmittal electing to receive cash in lieu of
Class A Common Shares shall be purchased by Microsoft for $12.841, less, with
respect to the consideration to be received by holders of WNI Common Shares in
items (i), (ii) and (iii), approximately 11.4%, which amount (the "Common
Escrow Withholding Amount") will be withheld and placed in an escrow fund more
fully described in the Proxy Statement/Prospectus under the heading "Proposal
I--The Recapitalization and Related Transactions--Related Agreements--Escrow
Agreement" (for an effective price per WNI Common Share of approximately
$11.381 if none of the Common Escrow Withholding Amount is ultimately paid out
to the holders of WNI Common Shares) (such lesser amount, the "Adjusted Common
Shares Consideration"); (iv) each WNI Preferred Share and WNI Warrant of
holders who have returned a completed letter of transmittal electing to have
their share or warrant purchased by Microsoft shall be purchased by Microsoft
for $13.686 (determined on an as-if-converted to WNI Common Shares basis and,
in the case of warrants, on an as-if-net-exercised basis) in cash, less
approximately 11.4% of the cash to be received by each holder of WNI Preferred
Shares and WNI Warrants, which amount (the "Preferred/Warrant Escrow
Withholding Amount") will be withheld and placed in an escrow fund described
below, (for an effective price per underlying WNI Common Share of
approximately $12.130 if none of the Preferred/Warrant Escrow Withholding
Amount is ultimately paid out to the holders of WNI Preferred Shares or WNI
Warrants) (in the case of WNI Preferred Shares, such lesser amount being the
"Adjusted Preferred Shares Consideration" and, in the case of WNI Warrants,
such lesser amount being the "Adjusted Warrant Consideration"); (v) each WNI
Preferred Share, other than shares of holders who have perfected their
dissenters' rights or have elected to have their shares purchased by
Microsoft, shall be converted into the right to receive the Adjusted Preferred
Shares Consideration; (vi) each WNI Warrant, other than warrants of holders
who have elected to have their warrants purchased by Microsoft, shall be
converted into the right to receive the Adjusted Warrant Consideration;
(vii) each option to purchase WNI Common Shares shall be replaced by one or
more nonqualified Microsoft stock options to purchase Microsoft Common Shares
on the terms and conditions described in the accompanying Proxy
Statement/Prospectus; and (viii) Microsoft shall be entitled to receive all of
the newly created Class B Common Shares of WNI at a ratio of four Class B
Common Shares for each Class A Common Share issued in connection with the
Recapitalization, which will represent not less than 80% of the voting power
of WNI, in exchange for the consideration described in the Proxy
Statement/Prospectus and (ix) the Common and Preferred/Warrant Escrow
Withholding Amounts will be deposited into an escrow account to be held for a
period of 18 months to secure the indemnification obligations of the WNI
securities holders under the Recapitalization
<PAGE>
Agreement. Should Microsoft successfully assert claims for indemnification
under the Recapitalization Agreement, some or all of the Common and
Preferred/Warrant Escrow Withholding Amounts would not be released to holders
of WNI Shares or WNI Warrants;
2. To approve certain employee and consultant compensation matters as more
fully described in the Proxy Statement/Prospectus under the heading "Proposal
II--Option Grants, Option Acceleration and Other Compensatory Matters,"
including specifically: (i) approval of various option grants previously made
by WNI and grants to be made by Microsoft on a discounted basis in connection
with the Recapitalization; (ii) approval of rights of certain employees to
additional vesting of WNI options upon termination of employment without cause
following a change of majority ownership or control of WNI; and (iii) for
certain other WNI shareholders and advisors, approval of various option grants
and payments to be made to such individuals and entities in connection with the
Recapitalization; and
3. To transact such other business that may properly come before the Special
Meeting or any postponements or adjournments thereof.
Each new WNI Class A Common Share initially will be exchangeable, at the
election of the holder and subject to certain restrictions and limitations
described in the Proxy Statement/Prospectus, for one Microsoft Common Share or
cash. Microsoft has a call right which will entitle it to directly acquire WNI
Class A Common Shares which have been tendered for exchange by delivering
either Microsoft Common Shares or the cash equivalent value thereof.
THE WNI BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE RECAPITALIZATION AND
THE TRANSACTIONS RELATED THERETO AND HAS UNANIMOUSLY DETERMINED THAT THEY ARE
FAIR TO AND IN THE BEST INTERESTS OF WNI AND ITS SHAREHOLDERS. AFTER CAREFUL
CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE FOR THE RECAPITALIZATION AND FOR THE APPROVAL OF THE EMPLOYEE AND
CONSULTANT COMPENSATION MATTERS DESCRIBED ABOVE.
Only shareholders of record at the close of business on , 1997 are
entitled to notice of and to vote at the Special Meeting, or at any
postponements or adjournments thereof. The Recapitalization must be approved by
a majority of the WNI Common Shares and the WNI Preferred Shares voting
together as a single class, of which the Principal Shareholders (as defined
below) own approximately 45%, a majority of the WNI Common Shares and a
majority of the WNI Preferred Shares each voting as a single class, and a
majority of the Series A, Series B and Series D Preferred Shares voting
together as a single class. The employee and consultant compensation matters
described above must be approved by holders of more than 75% of the eligible
WNI Common Shares and WNI Preferred Shares voting together as a single class.
The determination of whether such 75% approval requirement is met with respect
to a payment shall be made disregarding WNI Common Shares and WNI Preferred
Shares owned (actually or constructively) by a recipient of such payment. Such
shareholder vote on employee and consultant compensation matters must, in each
case, determine the right of the recipient to receive (or in the case of a
payment previously made, retain) such payment. Officers and directors as a
group are deemed to beneficially own 83.87% and 49.17% of WNI Common Shares and
WNI Preferred Shares, respectively, and 69.71% of such shares treated as a
single class. Stephen G. Perlman, Bruce A. Leak, and Phillip Y. Goldman, WNI's
President and Chief Executive Officer, Chief Operating Officer, and Senior Vice
President, respectively (collectively, the "Principal Shareholders"), the
holders of an aggregate of 15,000,000 WNI Common Shares have agreed to vote
their shares in favor of the Recapitalization, and against approval of any
proposal made in opposition to or in competition with consummation of the
Recapitalization.
Under the California General Corporation Law (the "CGCL"), a shareholder who
objects to the Recapitalization may assert statutory dissenters' rights to
dissent from and obtain payment of the fair value of his or her WNI Common
Shares and WNI Preferred Shares by strict compliance with the requirements of
the CGCL. See "The WNI Special Meeting of Shareholders--Dissenters' Rights" in
the Proxy Statement/ Prospectus for a more detailed description of dissenters'
rights with respect to the Recapitalization.
2
<PAGE>
A complete list of shareholders entitled to vote at the Special Meeting will
be available for examination at WNI's principal executive offices, for any
purposes germane to the Special Meeting, during ordinary business hours, for a
period of at least ten days prior to the Special Meeting.
IMPORTANT
ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED
BLUE ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT
THE SPECIAL MEETING.
SHAREHOLDERS SHOULD NOTE THAT NOTWITHSTANDING ANY SHAREHOLDER APPROVAL OF THE
MATTERS DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS, THE RECAPITALIZATION AND
RELATED TRANSACTIONS REMAIN SUBJECT TO, AND WILL NOT OCCUR UNTIL SATISFACTION
OF, ALL APPLICABLE REGULATORY REQUIREMENTS, INCLUDING THOSE IMPOSED BY THE
HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976.
By Order of the Board of Directors,
_____________________________________
Bruce A. Leak, Secretary
Palo Alto, California
, 1997
3
<PAGE>
MICROSOFT CORPORATION
WEBTV NETWORKS, INC.
PROSPECTUS
----------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
WEBTV NETWORKS, INC.
TO BE HELD , 1997
----------------
This Proxy Statement/Prospectus constitutes the proxy statement of WebTV
Networks, Inc., a California corporation ("WNI"), relating to the solicitation
by WNI of proxies for use at the Special Meeting of Shareholders of WNI (the
"Special Meeting") scheduled to be held at local time on , 1997, and
the prospectus of WNI relating to WNI Class A Common Stock, par value $.001
per share (the "Class A Shares" or "Exchangeable Shares"), that will be issued
in connection with the recapitalization (the "Recapitalization") of WNI,
pursuant to which, among other things, Microsoft Corporation, a Washington
corporation ("Microsoft"), will acquire WNI Class B Common Stock, par value
$.001 per share (the "Class B Shares"), and WNI will become a controlled
subsidiary of Microsoft. This Proxy Statement/Prospectus also serves as a
prospectus for the Microsoft Common Shares, par value $.000025 ("Microsoft
Common Shares"), that may be issued upon exchange of the Exchangeable Shares.
The Exchangeable Shares and the Microsoft Common Shares are sometimes referred
to collectively as the "Securities." The Recapitalization will be effected
pursuant to an Agreement and Plan of Recapitalization (the "Recapitalization
Agreement") dated as of April 5, 1997, by and among Microsoft, WNI and certain
shareholders of WNI. A copy of the Recapitalization Agreement is attached to
this Proxy Statement/Prospectus as Appendix A and incorporated herein by
reference. WNI and Microsoft have filed a joint registration statement with
the Securities and Exchange Commission (the "Commission") with respect to the
issuance of the Exchangeable Shares by WNI and the Microsoft Common Shares
issuable upon the exchange of Exchangeable Shares.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus
in connection with the solicitations of proxies or the offering of securities
made by this Proxy Statement/Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by WNI or Microsoft. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities made hereunder shall
under any circumstances create any implication that there has been no change
in the information set forth herein since the date of this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
EVALUATED BY WNI SHAREHOLDERS IN CONNECTION WITH THEIR CONSIDERATION OF THE
RECAPITALIZATION. THIS DISCUSSION BEGINS AT PAGE 20.
NEITHER THE RECAPITALIZATION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Capitalized terms that are not otherwise defined in this Proxy
Statement/Prospectus are defined in the Recapitalization Agreement attached
hereto as Appendix A. Page 6 of this Proxy Statement/Prospectus sets forth an
index of significant defined terms that are used herein.
The approximate date on which this Proxy Statement/Prospectus and the
accompanying proxy card will first be mailed to WNI shareholders is ,
1997.
The date of this Proxy Statement/Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
Microsoft is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and files reports and
other information with the Commission in accordance therewith. Such reports,
proxy statements and other information filed by Microsoft are available for
inspection and copying at the public reference facilities of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York
10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The Microsoft Common Shares are
traded as a "National Market Security" on The Nasdaq Stock Market. Material
filed by Microsoft can be inspected at the offices of the National Association
of Securities Dealers, Inc., Reports Section, 1735 K Street, N.W., Washington,
D.C. 20006.
This Proxy Statement/Prospectus constitutes a part of a Registration
Statement on Form S-4 (together with amendments and exhibits thereto, the
"Registration Statement") filed with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Exchangeable
Shares of WNI and the Microsoft Common Shares issuable upon the exchange of
such Exchangeable Shares. This Proxy Statement/Prospectus does not contain all
of the information set forth in such Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Reference is made to the Registration Statement and to the
exhibits relating thereto for further information with respect to WNI,
Microsoft and the Securities offered hereby. Any statements contained herein
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission or incorporated
by reference herein are not necessarily complete, and, in each instance,
reference is made to the copy of such document so filed for a more complete
description of the matter involved. Each such statement is qualified in its
entirety by such reference.
As a result of the filing of this Registration Statement, WNI will become
subject to certain periodic reporting and other informational requirements of
the Exchange Act. For so long as WNI is subject to such periodic reporting and
information requirements, it will file with the Commission all reports and
other information required thereby, which may be inspected at the public
reference facilities maintained by the Commission at the same addresses
referenced above in the first paragraph of this section. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549 at prescribed
rates.
Under the Amended and Restated Articles of Incorporation (attached as
Appendix E) WNI or Microsoft is obligated to provide the holders of the
Exchangeable Shares with notice of (i) adoption of a plan of Liquidation
(defined in such Articles to include the liquidation, dissolution, winding-up
of, or the filing of a petition for involuntary liquidation or other
proceeding in bankruptcy by, WNI); (ii) declaration of a dividend record date
by WNI; or (iii) exercise of a class call right by Microsoft whereby all of
the outstanding Exchangeable Shares may be acquired by Microsoft during the
period commencing five years and six months after the Effective Time and
ending six years after the Effective Time. WNI and Microsoft undertake to
provide such notices to the holders of outstanding Exchangeable Shares
together with other information that may reasonably be expected to have a
material effect on the decisions of holders of Exchangeable Shares generally
to either hold or exchange such shares.
Microsoft will also provide holders of outstanding Exchangeable Shares with
copies of Microsoft's annual reports, proxy statements and other reports and
documents, if any, generally sent to holders of Microsoft Common Shares.
2
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Microsoft (File No. 0-
14278) are incorporated by reference in this Proxy Statement/Prospectus:
1. Microsoft's Annual Report on Form 10-K for the year ended June 30, 1996;
2. Microsoft's Proxy Statement dated September 27, 1996 for Microsoft's
annual meeting of shareholders on November 12, 1996;
3. Microsoft's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996;
4. Microsoft's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996;
5. Microsoft's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997; and
6. The description of the capital shares of Microsoft which is contained in
the Registration Statement on Form S-3 of Microsoft filed pursuant to the
Securities Act under Commission, file number 333-17143, dated December 16,
1996, which is incorporated by reference in Form 8-A filed pursuant to the
Exchange Act under Commission file number 0-14278.
All documents filed by Microsoft pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the termination of the offering of the
Securities offered hereby shall be deemed to be incorporated by reference into
this Proxy Statement/Prospectus and to be a part hereof from the date of
filing of such document. Any statement contained herein or in a document all
or a portion of which is incorporated or deemed incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
Microsoft hereby undertakes to provide without charge to each person to whom
this Proxy Statement/Prospectus has been delivered, upon the written or oral
request of any such person, a copy of any and all of the foregoing documents
incorporated herein by reference (other than exhibits to such documents which
are not specifically incorporated by reference into the information that this
Proxy Statement/Prospectus incorporates). Written or telephone requests should
be directed to Investor Relations Department, Microsoft Corporation, One
Microsoft Way, Redmond, Washington 98052-6399, telephone number (800) 285-7772
or by electronic mail at [email protected]. Microsoft also has posted on its
website (www.microsoft.com/msft/) the Annual Report (Form 10-K), Proxy
Statement and Quarterly Reports (Form 10-Q) incorporated by reference in this
Proxy Statement/Prospectus. In order to ensure timely delivery of the
documents, any request should be made by , 1997.
Microsoft, Natural Keyboard, PowerPoint, Windows and Windows NT are
registered trademarks and BackOffice, FrontPage, MSN, and Outlook are
trademarks of Microsoft Corporation.
WebTV, WebTV Network, TVLens, LineShare, Explore, Around Town and One Thumb
Browsing are trademarks of WNI.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 3
SUMMARY OF PROXY STATEMENT/PROSPECTUS..................................... 7
RISK FACTORS.............................................................. 20
Consequences of Holder's Failure to Give Timely Notice Prior to
Expiration of Holder's Exchange Rights................................. 20
Absence of Public Market for Exchangeable Shares........................ 20
Right of Microsoft to Call All Exchangeable Shares...................... 20
Risks Related to Exercise of Exchange Rights............................ 20
Risks Related to Escrow Agreement....................................... 21
Risks Related to Interests of Certain Persons........................... 21
Effects of Bankruptcy of WNI Following the Recapitalization............. 21
Tax Consequences of Exchange of WNI Common Shares for Exchangeable
Shares................................................................. 21
Risks and Uncertainties Regarding Forward-Looking Statements............ 22
Effects of Non-Consummation of the Recapitalization of WNI.............. 22
THE WNI SPECIAL MEETING OF SHAREHOLDERS................................... 24
Date, Time and Place of Meeting......................................... 24
Record Date and Outstanding Shares...................................... 24
Voting of Proxies....................................................... 24
Vote Required and Voting Intentions of Certain Shareholders............. 24
Solicitation of Proxies and Expenses.................................... 25
Dissenters' Rights...................................................... 25
PROPOSAL I--THE RECAPITALIZATION AND RELATED TRANSACTIONS................. 27
Background of Recapitalization; Material Contacts and Deliberations..... 27
WNI's Reasons for the Recapitalization.................................. 29
WNI Board Recommendation................................................ 30
Opinion of Financial Advisor............................................ 31
Interests of Certain Persons in the Recapitalization.................... 33
Microsoft's Reasons for the Recapitalization............................ 34
The Recapitalization.................................................... 34
Summary of Other Provisions of the Recapitalization Agreement........... 39
Related Agreements...................................................... 45
Certain U.S. Federal Income Tax Matters................................. 47
Accounting Treatment.................................................... 51
Regulatory Requirements................................................. 51
Surrender of Certificates; Lost Certificates............................ 51
Affiliates' Restrictions on Sale of Shares.............................. 52
Recapitalization Expenses............................................... 52
PROPOSAL II--OPTION GRANTS, OPTION ACCELERATION AND OTHER COMPENSATORY
MATTERS.................................................................. 53
Employment and Noncompetition Agreements................................ 53
Grant of Options to Purchase Microsoft Common Shares.................... 53
WNI Board Recommendation................................................ 58
WNI'S BUSINESS............................................................ 59
General................................................................. 59
Products, Services and Technology....................................... 59
Sales, Marketing and Distribution....................................... 62
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TABLE OF CONTENTS--(CONTINUED)
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Manufacturing........................................................... 62
Customer Service........................................................ 62
Proprietary Technology.................................................. 62
Patents, Copyrights and Trademarks...................................... 63
Competition............................................................. 64
Employees............................................................... 65
Facilities.............................................................. 65
Legal Proceedings....................................................... 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 66
MANAGEMENT OF WNI......................................................... 70
PRINCIPAL SHAREHOLDERS OF WNI............................................. 73
DESCRIPTION OF CAPITAL SHARES OF WNI...................................... 75
Common Shares........................................................... 75
Preferred Shares........................................................ 75
Warrants................................................................ 75
Certain Anti-Takeover Provisions........................................ 76
Class B Shares and Exchangeable Shares.................................. 76
COMPARISON OF RIGHTS OF SHAREHOLDERS OF WNI AND MICROSOFT................. 76
Rights Under Existing Common Shares Versus Rights Under Exchangeable
Shares................................................................. 76
Rights Under Washington Law Versus Rights Under California Law.......... 77
LEGAL MATTERS............................................................. 83
EXPERTS................................................................... 83
INDEX TO FINANCIAL STATEMENTS OF WNI...................................... F-1
</TABLE>
LIST OF APPENDICES
Appendix A Agreement and Plan of Recapitalization
Appendix B Opinion of Deutsche Morgan Grenfell Inc.
Appendix C Chapter 13 of California General Corporation Law
Appendix D Escrow Agreement
Appendix E Amended and Restated Articles of Incorporation of WNI
5
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INDEX OF SIGNIFICANT DEFINED TERMS
<TABLE>
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1991 Plan.......................... 39
Acquiring Person................... 79
Adjusted Common Shares
Consideration..................... 9
Adjusted Preferred Shares
Consideration..................... 10
Adjusted Warrant Consideration..... 10
Affiliates Agreements.............. 46
Annual Report...................... 22
AOL................................ 32
Approval Notice.................... 26
Break-up Fee....................... 44
Call Right......................... 11
Cash............................... 11
Certificate........................ 36
CGCL............................... 13
Chapter 13......................... 25
Class A Exchange Rate.............. 11
Class A Shares..................... 1
Class B Shares..................... 1
Class Call Right................... 11
Closing............................ 15
CNET............................... 32
Code............................... 16
Commission......................... 1
Common Escrow Withholding Amount... 9
Comparable Companies............... 32
Competing Business................. 46
CompuServe......................... 32
Counsel............................ 47
Court.............................. 26
Credit Agreement................... 46
Current Market Value............... 11
Department of Justice.............. 51
Dissenting Shares.................. 25
Dividend Equivalent Transaction.... 48
DMG................................ 8
Earthlink.......................... 32
Effective Time..................... 12
Employment Agreements.............. 46
Escrow Agreement................... 45
Escrow Amount...................... 21
Escrow Withholding Amounts......... 10
Exchange Act....................... 2
Exchange Agent..................... 36
Exchange Ratio..................... 9
Exchangeable Shares................ 1
Excite............................. 61
Founders Shares.................... 45
FTC................................ 51
Fujitsu............................ 68
HSR Act............................ 41
Indemnifiable Amounts.............. 43
Intellectual Property Agreements... 45
Interested Shareholder............. 79
IRS................................ 21
Letter of Transmittal.............. 12
Liquidation........................ 11
Loan............................... 46
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Microsoft...................... 1
Microsoft Articles............. 77
Microsoft Bylaws............... 77
Microsoft Closing Price........ 9
Microsoft Common Shares........ 1
Microsoft Options.............. 12
MSN............................ 28
NETCOM......................... 32
Netscape....................... 32
OEMs........................... 18
Opinion........................ 31
Outside Date................... 14
Pace........................... 59
Participating Shares........... 80
PCs............................ 18
Philips........................ 59
Preferred Escrow Withholding
Amount........................ 10
Preston Gates & Ellis.......... 15
Principal Shareholders......... 24
Recapitalization............... 1
Recapitalization Agreement..... 1
Registration Statement......... 2
Securities..................... 1
Securities Act................. 2
Securities Holders............. 45
Series A Shares................ 34
Series B Shares................ 34
Series B Warrant............... 75
Series C Shares................ 35
Series C Warrants.............. 76
Series D Shares................ 35
Shareholder Agreements......... 45
Shareholders' Representative... 43
Sony........................... 59
Special Event.................. 39
Special Meeting................ 1
Target Corporation............. 79
Tax Opinions................... 47
Termination Fee................ 44
URL............................ 60
Venture Law Group.............. 15
Voting Agreements.............. 45
WBCA........................... 77
Web............................ 59
WebTV Network.................. 59
WebTV set-top terminal......... 59
WNI............................ 1
WNI Articles................... 76
WNI Bylaws..................... 77
WNI Common Shares.............. 34
WNI Dissenting Shareholder..... 25
WNI Options.................... 35
WNI Preferred Shares........... 34
WNI Record Date................ 24
WNI Shares..................... 35
WNI Warrants................... 35
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SUMMARY OF PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. This summary is not, and is not intended to be,
complete in itself. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Proxy
Statement/Prospectus and the attached Appendices, which shareholders of WNI are
encouraged to review. Unless otherwise defined in this summary, capitalized
terms used in this summary are defined elsewhere in this Proxy
Statement/Prospectus.
INTRODUCTION
This Proxy Statement/Prospectus relates to the consideration of a
recapitalization of WNI, following which WNI will become a controlled
subsidiary of Microsoft, and the consideration of certain employee and
consultant compensation matters.
THE COMPANIES
Microsoft
Microsoft develops, manufactures, licenses, sells and supports a wide range
of software products, including operating systems for personal computers and
servers, server applications for client/server environments, business and
consumer productivity applications, software development tools, and Internet
and intranet software and technologies. Microsoft's principal executive offices
are located at One Microsoft Way, Redmond, Washington 98052-6399, and its
telephone number is (425) 882-8080. See "--Information About Microsoft."
WNI
WNI operates an on-line service that enables consumers to experience the
Internet through their televisions via set-top terminals based on WNI's
proprietary technologies. WNI's principal executive offices are located at 305
Lytton Avenue, Palo Alto, California 94301, and its telephone number is (415)
326-3240. See "WNI's Business."
THE WNI SPECIAL MEETING OF SHAREHOLDERS
Purpose of Meeting
A Special Meeting of shareholders of WNI will be held at the principal
executive offices of WNI, 305 Lytton Avenue, Palo Alto, California, on ,
1997 at local time. Only shareholders of record at the close of business
on , 1997 are entitled to notice of and to vote at the Special Meeting, or
at any postponements or adjournments thereof. At the Special Meeting, WNI
shareholders will be asked to consider and vote upon the following proposals:
(i) to approve the Recapitalization Agreement, pursuant to which WNI will
undergo the Recapitalization, as further described herein; (ii) to approve
certain employee and consultant compensation matters as more fully described
herein; and (iii) to transact such other business that may properly come before
the Special Meeting or any postponements or adjournments thereof. See "The WNI
Special Meeting of Shareholders."
Vote Required
Approval of the Recapitalization requires the affirmative vote of the holders
of (i) a majority of the outstanding WNI Common Shares and WNI Preferred
Shares, voting together as a single class, (ii) a majority of the WNI Common
Shares and a majority of the WNI Preferred Shares, each voting as a single
class, and (iii) a majority of the outstanding Series A Shares, Series B Shares
and Series D Shares, voting together as a single class. Approval of each of the
employee and consultant compensation matters described elsewhere in this Proxy
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<PAGE>
Statement/Prospectus requires the affirmative vote of the holders of more than
75% of the outstanding WNI Common Shares and WNI Preferred Shares, voting
together as a class on an as-converted basis, of those shareholders eligible to
vote on such matters (excluding in each case shares owned, actually or
constructively, by the person who would receive the payment subject to such
approval). See "The WNI Special Meeting of Shareholders--Vote Required and
Voting Intentions of Certain Shareholders."
BACKGROUND AND REASONS FOR THE RECAPITALIZATION; RECOMMENDATION OF BOARD OF
DIRECTORS OF WNI
The Board of Directors of WNI has unanimously approved the Recapitalization
Agreement and unanimously recommends that the shareholders of WNI vote for
approval and adoption of the Recapitalization Agreement. The primary factors
considered and relied upon by the WNI Board of Directors in reaching its
recommendations are referred to in "Proposal I--The Recapitalization and the
Related Transactions--WNI's Reasons for the Recapitalization."
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
In considering the recommendation of the Board of Directors of WNI with
respect to the Recapitalization, and the employee and consultant compensation
matters described elsewhere in this Proxy Statement/Prospectus, shareholders
should be aware that certain officers and directors of WNI have interests in
connection with the Recapitalization. If the Recapitalization is consummated,
Microsoft intends to appoint Stephen G. Perlman, the President and Chief
Executive Officer of WNI, a Vice President of Microsoft. As a result of the
Recapitalization, certain officers of WNI will receive employment agreements,
acceleration of existing options to the extent their employment with WNI is
terminated following the Recapitalization, grants of new options and other
consideration. See "Proposal I--The Recapitalization and Related Transactions--
Related Agreements--Employment and Noncompetition Agreements" and "Proposal
II--Option Grants, Option Acceleration and Other Compensatory Matters." In
addition, in the event that the Recapitalization is consummated, Microsoft has
agreed to provide certain indemnification rights to WNI's officers and
directors. Paul Allen, a director of Microsoft, is the beneficial owner of all
of the outstanding capital shares of Vulcan Ventures Inc., which is the record
owner of 3,220,582 WNI Preferred Shares. Accordingly, Vulcan Ventures will
receive $44,076,885 if the Recapitalization is consummated. See "Proposal I--
The Recapitalization and Related Transactions--Interests of Certain Persons in
the Recapitalization."
OPINION OF FINANCIAL ADVISOR
Deutsche Morgan Grenfell Inc. ("DMG"), the investment banking firm retained
by the WNI Board of Directors to perform certain financial advisory services in
connection with the Recapitalization, has rendered its opinion that, as of
April 5, 1997, the consideration to be received by the holders of WNI Common
Shares and WNI Preferred Shares was fair from a financial point of view to the
holders of WNI Common Shares and WNI Preferred Shares, respectively. The full
text of the written opinion of DMG, which sets forth the assumptions made,
matters considered and limitations on the review undertaken in connection with
such opinion, is attached hereto as Appendix B and is incorporated herein by
reference. Holders of WNI capital shares are urged to, and should, read such
opinion in its entirety. See "Proposal I--The Recapitalization and Related
Transactions--Opinion of Financial Advisor."
THE RECAPITALIZATION
Approval of the Recapitalization by the WNI shareholders will provide holders
of WNI securities with certain elections and/or result in the conversion of all
outstanding WNI securities as follows:
Conversion of WNI Common Shares
WNI Common Shares, other than WNI Common Shares of holders who exercise their
dissenters' rights or who elect to have their shares acquired by Microsoft for
cash, shall be converted into, and WNI shall issue to
8
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holders of WNI Common Shares, a number of Exchangeable Shares pursuant to an
exchange ratio determined by dividing $12.841 by the Microsoft Closing Price
(the "Exchange Ratio") (provided, however, that the amount to be received by
each holder of WNI Common Shares shall be reduced by approximately $1.460 per
WNI Common Share, which amount (the "Common Escrow Withholding Amount") will be
withheld and placed in an escrow fund more fully described herein under the
heading "Proposal I--The Recapitalization and Related Transactions--Related
Agreements--Escrow Agreement"). As a result of such withholding, each holder of
WNI Common Shares will receive an effective value per WNI Common Share of
approximately $11.381 if none of the Common Escrow Withholding Amount is
ultimately paid out to such holders (such lesser amount, the "Adjusted Common
Shares Consideration"). The "Microsoft Closing Price" shall be the average
closing price of Microsoft Common Shares as publicly reported by The Nasdaq
Stock Market over the twenty (20) consecutive trading days ending two (2) days
prior to the Closing. For example, if the Microsoft Closing Price was
calculated to be $100 per share, the Exchange Ratio would be .12841 ($12.841
divided by $100) and a holder would receive .12841 Exchangeable Shares for each
WNI Common Share held at the time of the Recapitalization. Thus, if a holder
has 1,000 WNI Common Shares at the time of the Recapitalization, such holder
would receive a total of 128 Exchangeable Shares, less the Common Escrow
Withholding Amount. See "Proposal I--The Recapitalization and Related
Transactions--The Recapitalization--Conversion of WNI Common Shares."
Election by Holders of Vested WNI Common Shares
Any holder of vested WNI Common Shares may elect to receive $12.841 per
share, less the Common Escrow Withholding Amount (for an effective value per
WNI Common Share of the Adjusted Common Shares Consideration) in cash from
Microsoft at the effective time of the Recapitalization in lieu of receiving
Exchangeable Shares by properly completing the Letter of Transmittal, marking
the election to have such shares purchased by Microsoft for cash, and returning
the Letter of Transmittal, Escrow Agreement Signature Page and the certificates
for such shares to WNI prior to the Closing. If no Letter of Transmittal
indicating an election for cash is received by WNI from an eligible holder
prior to the Closing, such holder will be deemed to have elected to receive
Exchangeable Shares. See "Proposal I--The Recapitalization and Related
Transactions--The Recapitalization--Election by Holders of Vested WNI Common
Shares" and "--Related Agreements--Escrow Agreement."
Conversion of Unvested WNI Common Shares
Certain WNI Common Shares are subject to a vesting schedule and may be
repurchased by WNI in the event a holder thereof ceases to be employed by WNI.
Unvested WNI Common Shares shall be converted into Exchangeable Shares on the
same basis as other WNI Common Shares and will be registered in each holder's
name. Such unvested Exchangeable Shares will be held by WNI following the
Recapitalization pursuant to existing agreements governing such shares. See
"The Recapitalization and Related Transactions--The Recapitalization--
Conversion of Unvested WNI Common Shares."
Election by Holders of WNI Preferred Shares and WNI Warrants
Any holder of WNI Preferred Shares or WNI Warrants may elect to have such
securities acquired for cash by Microsoft at the effective time of the
Recapitalization by properly completing the Letter of Transmittal marking the
election to have such shares acquired by Microsoft for cash and returning the
Letter of Transmittal, Escrow Agreement Signature Page and the certificates for
such shares to WNI prior to the Closing. See "Proposal I--The Recapitalization
and Related Transactions--The Recapitalization--Election by Holders of WNI
Preferred Shares and WNI Warrants."
Conversion of WNI Preferred Shares and WNI Warrants
Each of the WNI Preferred Shares, other than shares held by holders who have
exercised their dissenters' rights or elected to have their shares acquired by
Microsoft for cash, will be converted, without any action on
9
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the part of the holders, into the right to receive $13.686 (determined on an
as-if-converted to WNI Common Shares basis) in cash (provided, however, that
the amount to be received by each holder of WNI Preferred Shares shall be
reduced by approximately $1.556 per WNI Preferred Share, which amount (the
"Preferred Escrow Withholding Amount"), will be withheld and placed in the
escrow fund, for an effective price per underlying WNI Common Share of
approximately $12.130 if none of the Escrow Withholding Amount is ultimately
paid out to the holders of WNI Preferred Shares) (such lesser amount, the
"Adjusted Preferred Shares Consideration"). Subject to each of their terms,
each WNI Warrant, other than warrants held by holders who have elected to have
their warrants acquired by Microsoft for cash, shall be converted, without any
action of the part of the holders thereof, into the right to receive $13.686
(determined on an as-if-net-exercised and converted to WNI Common Shares basis)
in cash, less an amount per underlying WNI Preferred Share equal to the
Preferred Escrow Withholding Amount (together, such amount, the Common Escrow
Withholding Amount and the Preferred Escrow Withholding Amount constitute the
"Escrow Withholding Amounts"), which will be withheld and placed in the escrow
fund, for an effective price per underlying WNI Common Share of approximately
$12.130 if none of such Escrow Withholding Amount is ultimately paid out to the
holders of WNI Warrants) (such lesser amount, the "Adjusted Warrant
Consideration"). In each case, the cash payment contemplated by this paragraph
will be made by WNI following the Closing. See "Proposal I--The
Recapitalization and Related Transactions--The Recapitalization--Conversion of
WNI Preferred Shares and WNI Warrants."
Issuance of Class B Common Shares and Consideration Paid by Microsoft
At the Closing, Microsoft shall transfer to WNI cash equal to not less than
the amount required to satisfy the conversion rights of holders of WNI
Preferred Shares and WNI Warrants who have not elected to have their shares or
warrants purchased by Microsoft. Microsoft shall also transfer, at its
election, either Microsoft Common Shares equal to not less than five times the
amount required to satisfy the exchange rights of the Exchangeable Shares, or
cash equal to not less than such amount, or a combination of the foregoing. At
the Closing, Microsoft will also execute an agreement whereby among other
things Microsoft will agree to use its reasonable best efforts to ensure at all
times that sufficient numbers of Microsoft Common Shares or cash are available
to WNI to permit WNI to satisfy its obligation to deliver Microsoft Common
Shares or cash to holders of Exchangeable Shares upon the exercise of their
exchange rights. In consideration for the transfer of the Microsoft Common
Shares and/or cash to WNI as described above and the execution of the
Recapitalization Agreement and other ancillary agreements, Microsoft will
receive four Class B Shares for each Class A or Exchangeable Share issued in
the Recapitalization. Thus the exact number of Class B Shares to be issued to
Microsoft will not be known until just before the Effective Time but in no
event will the Class B Share represent less than eighty percent (80%) of the
outstanding capital shares on the basis of value and voting power. See
"Proposal I--The Recapitalization and Related Transactions--The
Recapitalization," "--Summary of Other Provisions of the Recapitalization
Agreement" and "--Related Agreements."
Rights and Preferences of Exchangeable Shares
The form of Amended and Restated Articles of Incorporation to be adopted by
WNI in connection with the Recapitalization is attached to this Proxy
Statement/Prospectus as Appendix E and is incorporated herein by reference. The
terms of such Articles are summarized below.
Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares
Each holder of Exchangeable Shares shall be entitled to vote for directors
and such other matters as may be submitted to the shareholders. Except to the
extent required by applicable law, each Exchangeable Share shall have one (1)
vote. Each holder of Exchangeable Shares shall be entitled to receive notice
of, and to attend, any meetings of shareholders of WNI.
10
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The WNI Board of Directors may declare dividends in its discretion from time
to time, and WNI shall pay dividends out of its assets properly available for
the payment of dividends, provided that any such dividend declared with respect
to each Exchangeable Share and Class B Share shall be identical in amount and
character. Such dividends shall have record and payment dates as may be
determined in the discretion of the WNI Board of Directors.
In the event of a liquidation, dissolution or winding-up of WNI or other
distribution of assets, including the filing of a petition for involuntary
liquidation or other proceeding in bankruptcy, of WNI (collectively, a
"Liquidation"), WNI shall pay to the holders of the Exchangeable Shares from
the assets of WNI available for distribution an amount that is identical in
amount and character with respect to each share of Exchangeable Share and Class
B Share. See "Proposal I--The Recapitalization and Related Transactions--The
Recapitalization--Rights and Preferences of Exchangeable Shares--Voting,
Dividend and Liquidation Rights of Holders of Exchangeable Shares."
Exchange Rights
Subject to the call rights of Microsoft described below, holders of
Exchangeable Shares shall have the right to exchange each Exchangeable Share
held for Microsoft Common Shares at any time prior to the end of fifty-one (51)
months after the effective date of the Recapitalization. Each Exchangeable
Share shall be exchanged, for (i) such number of Microsoft Common Shares as are
equal to the product obtained by multiplying the Class A Exchange Rate in
effect at the time the exchange procedure is initiated by the number of
Exchangeable Shares
being exchanged; or (ii) an amount in immediately available funds equal to the
Current Market Value of the Microsoft Common Shares otherwise issuable upon
exchange of the Exchangeable Shares ("Cash"). The determination as to whether
holders of Exchangeable Shares will receive Microsoft Common Shares or Cash
upon the exchange will be made by WNI. The "Class A Exchange Rate" shall
initially be 1.0 Microsoft Common Shares for each Exchangeable Share, subject
to adjustment based on certain capital changes in Microsoft Common Shares
following the Recapitalization. In the event Microsoft does not exercise its
call rights, WNI is obligated to exchange such Exchangeable Shares for either
Microsoft Common Shares or Cash. The "Current Market Value" of the Microsoft
Common Shares shall be the closing price as publicly reported by The Nasdaq
Stock Market at 4:00 p.m. (Eastern time) as of the date on which a holder of
Exchangeable Shares delivers his or her certificates and an "Exchange Notice"
to the Secretary of WNI, or a person designated by the Secretary. See "Proposal
I--The Recapitalization and Related Transaction--The Recapitalization--Rights
and Preferences of Exchangeable Shares--Exchange Rights."
Microsoft Call Rights
WNI shall immediately notify Microsoft of any exchange request. Microsoft
shall thereafter have one (1) day in which to exercise its right (the "Call
Right") to deliver to such holder, at Microsoft's election, (i) such number of
Microsoft Common Shares as are equal to the product obtained by multiplying the
Class A Exchange Rate in effect at the time the exchange procedure is initiated
by the number of Exchangeable Shares being exchanged; or (ii) Cash. In
addition, Microsoft shall have the right to acquire all, but not less than all,
of the outstanding Exchangeable Shares ("Class Call Right") solely for a number
of Microsoft Common Shares as determined under clause (i) above (except that
the Class A Exchange Rate used will be the Class A Exchange Rate in effect at
the time Microsoft shall exercise its Class Call Right, upon delivery of an
irrevocable written notice by Microsoft to WNI at any time during the period
commencing five years and six months after the effective date of the
Recapitalization and ending six years after the effective date of the
Recapitalization. In the event Microsoft exercises its Class Call Right,
Microsoft shall provide each holder of Exchangeable Shares written notice
specifying a closing date for such proposed action not more than sixty (60) and
not less than fifteen (15) days prior to taking such action. See "Proposal I--
The Recapitalization and Related Transactions--The Recapitalization--Rights and
Preferences of Exchangeable Shares--Microsoft Call Rights."
11
<PAGE>
Adjustments to Class A Exchange Ratio Upon Certain Events
Upon the happening of certain share issuances, subdivisions, splits or
combinations after the effective date of the Recapitalization, the Class A
Exchange Rate shall, simultaneously with the happening of such event, be
adjusted by multiplying the then effective Class A Exchange Rate by a fraction,
the numerator of which shall be the number of Microsoft Common Shares
outstanding immediately after such event and the denominator of which shall be
the number of Microsoft Common Shares outstanding immediately prior to such
event, and the product so obtained shall thereafter be the Class A Exchange
Rate. The Class A Exchange Rate, as so adjusted, shall be readjusted in the
same manner upon the happening of any successive event or events. See "Proposal
I--The Recapitalization and Related Transactions--The Recapitalization--Rights
and Preferences of Exchangeable Shares--Adjustments to Class A Exchange Rate
Upon Special Event."
WNI Stock Options
At the effective time of the Recapitalization, Microsoft shall replace the
outstanding WNI Options with options to purchase Microsoft Common Shares
("Microsoft Options") subject to terms and conditions as follows: (i) each new
Microsoft Option will be exercisable for a number of whole Microsoft Common
Shares equal to the number of WNI Common Shares subject to the WNI Option being
replaced immediately prior to such effective time multiplied by the Exchange
Ratio, rounded to the nearest whole Microsoft Common Share; (ii) the exercise
price per Microsoft Common Share shall be the exercise price of the WNI Option
being replaced immediately prior to such effective time divided by the Exchange
Ratio; and (iii) such replacement options will be nonqualified options even if
the WNI Options being replaced were incentive stock options (within the meaning
of Section 422 of the Code) before such replacement. For example, if a holder
has options for 1,000 WNI Common Shares priced at $1.00 per share and the
Microsoft Closing Price is $100, the Exchange Ratio is .12841 ($12.841 divided
by $100) and such holder's new options would cover 128 Microsoft Common Shares
and would be priced at approximately $7.79 per share ($1.00 divided by .12841).
See "Proposal I--The Recapitalization and Related Transactions--The
Recapitalization--WNI Stock Options."
In addition to the Microsoft Options issued in replacement of WNI Options,
Microsoft shall grant additional Microsoft Options to certain employees of WNI
with a discounted exercise price (but subject to vesting), with an aggregate
discount of $31,774,000. See "Proposal II--Option Grants, Option Acceleration
and Other Compensatory Matters."
Effective Time
It is anticipated that the Recapitalization will become effective as promptly
as practicable after the requisite WNI shareholder approval has been obtained
and all other conditions to the Recapitalization have been satisfied or waived
(the "Effective Time"). See "Proposal I--The Recapitalization and Related
Transactions--The Recapitalization--Effective Time."
Exchange Procedure
Accompanying this Proxy Statement/Prospectus is a Letter of Transmittal and
Election Form ("Letter of Transmittal"), which when properly completed and
returned together with certificate(s) that represent the shareholder's WNI
shares and an executed Escrow Agreement Signature Page, will enable the holder
to exchange such certificate(s) for the number of whole Exchangeable Shares to
which the holder of WNI Common Shares is entitled or the cash to which the
holder of WNI Preferred Shares, WNI Warrants or electing vested WNI Common
Shares has either elected to, or is entitled to, receive under the
Recapitalization Agreement. Until holders of certificates have surrendered them
for exchange and returned the executed Letter of Transmittal and Escrow
Agreement Signature Page, (i) no dividends or other distributions will be paid
with respect to any shares represented by such certificate(s), and (ii) no
interest will be paid on any cash payable for WNI Preferred Shares, WNI
Warrants or eligible electing WNI Common Shares or dividends or other
distributions payable with respect
12
<PAGE>
to Exchangeable Shares if and when declared. Upon surrender of any
certificate(s) in exchange for Exchangeable Shares, the holder thereof will
receive any dividends or other distributions which became payable at or after
the Effective Time, but were not paid by reason of the foregoing, with respect
to the number of whole Exchangeable Shares represented by the certificate(s)
issued upon such surrender. See "Proposal I--The Recapitalization and Related
Transactions--The Recapitalization--Effect of Recapitalization."
Dissenters' Rights
The shares of any holder of WNI Common Shares or WNI Preferred Shares who has
demanded and perfected dissenters' rights for such shares in accordance with
the California General Corporation Law ("CGCL") and who, as of the Effective
Time, has not effectively withdrawn or lost such dissenters' rights, shall not
be converted into or represent a right to receive the consideration to be
received by such holder in the Recapitalization, but rather the holder thereof
shall only be entitled to such rights as are granted by California Law. See
"The WNI Special Meeting of Shareholders--Dissenters' Rights."
SUMMARY OF OTHER PROVISIONS OF THE RECAPITALIZATION AGREEMENT
Representations and Covenants
The Recapitalization Agreement contains certain customary representations and
warranties by WNI, the Principal Shareholders and Microsoft. See "Proposal I--
The Recapitalization and Related Transactions--Summary of Other Provisions of
the Recapitalization Agreement--Representations and Covenants."
Conditions to the Recapitalization
The Recapitalization Agreement provides that, unless waived, the respective
obligations of each party to effect the Recapitalization are subject to, among
other things, the following material conditions: (i) shareholder approvals as
described above; (ii) the absence of any injunction or other specified legal
prohibition; (iii) the receipt of required consents; (iv) the performance of
agreements and covenants and the absence of a material breach of the
representations and warranties of the other party; and (v) the receipt of legal
opinions as to the tax consequences of the Recapitalization and other customary
matters. See "Proposal I--The Recapitalization and Related Transactions--
Summary of Other Provisions of the Recapitalization Agreement--Conditions to
the Recapitalization."
Indemnification by Shareholders and by Principal Shareholders
In the Recapitalization Agreement, the holders of WNI Common Shares and WNI
Preferred Shares (other than holders who exercise their dissenters' rights
under California law) and WNI Warrants will, by the approval of the
Recapitalization and acceptance of the consideration provided in the
Recapitalization Agreement, agree, severally, to defend, indemnify and hold
Microsoft harmless from and against any and all damages and other amounts
(including expenses and attorneys' fees) incurred by Microsoft by reason of or
arising out of or in connection with (i) any breach or asserted breach of any
representation or warranty of WNI or the Principal Shareholders contained in
the Recapitalization Agreement or related documents, or (ii) the failure of WNI
or the Principal Shareholders to perform any agreement or covenant in the
Recapitalization Agreement. Cash and Securities with an aggregate value of $50
million will be withheld on a pro rata basis from the consideration to be
distributed in connection with the Recapitalization and placed in an escrow
account to be used to secure the indemnification obligations of the WNI
shareholders. Should Microsoft successfully assert claims for indemnification
under the Recapitalization Agreement, some or all of the Escrow Withholding
Amounts would not be released to holders of WNI Shares or WNI Warrants. See
"Proposal I--The Recapitalization and Related Transactions--Summary of Other
Provisions of the Recapitalization Agreement--Indemnification by Shareholders
and by Principal Shareholders" and "--Related Agreements--Escrow Agreement."
13
<PAGE>
Termination or Amendment
The Recapitalization Agreement may be terminated by mutual consent of the
parties at any time prior to the Effective Time of the Recapitalization.
Microsoft or WNI may terminate the Recapitalization Agreement (i) upon the
failure of the shareholders of WNI to give the requisite approvals for the
Recapitalization and related transactions; (ii) upon the entry of any court
order that declares the Recapitalization unlawful or enjoins the consummation
of the Recapitalization or the enactment of any statute causing the
Recapitalization to be unlawful, or (iii) if the Effective Time does not occur
by September 30, 1997 (the "Outside Date"); provided that if the parties elect
to pursue litigation in connection with antitrust matters, this Outside Date
may be extended to March 31, 1998 by mutual agreement of the parties. Microsoft
may terminate the Recapitalization Agreement (so long as Microsoft is not in
material breach of the Recapitalization Agreement) if there has been a material
breach by WNI of any representation, warranty, covenant, or agreement contained
in the Recapitalization Agreement and such breach has a material adverse effect
on the Recapitalization and has not been cured within 30 days after notice of
such breach is given. Even if there has been no such breach, or a termination
is not otherwise permitted, Microsoft may terminate the Recapitalization
Agreement, subject to the payment to WNI of certain fees. WNI may terminate the
Recapitalization Agreement (so long as WNI is not in material breach of the
Recapitalization Agreement) if there has been a material breach by Microsoft of
any representation, warranty, covenant, or agreement contained in the
Recapitalization Agreement and such breach has not been cured within 30 days
after notice of such breach is given. Even if there has been no such breach,
WNI may terminate the Recapitalization Agreement. In such an event, Microsoft
shall be entitled to the receipt of specified consideration in the event that
WNI is acquired on or before the first anniversary of the effective date of
such termination. The Recapitalization Agreement may be amended only by an
instrument in writing signed on behalf of each of Microsoft, WNI and the
Principal Shareholders. See "Proposal I--The Recapitalization and Related
Transactions--Summary of Other Provisions of the Recapitalization Agreement--
Termination or Amendment."
RELATED AGREEMENTS
Escrow Agreement
At the Closing, Microsoft, WNI, each of the holders of WNI Common Shares, WNI
Preferred Shares and WNI Warrants, the Shareholders' Representative and
ChaseMellon Shareholder Services, LLC will enter into an escrow agreement, the
form of which is attached to this Proxy Statement/Prospectus as Appendix D and
is incorporated herein by reference. The purpose of the escrow agreement is to
secure the indemnification obligations of the WNI securities holders under the
Recapitalization Agreement. Under the terms of the escrow agreement, cash and
securities with an aggregate value of $50 million will be withheld from the
consideration to be distributed in connection with the Recapitalization and
placed in an escrow account. Execution of the escrow agreement is a
prerequisite to the receipt of the WNI Exchangeable Shares or cash provided for
in the Recapitalization Agreement. Should Microsoft successfully assert claims
for indemnification under the Recapitalization Agreement, some or all of the
Escrow Withholding Amounts would not be released to holders of WNI Shares or
WNI Warrants. See "Proposal I--The Recapitalization and Related Transactions--
Related Agreements--Escrow Agreement."
Voting Agreements
Microsoft has entered into agreements with each of the Principal
Shareholders, who on the Record Date together owned beneficially in the
aggregate 15,000,000 WNI Common Shares representing approximately 45% of the
then outstanding WNI Shares, pursuant to which such shareholders have agreed to
vote their WNI Shares in favor of the approval of the Recapitalization and the
adoption of certain documents with respect to the Recapitalization and against
any action or agreement that would impede or interfere with the performance of
such Recapitalization documents or the consummation of the transactions
contemplated thereby. See "Proposal I--The Recapitalization and Related
Transactions--Related Agreements--Voting Agreements."
14
<PAGE>
Intellectual Property, License of Technology and Patent License Agreements
Immediately prior to the execution of the Recapitalization Agreement, the
Principal Shareholders executed Intellectual Property, License of Technology,
and Patent License Agreements with WNI, the purpose of which is to ensure that
at the closing of the Recapitalization (the "Closing"), all of the Intellectual
Property (as defined in the Recapitalization Agreement) is in fact owned by, or
licensed to, WNI, and available for use by WNI. See "Proposal I--The
Recapitalization and Related Transactions--Related Agreements--Intellectual
Property, License of Technology and Patent License Agreements."
Amended and Restated Shareholder Agreements
Contemporaneous with the execution of the Recapitalization Agreement,
Microsoft, WNI and each of the Principal Shareholders entered into Amended and
Restated Shareholder Agreements with respect to the vesting of their respective
unvested WNI Common Shares. See "Proposal I--The Recapitalization and Related
Transactions--Related Agreements--Amended and Restated Shareholder Agreements."
Line of Credit Agreement
Contemporaneous with the execution of the Recapitalization Agreement,
Microsoft and WNI entered into a Line of Credit Agreement, whereby Microsoft
agreed to loan WNI, on a revolving basis, up to $30,000,000. See "Proposal I--
The Recapitalization and Related Transactions--Related Agreements--Line of
Credit Agreement."
Make-Well Agreement
It is a condition to WNI's obligation to consummate the Recapitalization that
Microsoft execute a Make-Well Agreement in favor of WNI pursuant to which
Microsoft will agree to use its reasonable best efforts to ensure that WNI is
able to and has the financial resources to take certain actions with respect to
its Exchangeable Shares and to ensure that all exchange obligations of WNI
under the terms of the Exchangeable Shares are satisfied. See "Proposal I--The
Recapitalization Agreement and Related Transactions--Related Agreements--Make-
Well Agreement."
Affiliates Agreements
Prior to the Effective Time, WNI and Microsoft will enter into agreements
with each of the Principal Shareholders, and certain officers and directors of
WNI, pursuant to which such persons will agree that they will not sell or
otherwise dispose of any Exchangeable Shares or Microsoft Common Shares unless
such sale or disposition is permitted pursuant to the provisions of Rule 145
under the Securities Act, is otherwise exempt from registration under the
Securities Act, or is effected pursuant to a registration statement under the
Securities Act. See "Proposal I--The Recapitalization Agreement and Related
Transactions--Related Agreements--Affiliates Agreements."
Employment and Noncompetition Agreements
Prior to the Effective Time, each of the Principal Shareholders will enter
into an Employment and Noncompetition Agreement with Microsoft and WNI. See
"Proposal I--The Recapitalization and Related Transactions--Related
Agreements--Employment and Noncompetition Agreements."
CERTAIN U.S. FEDERAL INCOME TAX MATTERS
It is a condition to the obligation of WNI and Microsoft to consummate the
Recapitalization that WNI receive from Venture Law Group, A Professional
Corporation ("Venture Law Group"), and Microsoft receive from Preston Gates &
Ellis LLP ("Preston Gates & Ellis"), an opinion that the Recapitalization more
likely
15
<PAGE>
than not constitutes a reorganization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). WNI
security holders are urged to consult their own tax advisors regarding the tax
consequences of the Recapitalization. See "Proposal I--The Recapitalization and
Related Transactions--Certain U.S. Federal Income Tax Matters."
ACCOUNTING TREATMENT
The Recapitalization is anticipated to be accounted for using the purchase
method of accounting under generally accepted accounting principles. Under the
purchase method of accounting, the assets of WNI will be valued at their
estimated fair market value and reflected on the books and records of Microsoft
accordingly. See "Proposal I--The Recapitalization and Related Transactions--
Accounting Treatment." Microsoft expects that an in process research and
development write-off of $300 million will be required in the quarter in which
the Recapitalization closes.
EFFECT OF NONAPPROVAL
If WNI is unable to obtain approval by its shareholders before September 30,
1997 (or March 31, 1998 if Microsoft and WNI have mutually agreed to pursue
litigation against any action challenging the Recapitalization as violative of
antitrust laws), either Microsoft or WNI may terminate the Recapitalization
Agreement.
16
<PAGE>
SELECTED FINANCIAL DATA OF WNI
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of WNI, including notes thereto,
included elsewhere in this Proxy Statement/Prospectus. The statement of
operations data set forth below for the period from inception (June 30, 1995)
to March 31, 1996 and for the year ended March 31, 1997 and the balance sheet
data as of March 31, 1996 and March 31, 1997 have been derived from the audited
financial statements of WNI included elsewhere in this Proxy
Statement/Prospectus, which have been audited by Ernst and Young LLP,
independent auditors.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, 1995) YEAR ENDED
TO MARCH 31, MARCH 31,
1996 1997
--------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
On-line service................................ $ -- $ 3,456,120
Licensing and manufacturing.................... -- 38,949,810
----------- ------------
Total revenues............................... -- 42,405,930
Cost of revenues:
On-line service................................ -- 12,384,056
Licensing and manufacturing.................... -- 36,968,200
----------- ------------
Total cost of revenues....................... -- 49,352,256
Gross loss....................................... -- (6,946,326)
Operating expenses:
Research and development....................... 2,117,852 11,273,081
Sales and marketing............................ 258,865 18,688,022
General and administrative..................... 853,373 6,506,030
----------- ------------
Total operating costs and expenses........... 3,230,090 36,467,133
----------- ------------
Loss from operations............................. (3,230,090) (43,413,459)
Interest income.................................. 8,383 925,531
Interest expense................................. (10,703) (257,966)
----------- ------------
Net loss......................................... $(3,232,410) $(42,745,894)
----------- ------------
Pro forma net loss per share..................... $ (0.22) $ (1.51)
=========== ============
Shares used in computing pro forma net loss per
share........................................... 14,546,887 28,253,713
=========== ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1997
----------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 4,501,745 $ 20,715,502
Working capital....................................... 2,473,015 9,118,056
Total assets.......................................... 5,931,650 39,386,574
Capital lease obligations, net of current portion..... 524,013 5,062,640
Redeemable convertible preferred stock................ 6,500,001 12,359,999
Shareholder's equity (net capital deficiency)(1)...... (3,217,410) 2,462,384
Book value per share(2)............................... $ (0.21) $ 0.13
Shares used in computing book per share amounts....... 15,000,000 19,106,373
</TABLE>
- --------
(1) WNI has never declared a cash dividend on any of its securities.
(2) Book value per share is computed by dividing total shareholders' equity by
the number of WNI Common Shares outstanding at the end of the period. Book
value per share does not reflect the exercise of outstanding WNI Options.
There is not currently, nor has there ever been, a public trading market for
any class of WNI securities.
17
<PAGE>
INFORMATION ABOUT MICROSOFT
Description of Microsoft's Business
Microsoft was founded as a partnership in 1975 and incorporated in 1981.
Microsoft develops, manufactures, licenses, sells, and supports a wide range of
software products, including operating systems for personal computers ("PCs")
and servers; server applications for client/server environments; business and
consumer productivity applications; software development tools; and Internet
and intranet software and technologies. It has recently expanded its
interactive content efforts, including MSN(TM), the Microsoft Network online
service, various Internet-based services, and entertainment and information
software programs. Microsoft also sells personal computer books and input
devices and researches and develops advanced technologies for future software
products. Microsoft(R) products are available for most 16-bit and 32-bit
microprocessor-based PCs, including PCs from AST Research, Acer, Apple, Compaq,
Dell, Digital Equipment Corporation, Fujitsu, Gateway 2000, Hewlett-Packard,
International Business Machines, NEC, Olivetti, Packard Bell, Siemens, Toshiba,
and Vobis. Microsoft develops most of its software products internally.
Microsoft's business strategy emphasizes the development of a broad line of PC
and server software products for business and personal use, marketed through
multiple channels of distribution. Microsoft classifies its products into two
categories: platforms, and applications and content.
Platform products include desktop operating systems, business systems,
consumer platforms, Internet platforms, and tools. Desktop operating systems
for PCs include Windows(R) 95 and Windows NT(R) Workstation operating systems.
Business systems include Windows NT Server operating system and Microsoft
BackOffice(TM) suite of Windows NT-based server applications. Consumer
platforms products include system software for non-PC devices, integrated
software systems for public networks, and software for the creation of content
for digital media productions. Microsoft also offers software development
tools, Internet browser technology, and other Internet and intranet software
products and technologies.
Applications and content products include productivity applications,
interactive entertainment and information products, PC input devices, and
desktop finance products. Business productivity applications and products are
designed for the business, home, school, and small business markets. The
primary products are Microsoft Office, an integrated suite of applications
including Microsoft Excel spreadsheet, Microsoft Word word processor, and
Microsoft PowerPoint(R) presentation graphics program, and Microsoft Office
Professional, which includes the foregoing applications plus Microsoft
Access(R) database management program. Other productivity applications include
Microsoft Schedule+(TM) calendar and scheduling program, Microsoft Outlook(TM)
desktop manager, Microsoft Publisher desktop publishing program, Microsoft
Project critical path project scheduling program, and Microsoft FrontPage(TM)
Web authoring and management tool for Internet and intranet sites. Interactive
products include children's titles, games, information products, and MSN. PC
input devices include Microsoft Mouse, Microsoft Natural(R) Keyboard, gamepads
and joysticks. The primary desktop finance product is Microsoft Money.
To further its efforts in developing interactive content, Microsoft and the
National Broadcasting Company (NBC) recently established two joint ventures: a
24-hour cable news and information channel, MSNBC Cable LLC, and an interactive
online news and information service, MSNBC Interactive News LLC.
Microsoft's sales and support operation builds long-term business
relationships with three primary customer types: original equipment
manufacturers ("OEMs"), end-users, and organizations. Microsoft manages the
channels that serve customers by working with OEMs, distributors, and
resellers. Microsoft also focuses directly on large enterprises, offering
tailored license programs, enterprisewide support, consulting services, and
other specialized services. In addition to the OEM channel, Microsoft has three
major geographic sales organizations: U.S. and Canada, Europe, and Other
International. Microsoft supports its products with technical support for end-
users, developers, and organizations.
18
<PAGE>
Selected Financial Data of Microsoft
The following table sets forth certain selected financial data for Microsoft
as of and for each of the five fiscal years in the period ended June 30, 1996,
which was derived from Microsoft's financial statements and notes thereto. The
financial statements as of and for each of the three years in the period ended
June 30, 1996, have been audited by Deloitte & Touche LLP, Microsoft's
independent auditors, as stated in their report which is incorporated by
reference herein. The table also sets forth certain selected financial data for
Microsoft as of March 31, 1997, and for the nine months ended March 31, 1997
and 1996, which was derived from unaudited financial statements of Microsoft,
which, in the opinion of Microsoft, include all adjustments necessary for the
fair presentation of Microsoft's financial position and results of operation
for such periods, and may not be indicative of the results of operations for a
full year. All per share data below reflects the two-for-one split of Microsoft
Common Shares effective November 22, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- -------- -----------
(IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues............ $2,759 $3,753 $4,649 $5,937 $ 8,671 $ 6,416 $ 8,183
Net income.............. 708 953 1,146 1,453 2,195 1,636 2,397
Earnings per share...... 0.60 0.79 0.94 1.16 1.71 1.28 1.83
Return on net revenues.. 25.7% 25.4% 24.7% 24.5% 25.3% 25.5% 29.3%
<CAPTION>
JUNE 30,
--------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term
investments............ $1,345 $2,290 $3,614 $4,750 $ 6,940 $ 9,086
Total assets............ 2,640 3,805 5,363 7,210 10,093 12,613
Stockholders' equity.... 2,193 3,242 4,450 5,333 6,908 9,134
Historical book value
per share.............. 5.79 7.67
Shares used in computing
book value per share... 1,194 1,191
</TABLE>
Market Price Data
The following table sets forth the high and low sales prices of Microsoft
Common Shares, which are traded as "National Market Securities" on the Nasdaq
Stock Market under the symbol MSFT, for the periods indicated. Such prices
reflect the two-for-one split of Microsoft Common Shares effective November 22,
1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
First fiscal quarter ended September 30, 1996.................. $ 69.31 $ 53.75
Second fiscal quarter ended December 31, 1996.................. 86.125 65.438
Third fiscal quarter ended March 31, 1997...................... 103.50 80.75
Fourth fiscal quarter through , 1997......................
</TABLE>
See Microsoft's Annual Report on Form 10-K for the year ended June 30, 1996
incorporated herein by reference for sales prices for Microsoft Common Shares
for prior quarters.
On April 4, 1997, the last full trading day before announcement of the
Recapitalization, the closing price of a Microsoft Common Share was $94.1875.
As of , 1997, the most recent practicable date prior to the printing of
this Proxy Statement/Prospectus, the closing price of a Microsoft Common Share
was $ . Microsoft has not in the past paid dividends on its Common Shares.
19
<PAGE>
RISK FACTORS
CONSEQUENCES OF HOLDER'S FAILURE TO GIVE TIMELY NOTICE PRIOR TO EXPIRATION OF
HOLDER'S EXCHANGE RIGHTS
The Exchangeable Shares will be exchangeable into Microsoft Common Shares for
a period of four years and three months following the Effective Time of the
Recapitalization. If a holder fails to make a timely exchange election by
written notice prior to the expiration of this period, such holder will not be
able to exchange such shares. Although Microsoft will have the right to acquire
all of the Exchangeable Shares during the period commencing five years and six
months after the Effective Time and ending six years after the Effective Time,
there can be no assurance that Microsoft will exercise its call right and,
therefore, if a holder fails to make such election, such shareholder will be a
minority shareholder in a nonpublic corporation with little ability to control
such corporation. In addition, such shareholder will have difficulty disposing
of his or her shares.
ABSENCE OF PUBLIC MARKET FOR EXCHANGEABLE SHARES
The Exchangeable Shares are new securities for which there is not currently,
and will likely never be, a trading market. WNI does not intend to apply for
listing of the Exchangeable Shares on any securities exchange or for the
inclusion of the Exchangeable Shares in any automated quotation system.
Initially, there will be fewer than 200 holders of record of the Exchangeable
Shares. This number will be reduced to the extent that holders of vested WNI
Common Shares elect to receive cash and to the extent that recipients of the
Exchangeable Shares elect to exchange such shares for Microsoft Common Shares.
Neither Microsoft nor WNI has been advised by anyone of an intent to make a
market in the Exchangeable Shares and, given the nature of the Exchangeable
Shares, such a market likely will not develop. To the extent that a market for
such shares does develop, the value of the Exchangeable Shares likely will
fluctuate with the market price of the Microsoft Common Shares, at least until
the expiration of the 51-month exchange period. Accordingly, a holder who
continues to hold the Exchangeable Shares after the 51-month exchange period is
subject to the risk, if Microsoft does not exercise its Class Call Right, that
such holder will not obtain liquidity for the Exchangeable Shares at any point.
RIGHT OF MICROSOFT TO CALL ALL EXCHANGEABLE SHARES
During the period commencing five years and six months after the Effective
Time and ending six years after the Effective Time, Microsoft shall have the
right to acquire all, but not less than all, outstanding Exchangeable Shares
solely for Microsoft Common Shares. If Microsoft exercises this Class Call
Right, holders of Exchangeable Shares who did not elect to exchange such shares
for Microsoft Common Shares during the exchange period would, nevertheless,
become Microsoft shareholders and would cease to be WNI shareholders.
Microsoft, however, is under no obligation to exercise such call right.
RISKS RELATED TO EXERCISE OF EXCHANGE RIGHTS
Holders of Exchangeable Shares shall have the right to exchange each
Exchangeable Share held for Microsoft Common Shares at any time prior to the
end of fifty-one (51) months after the Effective Time, at the Class A Exchange
Rate, subject to the right of WNI to pay such holders cash in an amount equal
to the Current Market Value of the Microsoft Common Shares otherwise issuable
upon such exchange. Notwithstanding the foregoing, upon notification of an
exchange request, Microsoft has a Call Right with respect to such exchange,
whereby Microsoft may deliver to such holder Microsoft Common Shares at the
Class A Exchange Rate or cash in an amount equal to the Current Market Value of
the Microsoft Common Shares otherwise issuable upon such exchange.
Consequently, there can be no assurance that a holder of Exchangeable Shares
will ever receive Microsoft Common Shares in exchange for Exchangeable Shares.
See "Proposal I--The Recapitalization and Related Transactions--The
Recapitalization--Rights and Preferences of Exchangeable Shares--Exchange
Rights."
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RISKS RELATED TO ESCROW AGREEMENT
At the Closing, each of the holders of WNI Shares and WNI Warrants, in order
to receive consideration in the Recapitalization, will enter into an Escrow
Agreement, the purpose of which is to secure the indemnification obligations
of the WNI securities holders under the Recapitalization Agreement. Under the
terms of the Escrow Agreement, cash and securities with an aggregate value of
$50 million (the "Escrow Amount") will be withheld from the consideration to
be distributed in connection with the Recapitalization and placed in escrow
for a period of 18 months. Execution of the Escrow Agreement is a prerequisite
to the receipt of the WNI Exchangeable Shares or cash provided in the
Recapitalization Agreement. The Escrow Agreement provides for the delivery of
cash held in escrow to Microsoft and Exchangeable Shares held in escrow to WNI
upon the final determination of an indemnifiable claim, which includes (i) any
breach or asserted breach of any representation or warranty of WNI or the
Principal Shareholders contained in the Recapitalization Agreement or the
related documents, or (ii) the failure of WNI or the Principal Shareholders to
perform any agreement or covenant in the Recapitalization Agreement. Jeffrey
D. Brody, the Shareholders' Representative, has the right to contest,
negotiate and settle any such claim on behalf of the holders of WNI Shares and
WNI Warrants, solely at the holders' own risk, cost and expense. Payments of
cash to Microsoft and delivery of shares to WNI pursuant to the Escrow
Agreement may prevent a holder of WNI Shares or WNI Warrants from realizing
the holder's proportionate share of the Escrow Amount. See "Proposal I--The
Recapitalization and Related Transactions--Summary of Other Provisions of the
Recapitalization Agreement--Indemnification by Shareholders and by Principal
Shareholders" and "--Related Agreements--Escrow Agreement."
RISKS RELATED TO INTERESTS OF CERTAIN PERSONS
In addition to the Microsoft Options issued in replacement of WNI Options,
Microsoft shall grant additional Microsoft Options to certain employees of WNI
with a discounted exercise price (but subject to existing vesting schedules),
with an aggregate option spread of approximately $31.8 million. See "Proposal
II--Option Grants, Option Acceleration and Other Compensatory Matters."
EFFECTS OF BANKRUPTCY OF WNI FOLLOWING THE RECAPITALIZATION
Because WNI will hold Microsoft Common Shares and cash that may be issuable
upon exchange of Exchangeable Shares as its own corporate assets, in the event
WNI declares bankruptcy or its assets otherwise become subject to creditor
claims, the holders of Exchangeable Shares may be at risk of not receiving the
Microsoft Common Shares and/or cash for which their Exchangeable Shares may be
exchangeable. To address this risk, WNI has entered into a Make-Well Agreement
with Microsoft pursuant to which Microsoft agrees to use commercially
reasonable efforts to preserve WNI and its assets sufficiently to enable it to
satisfy any required exchanges of Microsoft Common Shares or cash for
Exchangeable Shares. See "Proposal I--The Recapitalization and Related
Transactions--Rights and Preferences of Exchangeable Shares."
TAX CONSEQUENCES OF EXCHANGE OF WNI COMMON SHARES FOR EXCHANGEABLE SHARES
It is a condition to the obligations of Microsoft and WNI to consummate the
Recapitalization that each receive an opinion from its legal counsel that it
is more likely than not that the Recapitalization constitutes a
"reorganization" within the meaning of Section 368(a)(1)(E) of the Code. If
the Recapitalization does constitute a reorganization, a WNI shareholder who
exchanges WNI Common Shares solely for Exchangeable Shares in the
Recapitalization will recognize no gain or loss with respect to the receipt of
such Exchangeable Shares.
WNI shareholders should note that an opinion of counsel represents only such
counsel's best legal judgment, is not binding on the Internal Revenue Service
("IRS") or a court, and no assurance can be given that the IRS or a court will
not adopt a contrary position. Neither WNI nor Microsoft has requested or will
request a ruling from the IRS with respect to any of the tax consequences of
the Recapitalization. In addition, the Recapitalization involves a unique
transaction structure that has not been the subject of a decision or ruling by
the courts or the IRS, which may increase the risk that the Recapitalization
would be determined not to be a reorganization. If the Recapitalization is
treated as a taxable transaction by the IRS or the courts, the exchange
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of WNI Common Shares for Exchangeable Shares would cause holders of WNI Common
Shares to recognize income, gain or loss equal to the excess of the fair
market value of the Exchangeable Shares received in the Recapitalization over
the tax basis of the WNI Common Shares exchanged therefor. See "Proposal I--
The Recapitalization and Related Transactions--Certain U.S. Federal Income Tax
Matters." Whether or not the Recapitalization constitutes a reorganization
within the meaning of Section 368(a)(1)(E) of the Code, WNI shareholders who
exchange WNI shares for cash will recognize income, gain or loss equal to the
excess of the cash proceeds received over the tax basis of the shares
exchanged therefor. WNI shareholders should consult their own tax advisors
with respect to the tax consequences to them of the Recapitalization.
RISKS AND UNCERTAINTIES REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus/Proxy Statement contains and incorporates certain statements
with respect to Microsoft which may be viewed as forward-looking statements
that involve risks and uncertainties. These forward-looking statements, such
as the information contained in Microsoft's Annual Report to Shareholders for
the year ended June 30, 1996 (the "Annual Report") under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," represent known trends and uncertainties; actual events or
results may differ materially as a result of risks facing Microsoft. Some of
these risks are discussed in the "Outlook: Issues and Uncertainties" section
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report beginning at page 22 thereof and include
rapid technological change, changes in personal computer shipment levels,
software pricing changes, delays in new-product releases, lack of customer
acceptance of new products, market saturation, slower growth rates, changes in
product and distribution mix, and difficulties in defending and securing
intellectual property rights for Microsoft's products.
EFFECTS OF NON-CONSUMMATION OF THE RECAPITALIZATION ON WNI
The Recapitalization Agreement contains a number of conditions precedent to
the Recapitalization, including the receipt of all required government
approvals, the absence of any legal restraints on consummation of the
transaction, the receipt of the approval of the shareholders of WNI, the
effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part, the continuing accuracy of representations and
warranties and the performance of covenants, the employment of WNI developers
and the execution of certain ancillary agreements. The failure of any such
conditions could result in the Recapitalization not being consummated. During
the pendency of the Recapitalization, WNI expects the manner in which it
conducts its business to be affected by the terms of the Recapitalization
Agreement. In particular, WNI has agreed that, except as expressly
contemplated by the Recapitalization Agreement or with the prior written
consent of Microsoft, WNI will carry on its business in the ordinary course
consistent with past practice, provided that, among other things, it will not:
(i) declare or pay any dividends or make any other distributions in respect of
its capital shares; (ii) issue or agree to issue any capital stock, options,
warrants, calls, conversion rights, or other similar securities, subject to
certain exceptions; (iii) amend its corporate charter documents; (iv) dispose
of any assets, except in the ordinary course of business; (v) incur any debt;
(vi) enter into or amend employee benefit plans or increase employee
remuneration; (vii) settle any claim, action, or proceeding, except in the
ordinary course of business; (viii) enter into any commitment or transaction
(a) to be performed over a period longer than six (6) months in duration, or
(b) to purchase assets (other than raw materials, supplies, or cash
equivalents) for a purchase price in excess of $500,000, other than certain
approved transactions; (ix) grant any bonus, severance, or termination pay to
any officer, director, independent contractor or employee of WNI in excess of
$25,000 individually or $100,000 in the aggregate; (x) transfer to any person
or entity any rights to intellectual property of WNI other than pursuant to
normal licenses to end-users; (xi) enter into or amend any material agreements
pursuant to which any other party is granted marketing, publishing or
distribution rights of any type or scope with respect to any hardware or
software products of WNI; (xii) except in the ordinary course of business
consistent with prior practice, enter into or terminate any contracts,
arrangements, plans, agreements, leases, licenses, franchises, permits,
indentures, authorizations, instruments or commitments, or amend or otherwise
change the terms thereof; (xiii) commence a lawsuit other than (a) for the
routine collection of bills, (b) in such cases where WNI in good faith
determines that failure to commence suit would result in a material impairment
of a valuable aspect
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of WNI's business, provided WNI consults with Microsoft prior to filing such
suit, or (c) for a breach of the Recapitalization Agreement; (xiv) materially
modify existing discounts or other terms and conditions with dealers,
distributors and other resellers of WNI's products; (xv) materially modify the
terms and conditions of existing corporate end-user licenses or service
agreements or enter into new corporate end-user licenses or service agreements;
(xvi) maintain inventories other than as necessary to (a) satisfy anticipated
demand during the period between the date of the Recapitalization Agreement and
the Effective Time, and (b) maintain reasonable inventory levels; or (xvii)
accelerate the vesting or otherwise modify any WNI Options, restricted stock,
or other outstanding rights or other securities. There may be certain
transactions that WNI does not pursue because they are outside of WNI's
ordinary course of business and Microsoft does not give its consent to WNI
pursuing such transactions, and there may be certain transactions that WNI
pursues on different terms than it would negotiate if it expected to remain an
independent entity. Should the Recapitalization not be consummated, certain of
these transactions may not be available or may be available on different terms
than would have been available had WNI not elected to pursue the
Recapitalization. Therefore, actions taken, or not taken, by WNI during the
pendency of the transaction could have a material adverse effect on WNI's
ability to operate as an independent entity if the Recapitalization is not
consummated. No assurance can be given that the announcement of the
Recapitalization will not adversely effect some or all of these strategic
relationships or that any of these strategic relationship would continue if the
Recapitalization is not consummated. Although the Recapitalization Agreement
provides for payments by Microsoft to WNI if the Recapitalization is not
consummated under certain circumstances, such payments will not be available in
all cases, and, even if available, may not be sufficient to cover the damage
experienced by WNI (including in terms of lost or reduced market opportunities)
or the cost and expense incurred in connection with the contemplated
transaction, including financial advisory and legal fees, printing expenses,
filing fees and other related costs.
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THE WNI SPECIAL MEETING OF SHAREHOLDERS
DATE, TIME AND PLACE OF MEETING
The Special Meeting will be held at the principal executive offices of WNI,
305 Lytton Avenue, Palo Alto, California, on , 1997, at local time.
RECORD DATE AND OUTSTANDING SHARES
The record date for determining shareholders of WNI entitled to notice of
and to vote at the Special Meeting is , 1997 (the "WNI Record Date"). On
the WNI Record Date there were approximately WNI Common Shares, Series
A Shares, Series B Shares, Series C Shares and Series D Shares
outstanding, held by approximately holders of record. Each WNI Common
Share and WNI Preferred Share entitles the holders thereof to one vote upon
all matters submitted to a vote of shareholders, except that the Series A
Shares have 1.1 votes per Series A Share outstanding and entitled to vote. The
presence at the Special Meeting in person or by proxy of a majority of the
outstanding WNI Common Shares and WNI Preferred Shares constitutes a quorum.
VOTING OF PROXIES
All properly executed proxies given by holders of WNI Common Shares or WNI
Preferred Shares that are not revoked will be voted at the Special Meeting,
and at any postponements or adjournments thereof, in accordance with the
instructions contained therein. Proxies containing no instructions regarding
the proposals specified in the proxy will be voted in favor of the
Recapitalization and in favor of the employee compensation matters described
in this Proxy Statement/Prospectus. If any other matters are properly brought
before the Special Meeting, all proxies will be voted in accordance with the
judgment of the persons appointed in the proxies. The Special Meeting may be
adjourned, and additional proxies solicited, if the vote necessary to approve
a proposal has not been obtained. Any adjournment of the Special Meeting will
require the affirmative vote of the holders of at least a majority of shares
represented, whether in person or by proxy, at the Special Meeting (regardless
of whether those shares constitute a quorum).
A WNI shareholder who has executed and returned a proxy may revoke such
proxy at any time before it is voted at the Special Meeting by executing and
returning a proxy bearing a later date, by filing a written notice of such
revocation with the Secretary of WNI which states that such proxy is revoked,
or by attending the Special Meeting and voting in person. Attendance at the
Special Meeting, in and of itself, will not constitute a revocation of a
proxy.
VOTE REQUIRED AND VOTING INTENTIONS OF CERTAIN SHAREHOLDERS
Approval of the Recapitalization requires the affirmative vote of the
holders of (i) a majority of the outstanding WNI Common Shares and WNI
Preferred Shares, voting together as a single class, (ii) a majority of the
outstanding WNI Common Shares and a majority of the outstanding WNI Preferred
Shares, each voting as a single class, and (iii) a majority of the outstanding
Series A Shares, Series B Shares and Series D Shares, voting together as a
single class. Approval of the employee and consultant compensation matters
described elsewhere in this Proxy Statement/Prospectus requires the
affirmative vote of the holders of more than 75% of the eligible outstanding
WNI Common Shares and WNI Preferred Shares, determined pursuant to Section
280G of the Code, voting together as a class on an as-converted basis. The
determination of whether such 75% approval requirement is met with respect to
a payment shall be made disregarding WNI Common Shares and WNI Preferred
Shares owned (actually or constructively) by a recipient of such payment. Such
shareholder vote on employee and consultant compensation matters must, in each
case, determine the right of the recipient to receive (or in the case of a
payment previously made, retain) such payment.
Stephen G. Perlman, Phillip Y. Goldman and Bruce A. Leak, WNI's President
and Chief Executive Officer, Senior Vice President, Engineering, and Chief
Operating Officer, respectively (collectively, the "Principal
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Shareholders"), the holders of the aggregate of 15,000,000 WNI Common Shares,
45% of the combined WNI Common Shares and WNI Preferred Shares, have agreed to
vote their shares in favor of the Recapitalization and against the approval of
any proposal made in opposition to or in competition with the consummation of
the Recapitalization. See "Principal Shareholders of WNI."
Votes cast by proxy or in person at the Special Meeting will be tabulated by
the inspector of election appointed for the meeting and will determine whether
or not a quorum is present. The inspector of election will treat abstentions
as shares that are present and entitled to vote for purposes of determining
the presence of a quorum, and such abstentions will have the effect of a vote
against the Recapitalization and a vote against the employee and consultant
compensation matters described elsewhere in this Proxy Statement/Prospectus.
SOLICITATION OF PROXIES AND EXPENSES
WNI will bear the costs of solicitations of proxies from its shareholders.
Microsoft will bear the cost of printing and filing this Proxy
Statement/Prospectus and the registration statement of which it is a part
unless the Recapitalization is not completed for certain reasons, in which
case such expenses will be divided equally between Microsoft and WNI. In
addition to solicitation by mail, the directors, officers and employees of WNI
and shareholders of WNI may solicit proxies from other shareholders of WNI by
telephone, telegram or letter or in person for no additional compensation.
Nominees, fiduciaries and other custodians have been requested by WNI to
forward proxy solicitation materials to the beneficial owners of WNI Common
Shares and WNI Preferred Shares held of record by such custodians. Such
custodians will be reimbursed by WNI for their expenses.
DISSENTERS' RIGHTS
General
The shares of any holder of WNI Shares who has demanded and perfected
dissenters' rights for such shares in accordance with the CGCL and who, as of
the Effective Time, has not effectively withdrawn or lost such dissenters'
rights (as further defined below, "Dissenting Shares") shall not be converted
into or represent a right to receive the consideration to be received by such
holder in the Recapitalization, but rather the holder thereof shall only be
entitled to such rights as are granted by California Law.
Notwithstanding the foregoing, if any holder of WNI Shares who has exercised
dissenters' rights under California Law shall effectively withdraw or lose
(through failure to perfect or otherwise) such right, then, as of the later of
the Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
consideration to be received by such holder in the Recapitalization, upon
surrender of the certificate representing such WNI Shares in the manner
provided in the Recapitalization Agreement (or in the case of a lost, stolen
or destroyed certificate, upon delivery of an affidavit (and bond, if
required)).
WNI shall give Microsoft (i) prompt notice of any written demands for
appraisal of any WNI Shares, withdrawals of such demands, and any other
instruments served pursuant to California Law and received by WNI which relate
to any such demand for appraisal and (ii) the opportunity to participate in
all negotiations and proceedings which take place prior to the Effective Time
with respect to demands for appraisal under California Law. WNI shall not,
except with the prior written consent of Microsoft or as may be required by
applicable law, voluntarily make any payment with respect to any demands for
appraisal of WNI Shares or offer to settle or settle any such demands. Any
payments made in respect of Dissenting Shares shall be made by WNI.
"Dissenting Shares" means shares of WNI Shares with respect to which the
holder thereof has perfected such holder's right that WNI purchase the
holder's shares in accordance with Chapter 13 ("Chapter 13") of the CGCL and
with respect to which the holder thereof has not effectively withdrawn or lost
such rights. "WNI Dissenting Shareholder," as that term is used in this Proxy
Statement/Prospectus, means a WNI shareholder of record as of , 1997, who
wishes to exercise dissenters' rights, or such holder's duly appointed
representative, or a transferee of record of a holder of Dissenting Shares.
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A shareholder who wishes to exercise dissenters' rights must not vote in
favor of the Recapitalization Agreement and the Recapitalization at the
Special Meeting. However, failure to vote in favor of the Recapitalization
will not, in and of itself, be sufficient notice of such shareholder's
intention to dissent. Rather, any shareholder wishing to exercise dissenters'
rights must comply with the procedures described below.
Required Procedures Under Chapter 13
A summary of the material provisions of Chapter 13 is provided below.
Reference is made to the full text of Chapter 13, a copy of which is attached
to this Proxy Statement/Prospectus as Appendix C and is incorporated herein by
reference. Shareholders of WNI are urged to read carefully the full text of
Chapter 13 contained in Appendix C.
If the Recapitalization is approved by the required vote of WNI's
shareholders and is not abandoned or terminated, each holder of WNI Shares who
does not vote in favor of the Recapitalization and who follows the procedures
set forth in Chapter 13 will be entitled to have such holder's WNI Shares
purchased by WNI for cash at their fair market value. The fair market value of
WNI Shares will be determined as of the day before the first announcement of
the terms of the Recapitalization, excluding any appreciation or depreciation
in consequence of the Recapitalization, but adjusted for any share split,
reverse share split, or share dividend that becomes effective thereafter. The
determination of fair market value will be made by agreement between WNI and
any dissenting shareholder, or in the event agreement cannot be reached, by
the Superior Court of Santa Clara County, California (the "Court").
If the Court is to determine the fair market value, the Court may do so
itself or may appoint one or more appraisers. If the Court appoints
appraisers, each appraiser will submit a report to the Court, which the Court
will consider, but is not bound to accept in making a final determination of
the fair market value. The CGCL does not specify the criteria and other
considerations that the Court may employ in determining fair market value, and
California courts generally have interpreted such term to mean the price at
which a willing and fully informed buyer and seller would trade the stock
under existing conditions. The Court may employ certain methods of valuation,
such as liquidation value or asset value, to the extent that they provide
evidence as to fair market value, although they are not substitutes for fair
market value.
Within ten (10) days after approval of the Recapitalization by WNI
shareholders, WNI must mail a notice of such approval (the "Approval Notice")
to all WNI shareholders who did not vote in favor of the Recapitalization,
together with a statement of the price determined by WNI to represent the fair
market value of a Dissenting Share, a brief description of the procedures to
be followed in order to pursue dissenters' rights, and a copy of Sections 1300
through 1304 of the CGCL. The statement of price made in the Approval Notice
will constitute an offer by WNI to purchase all Dissenting Shares at the
stated amount, unless such shares lose their status as Dissenting Shares as
described below.
A WNI Dissenting Shareholder must make a written demand upon WNI for the
purchase of such holder's Dissenting Shares and for payment to the WNI
Dissenting Shareholder in cash of the fair market value of such shares. The
written demand must state the number and class of the WNI Shares held of
record by the WNI Dissenting Shareholder that the WNI Dissenting Shareholder
demands that WNI purchase and must contain a statement of what such WNI
Dissenting Shareholder claims to be the fair market value of those shares as
of the day before the announcement of the Recapitalization. The statement of
fair market value will constitute an offer by the WNI Dissenting Shareholder
to sell the shares to WNI at such price. The written demand should also
specify the WNI Dissenting Shareholder's name and mailing address. In order
for such demand to be effective, it must be received by WNI no later than the
day of the approval of the Recapitalization by the WNI shareholders. Within
thirty (30) days after the date of which the Approval Notice is mailed to the
WNI Dissenting Shareholder, the WNI Dissenting Shareholder must also submit to
WNI the certificate(s) representing such holder's WNI Dissenting Share for
endorsement as a WNI Dissenting Share. The written demand and certificate(s)
representing the Dissenting Shares should be delivered to WNI, 305 Lytton
Avenue, Palo Alto, California 94301, Attention: Secretary.
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If WNI and a WNI Dissenting Shareholder agree that the WNI Dissenting
Shareholder's shares are Dissenting Shares and agree upon the price of such
shares, the WNI Dissenting Shareholder will be entitled to the agreed price
with interest thereon at the legal rate on judgments from the date of such
agreement. Payment for such Dissenting Shares must be made within thirty (30)
days after the later of the date of such agreement or the date on which all
statutory and contractual conditions to the Recapitalization are satisfied,
and is subject to the surrender by the WNI Dissenting Shareholder of the
certificate(s) representing the Dissenting Shares.
If WNI denies that a WNI Dissenting Shareholder's shares qualify as
Dissenting Shares, or if WNI and a WNI Dissenting Shareholder fail to agree
upon the fair market value of the Dissenting Shares, then the WNI Dissenting
Shareholder may file a complaint in the Court requesting a determination as to
whether the shares are Dissenting Shares or as to the fair market value of the
WNI Dissenting Shareholder's shares, or both. Such complaint must be filed
within six (6) months after the date on which the Approval Notice is mailed to
the WNI Dissenting Shareholder. A WNI Dissenting Shareholder may also
intervene in any action pending on such a complaint. Two or more WNI
Dissenting Shareholders may join as plaintiffs or be joined as defendants in
any such action and two or more such actions may be consolidated. The costs of
the action, including reasonable compensation to appraisers that may be
appointed by the Court, will be assessed or apportioned as the Court considers
equitable, and, except in the situation where the appraised value exceeds the
price offered by WNI and Chapter 13 would require that WNI pay such expenses,
may be apportioned to the WNI Dissenting Shareholders.
If any WNI Dissenting Shareholder who demands the purchase of such holder's
WNI Shares fails to perfect, or effectively withdraws or loses the right to
such purchase, the WNI Shares of such holder will be converted into the right
to receive a number of Exchangeable Shares of Microsoft Common Shares equal to
the Exchange Ratio or cash, as applicable, in accordance with the
Recapitalization Agreement. Dissenting Shares lose their status as Dissenting
Shares if (i) the Recapitalization is abandoned; (ii) the shares are
transferred prior to their submission for the required endorsement; (iii) the
WNI Dissenting Shareholder and WNI do not agree upon the status of the WNI
Dissenting Shareholder's shares as Dissenting Shares or do not agree on the
purchase price, but neither the WNI Dissenting Shareholder nor WNI files a
complaint or intervenes in a pending motion within six (6) months after the
Approval Notice is mailed to the WNI Dissenting Shareholder; or (iv) the WNI
Dissenting Shareholder, with WNI's consent, withdraws the demand that WNI
purchase such holder's Dissenting Shares.
PROPOSAL I--THE RECAPITALIZATION AND RELATED TRANSACTIONS
BACKGROUND OF RECAPITALIZATION; MATERIAL CONTACTS AND DELIBERATIONS
On September 13, 1996, Microsoft purchased 702,939 Series C Shares of WNI.
In connection with such purchase, Microsoft and WNI entered into a Memorandum
of Understanding relating to possible technology sharing and licensing
arrangements between the companies.
From mid-September 1996 until the end of January 1997, Microsoft and WNI
personnel conducted discussions relating to such technology sharing and
licensing arrangements.
On February 3, 1997, Craig Mundie, Microsoft's Senior Vice President,
Consumer Platforms Division, Gregory B. Maffei, Microsoft's Vice President,
Corporate Development; Treasurer, and other Microsoft personnel met with
Stephen G. Perlman, WNI's President and Chief Executive Officer, and other WNI
personnel at Microsoft's Redmond, Washington headquarters to discuss such
technology sharing and licensing arrangements.
On February 17, 1997, Messrs. Mundie, Maffei and Perlman and their
respective staff members met at WNI's headquarters to continue the discussions
regarding such technology sharing and licensing arrangements. Prior to the
commencement of such discussions, Mr. Mundie discussed with Mr. Perlman the
possibility of a business combination between the two companies. During the
following week, Messrs. Mundie and Perlman and other Microsoft and WNI
personnel continued such discussions.
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On February 20, 1997, the Company engaged DMG to act as its financial
advisor in connection with the proposed transaction.
On February 21, 1997, the WNI Board of Directors, together with
representatives of DMG and Venture Law Group met to consider, among other
things, the proposed business combination with Microsoft.
On February 23, 1997, William Gates, Microsoft's Chairman and Chief
Executive Officer, Mr. Mundie and Mr. Maffei met with Mr. Perlman and WNI's
executive officers at WNI's headquarters to discuss, among other things, WNI's
history, business model, technology and products.
On February 25, 1997, Microsoft and WNI entered into a Non-Disclosure
Agreement which superseded an earlier agreement between the companies.
On February 28, 1997, Mr. Maffei communicated Microsoft's interest in
acquiring WNI to Albert Pimentel, WNI's Chief Financial Officer,
representatives of DMG and representatives of Venture Law Group.
During the week of March 3, 1997, representatives of Microsoft, Preston
Gates & Ellis, WNI, DMG and Venture Law Group continued negotiations regarding
a business combination between the two companies. During such period, due
diligence meetings relating to WNI's technology, products and business were
also held. Among other contacts, on March 7, 1997, Robert Herbold, Microsoft's
Chief Operating Officer, and Paul A. Maritz, Microsoft's Group Vice President,
Platforms, held discussions with William Herman, WNI's Vice President of
Marketing, and other WNI personnel. On March 4, 1997, technical teams from
both companies met in Palo Alto, California, and, later that week,
representatives of the Microsoft Network ("MSN") met with WNI's executive
officers at WNI's headquarters.
On March 13, 1997, Microsoft's Board of Directors met to consider the
proposed business combination, and authorized Microsoft management to continue
discussions and to consummate a combination within certain parameters. On
March 14, 1997, Mr. Maffei communicated an offer having an approximate value
of $375 million in cash and stock to acquire WNI to representatives of WNI,
DMG and Venture Law Group. On March 17, following a meeting of its Board of
Directors, WNI declined Microsoft's offer.
During the week of March 24, 1997, representatives of Microsoft, Preston
Gates & Ellis, WNI, DMG and Venture Law Group continued negotiations regarding
a business combination between the companies.
On March 30, 1997, Mr. Gates and Mr. Perlman discussed WNI's technology,
products and business as well as terms of the proposed business combination.
On March 31, 1997, the WNI Board met again to consider the proposed
transaction. After this meeting, representatives of WNI, DMG and Venture Law
Group discussed various terms of Microsoft's offer with Mr. Maffei. Later that
day, a tentative agreement was reached with respect to the principal terms of
the transaction, subject to agreement on definitive documentation.
From March 31, 1997 to April 5, 1997, representatives of Microsoft, Preston
Gates & Ellis, WNI, DMG and Venture Law Group negotiated the final terms of
the transaction having an approximate value of $425 million in cash and stock.
At a meeting on April 5, 1997, after presentations from DMG and Venture Law
Group, the Board of Directors of WNI approved the proposed business
combination. The parties executed the Recapitalization Agreement the next
morning.
On April 6, 1997, the parties announced the transaction at the National
Association of Broadcasters meeting in Las Vegas, Nevada, and
contemporaneously issued a joint press release.
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WNI'S REASONS FOR THE RECAPITALIZATION
The Board of Directors of WNI has determined that the terms of the
Recapitalization Agreement and the transactions contemplated thereby are fair
to, and in the best interests of, WNI and its shareholders. Accordingly, the
Board of Directors of WNI has unanimously approved the Recapitalization
Agreement and unanimously recommends that the shareholders of WNI vote FOR
approval and adoption of the Recapitalization Agreement. In reaching its
determination, the Board of Directors of WNI has identified certain potential
benefits for the WNI shareholders that it believes will contribute to the
success of WNI following consummation of the Recapitalization. These potential
benefits include principally the following:
. The association with Microsoft will make available to WNI greater
resources for product development, marketing and distribution.
. The Recapitalization offers WNI shareholders an opportunity for liquidity
at a valuation deemed fair by the WNI Board of Directors and its
financial advisor.
. The Recapitalization has been structured with a view toward (i) providing
the holders of WNI Preferred Shares with a cash payment in an amount that
represents a substantial return on their original investment in WNI,
which investments ranged in price per share from $.9930 to $10.42, and
(ii) providing the holders of WNI Common Shares with either (a) a cash
payment in an amount that represents a substantial return on their
original investment in WNI or (b) Exchangeable Shares that are
exchangeable for Microsoft Common Shares (or cash) with a current market
price that would represent a substantial return on their original
investment in WNI, which investments ranged in price per share from $.001
to $2.50.
. The association with Microsoft will permit WNI and Microsoft to share
technology to improve each other's products and develop new products and
services.
. WNI and Microsoft in association following the Recapitalization will be
better positioned than WNI alone to adapt to, and benefit from, rapidly
changing technologies and to develop products based on such technologies.
. The association with Microsoft will afford WNI the opportunity to reduce
its exposure to the difficulties in competing against larger companies
with more diversified product lines and greater financial resources than
WNI.
. The management team of WNI and Microsoft in association following the
Recapitalization will have greater experience and depth than that of WNI
alone.
. The association with Microsoft will permit the WNI management to focus
its efforts on the development and marketing of WNI products rather than
the time-consuming process of securing additional financing to fund WNI's
substantial continuing capital needs.
The WNI Board considered a number of factors relating to the
Recapitalization, including, but not limited to, the following: (i) historical
information concerning Microsoft's and WNI's respective businesses, prospects,
financial performance and condition, operations, technology, management and
competitive position; (ii) the financial condition, results of operations and
businesses of Microsoft and WNI before and after giving effect to the
Recapitalization and the combination of their respective businesses; (iii)
current financial market conditions for companies in the Internet television
and related business and capital raising in connection with such businesses;
(iv) historical market prices, volatility and trading information with respect
to the Microsoft Common Shares; (v) the reasonableness of the terms of the
Recapitalization Agreement; (vi) the prospects of WNI as an independent
company, including WNI's positive brand development to date and anticipated
future marketing activities, WNI's technology and the potentially broad market
for the products resulting therefrom, as well as the risks associated with the
large funding requirements to establish and maintain WNI's existence and
competitive position, the entry of competitors into the market for WNI's
products and services, many of whom are larger than WNI and have greater
resources than WNI, and WNI's ability to increase and maintain the WebTV
Network subscriber base; (vii) the potential for other third parties to enter
into strategic relationships with WNI prior to and after consummation of the
Recapitalization, which the Board viewed as potentially positive due to third
parties' perceptions of the relative financial and marketing strengths of
Microsoft as compared to WNI but as
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potentially negative due to some third parties' reluctance to enter into
transactions with Microsoft due to competition with Microsoft in other
business areas; (viii) the financial analysis and other financial information
with respect to the recapitalization presented by DMG to the Board of
Directors of WNI, including DMG's opinion that, as of such date, the
consideration to be paid to the holders of WNI Common Shares and the
consideration to be paid to the holders of WNI Preferred Shares pursuant to
the Recapitalization Agreement were fair from a financial point of view to the
holders of WNI Common Shares and the holders of WNI Preferred Shares,
respectively; (ix) the impact of the Recapitalization and the combination with
Microsoft on WNI's customers and employees, which the Board viewed as positive
in light of WNI customers obtaining access to greater resources that Microsoft
would be able to supply and, as a result, obtaining better service overall
from the WebTV Network, and positive in light of WNI employees obtaining a
substantial return on their equity investment in WNI and obtaining a greater
degree of security and stability in being an affiliated company of Microsoft
instead of a start-up company with the risks attendant thereto; (x) reports
from legal advisors on specific terms of the relevant agreements, which
included a summary description of the material terms of such agreements; and
(xi) reports from management on the perceived benefits associated with the
Recapitalization and the combination with Microsoft, the risk that the
benefits of the combination might not be realized, and the state of WNI's
business, financial condition, results of operations and prospects as
described above.
The WNI Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Recapitalization,
including, but not limited to: (i) the risk that the potential benefits sought
in the Recapitalization and the combination with Microsoft might not be fully
realized if at all; (ii) the possibility that the Recapitalization might not
be consummated; (iii) the risk that despite the efforts of WNI following the
Recapitalization, key technical and management personnel might not remain
employed by WNI; (iv) the effect of public announcement of the
Recapitalization and the proposed combination with Microsoft on (a) WNI's
sales and operating results, (b) WNI's relationships with third parties,
including developers, original equipment manufacturers ("OEMs") and
distributors and (c) WNI's ability to attract and retain key management,
marketing and technical personnel; and (v) the risk that the Recapitalization
might not be consummated and the resulting effects on WNI.
In view of the wide variety of factors considered by the WNI Board, it did
not find it practicable to quantify, or otherwise attempt to assign relative
weights to, the specific factors considered in making its determination.
Consequently, the WNI Board did not quantify the assumptions and results of
its analysis in making its determination that the Recapitalization is fair to,
and in the best interests of, WNI and its shareholders.
With regard to the transaction structure, WNI and Microsoft determined that
the Recapitalization was the most advantageous transaction structure because
it permitted WNI employee shareholders to retain WNI Common Shares, with the
correspondent morale benefit of continuing to hold WNI Common Shares, while
also obtaining the opportunity to exchange such WNI Common Shares for
Microsoft Common Shares at their election. In addition, WNI and Microsoft were
unable to agree upon a merger structure or other business combination which
satisfied their mutual business objectives without involving undue risk of
adverse federal income tax consequences for WNI, Microsoft and/or WNI's
securities holders.
WNI BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF WNI HAS DETERMINED THAT THE RECAPITALIZATION IS IN
THE BEST INTERESTS OF WNI AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL AND ADOPTION OF THE RECAPITALIZATION AGREEMENT AND THE
RECAPITALIZATION.
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OPINION OF FINANCIAL ADVISOR
WNI retained Deutsche Morgan Grenfell Inc. ("DMG") to act as its financial
advisor in connection with the Recapitalization. DMG was selected by WNI's
Board of Directors based on DMG's qualifications, expertise and reputation as
well as DMG's investment banking relationship and familiarity with WNI.
At the meeting of the WNI Board of Directors on April 5, 1997, DMG rendered
its oral opinion, subsequently confirmed in writing (the "Opinion"), that, as
of such date, based upon and subject to the various considerations set forth
in the Opinion, the consideration to be paid to the holders of WNI Common
Shares and the consideration to be paid to the holders of WNI Preferred Shares
were fair from a financial point of view to the holders of WNI Common Shares
and WNI Preferred Shares, respectively
THE FULL TEXT OF THE WRITTEN OPINION OF DMG DATED APRIL 5, 1997, WHICH SETS
FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED, AND LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY DMG IN
RENDERING ITS OPINION, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS. HOLDERS OF WNI COMMON SHARES AND WNI PREFERRED SHARES
ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. DMG DID NOT
RECOMMEND TO WNI THAT ANY SPECIFIC VALUE CONSTITUTED THE ONLY APPROPRIATE
VALUE IN THE RECAPITALIZATION. DMG'S OPINION ADDRESSES ONLY THE FAIRNESS OF
THE CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF WNI COMMON
SHARES AND WNI PREFERRED SHARES AS OF THE DATE OF THE OPINION, AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF WNI COMMON SHARES OR WNI
PREFERRED SHARES OR AS TO HOW SUCH HOLDER SHOULD VOTE AT THE SPECIAL MEETING.
THE SUMMARY OF THE OPINION OF DMG SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, DMG, among other things: (i) analyzed certain
publicly available financial statements and other information of Microsoft;
(ii) analyzed certain internal financial statements and other financial and
operating data concerning WNI prepared by the management of WNI;
(iii) analyzed certain financial projections relating to WNI prepared by the
managements of WNI and Microsoft; (iv) discussed the past and current
operations and financial condition and the prospects of WNI with senior
executives of WNI and Microsoft; (v) compared the financial performance of WNI
with that of certain publicly-traded companies which DMG deemed to be
relevant; (vi) reviewed the reported prices and trading activity for the
Microsoft Common Shares; (vii); compared the financial performance of
Microsoft and the prices and trading activity of the Microsoft Common Shares
with that of certain other publicly-traded companies which DMG deemed to be
relevant and their securities; (viii) reviewed the financial terms, to the
extent publicly available, of certain merger and acquisition transactions
which DMG deemed to be relevant; (ix) participated in discussions and
negotiations among representatives of WNI and Microsoft and their respective
legal advisors; (x) reviewed the Agreement and certain related agreements; and
(xi) performed such other analyses and considered such other factors as DMG
deemed appropriate.
In rendering its Opinion, DMG assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by it
for the purposes of its Opinion. DMG assumed that the financial projections
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of WNI. DMG did
not make any independent valuation or appraisal of the assets, liabilities or
technology of WNI or Microsoft, respectively, and was not furnished with any
such appraisals. DMG's Opinion states that it is necessarily based on
economic, market and other conditions in effect on, and the information made
available to DMG as of, the date of the Opinion.
The following is a summary of the analysis performed by DMG in preparation
of its Opinion letter and reviewed with the Board of Directors of WNI at the
meeting held on April 5, 1997. This analysis was provided to the Board of
Directors of WNI for background information only and was one of the many
factors considered by DMG in rendering its Opinion. No conclusions can be
independently drawn from any independent analysis.
Peer Group Comparison: DMG examined certain available financial and market
information of approximately 35 selected publicly traded companies in various
sectors of the technology industry which were
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deemed comparable to at least some portion of WNI's business for purposes of
DMG's financial analysis. Such sectors included online service providers,
internet software, search engine, internet content, internet security and
electronic commerce. In particular, DMG compared certain financial information
of WNI and Microsoft with America Online, Inc. ("AOL"), Compuserve Corporation
("Compuserve"), Earthlink Network, Inc. ("Earthlink"), Netscape Communications
Corporation ("Netscape"), NETCOM On-Line Communication Services, Inc.
("NETCOM") and CNET, Inc. ("CNET") (collectively, the "Comparable Companies").
Such financial information included, among other things, market valuation,
stock price as a multiple of earnings per share and aggregate market valuation
as a multiple of revenues. The multiples are based on a compilation of
publicly available information and earnings forecasts by securities research
analysts. In particular, such analysis showed that as of April 3, 1997,
Microsoft traded at 37.3 and 30.8 times calendar year 1997 and calendar year
1998 forecasted earnings, respectively, 11.1 times latest twelve months
revenue and 8.8 times calendar year 1997 forecasted revenue. DMG also observed
that AOL traded at 43.9 times calendar year 1998 forecasted earnings, 3.0
times latest twelve months revenue and 2.0 times calendar year 1997 forecasted
revenue; Compuserve traded at 1.2 times latest twelve months revenue and 0.8
times calendar year 1997 forecasted revenue; Earthlink traded at 3.9 times
latest twelve months revenue; Netscape traded at 54.9 and 35.3 times calendar
year 1997 and calendar year 1998 forecasted earnings, respectively, 6.6 times
latest twelve months revenue and 4.2 times calendar year 1997 forecasted
revenue; NETCOM traded at 0.1 times latest twelve months revenue and 0.1 times
calendar year 1997 forecasted revenue; and CNET traded at 33.4 times calendar
year 1998 forecasted earnings, 17.8 times latest twelve months revenue and 6.7
times calendar year 1997 forecasted revenue.
Comparative Shares Price Performance: As part of its analysis, DMG reviewed
the recent stock price performance of Microsoft and compared such performance
with that of each of the Comparable Companies. DMG observed that over the
period from January 1, 1997 to April 3, 1997, the market price of the
Microsoft Common Shares increased 15%, compared with increases of 37% for AOL
and 29% for Compuserve, and decreases of 10% for Earthlink, 26% for C/NET, 31%
for NETCOM, 48% for Netscape and 6% for the NASDAQ composite. DMG noted that
over such period, the Microsoft Common Shares outperformed relative to the
common stock of Netscape, CNET, NETCOM, Earthlink and the NASDAQ composite,
respectively, and underperformed relative to the common stock of AOL and
Compuserve, respectively.
DMG also reviewed the historical prices of the common stock of AOL and the
implied aggregate values per subscriber and the implied multiples of aggregate
value to trailing revenues since March 1995 to present. DMG observed that,
over such period, the average aggregate value per subscriber and average
multiple of aggregate value to trailing revenues were $686 and 2.9 times,
respectively.
DMG reviewed the financial performance, public market multiples and stock
price performance of the Comparable Companies in order to provide the WNI
Board with a clear understanding of how such Comparable Companies were valued
in the public markets as of the date of such presentation. Because, for
example, certain companies did not have meaningful revenues or earnings
estimates, DMG noted that certain valuation benchmarks were more or less
relevant for certain of the Comparable Companies than others. DMG did not draw
any conclusions as to the value of Microsoft or WNI based on this analysis.
Present Value IPO Analysis: DMG performed an analysis, assuming that WNI did
not effect a transaction involving Microsoft or any other third party, of the
theoretical present value of the future value of WNI in the context of an
initial public offering by the Company in the United States. Assuming dilution
to current holders of WNI stock for additional financings, an initial public
offering based on WNI management estimates and a range of discount rates from
20% to 30%, DMG observed the following present values per share of
WNI: (i) assuming a range of aggregate values per subscriber of $500 to $700
based on DMG's analysis of the Comparable Companies, the analysis resulted in
a range of present values of $4 to $7; (ii) assuming a range of forward
revenue multiples of 1 to 3 times based on DMG's analysis of the Comparable
Companies, the analysis resulted in a range of present values of $5 to $12;
and (iii) assuming a range of forward earnings multiples of 20 to 40 times
based on DMG's analysis of the Comparable Companies, the analysis resulted in
a range of present values of $10 to $13.
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Discounted Cash Flow Valuation: DMG also performed discounted cash flow
analyses (i.e., an analysis of the present value of the projected unlevered
free cash flows and terminal value at the discount rates indicated) of WNI for
the years 1997 through 2001. Based on WNI management estimates and a discount
rate of 30%, DMG observed the following present values per share of WNI: (i)
assuming a range of forward revenue multiples of 1 to 3 times based on DMG's
analysis of the Comparable Companies, a range of present values of $10 to $20
and (ii) assuming a range of forward earnings multiples of 20 to 40 times
based on DMG's analysis of the Comparable Companies, a range of present values
of $10 to $14.
In connection with the review of the Recapitalization by the Board of
Directors of WNI, DMG performed a variety of financial and comparative
analyses for purposes of its Opinion given in connection therewith. While the
foregoing summary describes all material analyses and factors reviewed by DMG
with the Board of Directors of WNI, it does not purport to be a complete
description of the presentations by DMG to the Board of Directors of WNI or
the analyses performed by DMG in arriving at its Opinion. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. DMG believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of
the factors considered by DMG, without considering all analyses and factors,
could create a misleading view of the processes underlying its Opinion. In
addition, DMG may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the range of valuation resulting from any
particular analysis described above should not be taken to be DMG's view of
the actual value of WNI. In performing its analyses, DMG made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
WNI or Microsoft. The analyses performed by DMG are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. In addition, analyses relating
to the value of businesses or assets do not purport to be appraisals or to
necessarily reflect the prices at which businesses or assets may actually be
sold. The analyses performed were prepared solely as part of DMG's analysis of
the fairness of the consideration, from a financial point of view, to the
holders of WNI Common Shares and WNI Preferred Shares, respectively, and were
provided to the Board of Directors of WNI in connection with the delivery of
DMG's Opinion.
The Board of Directors of WNI retained DMG to act as WNI's financial advisor
in connection with the Recapitalization. DMG was selected by WNI's Board of
Directors based on DMG's qualifications, expertise and reputation as well as
DMG's investment banking relationship and familiarity with WNI. DMG is an
internationally recognized investment banking and advisory firm. DMG, as part
of its investment banking business, is continuously engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for
corporate and other purposes. In the ordinary course of DMG's trading and
brokerage activities, DMG or its affiliates may at any time hold long or short
positions, may trade or otherwise effect transactions, for its own account or
for the account of customers, in debt or equity securities of Microsoft.
WNI has agreed to pay DMG a fee for its financial advisory services in
connection with the Recapitalization, including, among other things, rendering
its Opinion and making the presentation referred to above. Pursuant to a
letter agreement between WNI and DMG dated February 20, 1997, WNI has agreed
to pay DMG a transaction fee in the event the transaction is consummated equal
to 0.8% of the aggregate purchase price paid in the transaction. In addition
to the foregoing compensation, WNI has agreed to reimburse DMG for its out-of-
pocket expenses incurred in connection with its engagement, and to indemnify
DMG and certain related persons against certain liabilities and expenses,
including certain liabilities under the federal securities laws, arising out
of or in conjunction with its rendering of services under its engagement.
INTERESTS OF CERTAIN PERSONS IN THE RECAPITALIZATION
In considering the recommendation of the Board of Directors of WNI with
respect to the Recapitalization, and the employee and consultant compensation
matters described elsewhere in this Proxy Statement/Prospectus,
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shareholders should be aware that certain officers and directors of WNI have
interests in connection with the Recapitalization.
If the Recapitalization is consummated, Microsoft intends to appoint Stephen
G. Perlman, the current President and Chief Executive Officer of WNI, a Vice
President of Microsoft. In connection with the Recapitalization, WNI
documented its obligation to pay fees associated with certain patents licensed
to WNI by Mr. Perlman.
As a result of the Recapitalization, certain officers of WNI will receive
employment agreements, grants of new option and other consideration. In
addition, certain employees may receive acceleration of existing options. See
"--Related Agreements--Employment and Noncompetition Agreements" and "Proposal
II--Option Grants, Option Acceleration and Other Compensatory Matters."
Microsoft has agreed that, after the Effective Time, Microsoft and WNI will
indemnify each officer and director of WNI serving as such on the date of the
Recapitalization Agreement as provided in the CGCL, WNI's Articles of
Incorporation and Bylaws, and existing indemnification agreements between WNI
and such officers and directors. Microsoft has also agreed that all rights to
indemnification (including advancement of expenses) existing on the date of
the Recapitalization Agreement in favor of the present or former officers and
directors of WNI with respect to actions taken in their capacities as WNI
directors or officers prior to the Effective Time as provided in WNI's
Articles of Incorporation or Bylaws and indemnification agreements shall
survive the Recapitalization and continue in full force and effect for a
period of six years following the Effective Time and the obligations related
thereto shall be guaranteed and assumed by Microsoft.
Paul Allen, a director of Microsoft, is the beneficial owner of all of the
outstanding capital shares of Vulcan Ventures Inc., which is the record owner
of 3,220,582 WNI Preferred Shares. Vulcan Ventures will receive $44,076,885 if
the Recapitalization is consummated.
MICROSOFT'S REASONS FOR THE RECAPITALIZATION
The Microsoft Board and its management have determined that the terms of the
Recapitalization are fair to, and in the best interests of, Microsoft and its
shareholders. The Recapitalization has been approved by a majority of the
disinterested directors and is not required to be approved by the shareholders
of Microsoft. In reaching their determination, the Microsoft Board and its
management have identified the following reasons for entering into the
Recapitalization Agreement:
. The managements of Microsoft and WNI share a common vision of the
consumer PC and the coming "Digital Television" as complementary "home
information appliances" that will provide a broad range of new
entertainment and information services.
. WNI has developed and is developing promising technologies that, when
enhanced with various Microsoft technologies, will serve as a useful
base for building a "home information appliance" business.
. WNI has a strong engineering team and strong management which, in
addition to being important for the successful development of the
nascent WNI business, also increases Microsoft's presence in the
critical employment market of Silicon Valley.
THE RECAPITALIZATION
Effects of Recapitalization
WNI's authorized capital shares, as of April 5, 1997, consisted of
100,000,000 shares of WNI common stock, without par value ("WNI Common
Shares"), and 25,000,000 shares of preferred stock, without par value ("WNI
Preferred Shares"), of which the following series had been designated: (a)
Series A Convertible Preferred Stock ("Series A Shares"); (b) Series B
Convertible Preferred Stock ("Series B Shares"); (c) Series C
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Convertible Preferred Stock ("Series C Shares"); and (d) Series D Convertible
Preferred Stock ("Series D Shares"). WNI Common Shares and WNI Preferred
Shares are sometimes referred to collectively as the "WNI Shares." As of April
5, 1997, WNI had reserved 8,000,000 WNI Common Shares under WNI's 1996 Stock
Incentive Plan and granted options for WNI Common Shares under such plan ("WNI
Options"). WNI has also issued warrants to purchase Series B Shares and Series
C Shares (collectively "WNI Warrants"). See "Description of Capital Shares of
WNI."
Pursuant to the Recapitalization, WNI will undergo a reorganization of its
capital whereby at the Effective Time of the Recapitalization:
(i) each WNI Common Share, other than vested WNI Common Shares of holders
who have perfected their dissenters' rights or have elected to have their
shares purchased by Microsoft (see paragraph (iii) below), shall be
converted into a number of Exchangeable Shares pursuant to an exchange
ratio calculated in the manner described below, less the Common Escrow
Withholding Amount;
(ii) each WNI Common Share subject to repurchase by WNI (i.e., "unvested
shares") pursuant to existing agreements in effect as of the Effective Time
of the Recapitalization shall be converted into Exchangeable Shares
pursuant to such exchange ratio and registered in the holders' names and
held by WNI following the Recapitalization pursuant to such existing
agreements in effect as of the time of the Recapitalization Agreement;
(iii) each vested WNI Common Share of holders who have returned a
completed Letter of Transmittal electing to receive cash in lieu of
Exchangeable Shares shall be paid the Adjusted Common Shares Consideration
by Microsoft;
(iv) each WNI Preferred Share and WNI Warrant of holders who have
returned a completed Letter of Transmittal electing to receive cash shall
be paid the Adjusted Preferred Shares Consideration or Adjusted Warrant
Consideration, respectively, by Microsoft;
(v) each WNI Preferred Share, other than shares of holders who have
perfected their dissenters' rights or have elected to have their shares
purchased by Microsoft, shall be converted into the right to receive the
Adjusted Preferred Shares Consideration;
(vi) each WNI Warrant, other than warrants of holders who have elected to
have their warrants purchased by Microsoft, shall be converted into the
right to receive the Adjusted Warrant Consideration;
(vii) each WNI Option shall be replaced by one or more nonqualified
Microsoft options to purchase Microsoft Common Shares;
(viii) Microsoft shall be entitled to receive all of the outstanding
Class B Shares at a ratio of four Class B Common Shares for each Class A
Common Share issued in connection with the Recapitalization, which will
represent not less than 80% of the voting power of WNI, in exchange for
consideration described below; and
(ix) the Escrow Withholding Amounts will be deposited into an escrow
account to be held for a period of 18 months to secure the indemnification
obligations of the WNI securities holders under the Recapitalization
Agreement. Should Microsoft successfully assert claims for indemnification
under the Recapitalization Agreement, some or all of the Escrow Withholding
Amounts would not be released to holders of WNI Shares or WNI Warrants.
Although holders of WNI Preferred Shares and WNI Warrants will receive the
same cash consideration whether they elect to sell to Microsoft or have such
shares or warrants converted into the right to receive cash from WNI, there
may be income tax advantages either to such holders or to other WNI
shareholders if they elect to sell such shares or warrants to Microsoft. Such
holders should consult their own tax advisors with respect to such election.
See "--Certain U.S. Federal Income Tax Matters."
At the Closing, Microsoft shall transfer to WNI cash equal to not less than
the amount required to satisfy the conversion rights of holders of WNI
Preferred Shares and WNI Warrants who have not elected to have their shares or
warrants purchased by Microsoft. Microsoft shall also transfer, at its
election, either Microsoft Common
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Shares equal to not less than five times the amount required to satisfy the
exchange rights of the Exchangeable Shares, or cash equal to not less than
such amount, or a combination of the foregoing. At the Closing, Microsoft will
also execute a Make-Well Agreement whereby among other things Microsoft will
agree to use its reasonable best efforts to ensure at all times that
sufficient numbers of Microsoft Common Shares or cash are available to WNI to
permit WNI to satisfy its obligation to deliver Microsoft Common Shares or
cash to holders of Exchangeable Shares upon the exercise of their exchange
rights. In the event that WNI elects to purchase additional Microsoft Common
Shares to satisfy such exchange rights it is expected that any such purchases
will be at the current market value of Microsoft Common Shares. As discussed
below the exchange rights may also be satisfied by the delivery of Microsoft
Common Shares by WNI. The exercise of an exchange right also triggers a "Call
Right" exercisable by Microsoft to acquire the Exchangeable Shares directly by
delivering Microsoft Common Shares or cash. See "--Rights and Preferences of
Exchangeable Shares."
In consideration for the transfer of the Microsoft Common Shares and/or cash
to WNI as described above and the execution of the Recapitalization Agreement,
the Make-Well Agreement and other ancillary agreements, Microsoft will receive
four Class B Shares for each Class A or Exchangeable Share issued in the
Recapitalization. Thus the exact number of Class B Shares to be issued to
Microsoft will not be known until just before the Closing but in no event will
the Class B Share represent less than eighty percent (80%) of the outstanding
capital shares on the basis of value and voting power. See "--Summary of Other
Provisions of the Recapitalization Agreement" and "--Related Agreements."
At the Closing, WNI shall make available to ChaseMellon Shareholder Services
LLC, or another company reasonably satisfactory to WNI acting as exchange
agent (the "Exchange Agent"), the certificates representing Exchangeable
Shares and cash to be issued in the conversion of WNI Shares and WNI Warrants
in exchange for outstanding certificates of WNI Shares and WNI Warrants
("Certificate" or "Certificates").
Accompanying this Proxy Statement/Prospectus is a Letter of Transmittal,
which when properly completed and returned together with such Certificate(s),
and an executed Escrow Agreement Signature Page, will enable the holder to
exchange such Certificate(s) for the number of whole Exchangeable Shares to
which the holder of WNI Common Shares is entitled or the cash to which the
holder of WNI Preferred Shares, WNI Warrants or electing vested WNI Common
Shares has either elected to, or is entitled to, receive under the
Recapitalization Agreement. Until holders of Certificates have surrendered
them for exchange and returned the executed Letter of Transmittal and Escrow
Agreement Signature Page, (i) no dividends or other distributions will be paid
with respect to any shares represented by such Certificate(s), and (ii) no
interest will be paid on any cash payable for WNI Preferred Shares, WNI
Warrants or eligible electing WNI Common Shares or dividends or other
distributions payable with respect to Exchangeable Shares if and when
declared. Upon surrender of any Certificate(s) in exchange for WNI Common
Shares, the holder thereof will receive any dividends or other distributions
which became payable at or after the Effective Time, but were not paid by
reason of the foregoing, with respect to the number of whole Exchangeable
Shares represented by the Certificate(s) issued upon such surrender.
Conversion of WNI Common Shares
WNI Common Shares, other than vested WNI Common Shares of holders who
exercise their dissenters' rights or who elect to have their shares acquired
by Microsoft for cash, shall be converted into, and WNI shall issue to holders
of WNI Common Shares, a number of Exchangeable Shares pursuant to an exchange
ratio determined by dividing $12.841 by the Microsoft Closing Price (the
"Exchange Ratio"). The "Microsoft Closing Price" shall be the average closing
price of Microsoft Common Shares as publicly reported by The Nasdaq National
Market over the twenty (20) consecutive trading days ending two (2) days prior
to the Closing. For example, if the Microsoft Closing Price was $100 per
share, the Exchange Ratio would be .12841 ($12.841 divided by $100) and a
holder would receive .12841 Exchangeable Shares for each WNI Common Share
currently held. Thus, if a holder has 1,000 WNI Common Shares, such holder
would receive a total of 128 Exchangeable Shares, less the Common Escrow
Withholding Amount.
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Election by Holders of Vested WNI Common Shares
Any holder of vested WNI Common Shares may elect to receive the Adjusted
Common Shares Consideration from Microsoft at the Effective Time in lieu of
receiving Exchangeable Shares by properly completing the Letter of Transmittal
and marking the election to have such shares purchased for cash, returning the
Letter of Transmittal, Escrow Agreement Signature Page and the Certificates
for such shares to WNI prior to the Closing. If no Letter of Transmittal
indicating an election for cash is received by WNI from an eligible holder by
the Closing, such holder will be deemed to have elected to receive
Exchangeable Shares.
Conversion of Unvested WNI Common Shares
Certain WNI Common Shares are subject to a vesting schedule and may be
repurchased by WNI in the event a holder thereof ceases to be employed by WNI.
Unvested WNI Common Shares shall be converted into Exchangeable Shares on the
same basis as WNI Common Shares and will be registered in each holder's name.
Such unvested Exchangeable Shares will be held by WNI pursuant to existing
agreements governing such shares in effect as of the Effective Time, except
that the existing agreements with the Principal Shareholders have been
modified to provide Microsoft or WNI with the right to execute WNI's right to
repurchase Exchangeable Shares after the Closing.
Election by Holders of WNI Preferred Shares and WNI Warrants
Any holder of WNI Preferred Shares or WNI Warrants may elect to have such
securities acquired for cash by Microsoft at the Effective Time by properly
completing the Letter of Transmittal and returning the Letter of Transmittal,
Escrow Agreement Signature Page and the Certificates for such shares to WNI
prior to the Closing.
Conversion of WNI Preferred Shares and WNI Warrants
Each of the WNI Preferred Shares, other than shares held by holders who have
exercised their dissenter's rights or elected to have their shares acquired by
Microsoft for cash, will be converted, without any action on the part of the
holders, into the right to receive the Adjusted Preferred Shares
Consideration. Each WNI Preferred Share is convertible at the rate of one WNI
Common Share for each WNI Preferred Share, except for the Series A Shares,
which are convertible at the rate of 1.1 WNI Common Shares for each Series A
Share. Subject to each of their terms, each WNI Warrant, other than warrants
held by holders who have elected to have their warrants acquired by Microsoft
for cash, shall be converted, without any action of the part of the holders
thereof, into the right to receive the Adjusted Warrant Consideration.
Rights and Preferences of Exchangeable Shares
The form of Amended and Restated Articles of Incorporation to be adopted by
WNI in connection with the Recapitalization are attached to this Proxy
Statement/Prospectus as Appendix E and is incorporated herein by reference.
The terms of such Articles are summarized below.
Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares
Each holder of Exchangeable Shares shall be entitled to vote for directors
and such other matters as may be submitted to the shareholders. Except to the
extent required by applicable law, each Exchangeable Share shall have one (1)
vote. Each holder of Exchangeable Shares shall be entitled to receive notice
of, and to attend, any meetings of shareholders of WNI.
The WNI Board of Directors may declare dividends in its discretion from time
to time, and WNI shall pay dividends out of its assets properly available for
the payment of dividends, provided that any such dividend declared with
respect to each Exchangeable Share and Class B Share shall be identical in
amount and character.
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Such dividends shall have record and payment dates as may be determined in the
discretion of the WNI Board of Directors. WNI shall provide each holder of
Exchangeable Shares written notice of a dividend record date for the
Exchangeable Shares not more than sixty (60) and not less than fifteen (15)
days prior to the payment of any dividend in respect of the Exchangeable
Shares.
In the event of a Liquidation of WNI, WNI shall pay to the holders of the
Exchangeable Shares from the assets of WNI available for distribution an
amount that is identical in amount and character with respect to each
Exchangeable Share and Class B Share. In the event WNI adopts a Liquidation
plan, WNI is required to provide each holder of Exchangeable Shares written
notice specifying a date for the completion of the Liquidation not more than
sixty (60) and not less than fifteen (15) days prior to taking such action.
Exchange Rights
Subject to the call rights of Microsoft described below, holders of
Exchangeable Shares shall have the right to exchange each Exchangeable Share
held for Microsoft Common Shares at any time prior to the end of fifty-one
(51) months after the effective date. Each Exchangeable Share shall be
exchanged for (i) such number of Microsoft Common Shares as are equal to the
product obtained by multiplying the Class A Exchange Rate in effect at the
time the exchange procedure is initiated by the number of Exchangeable Shares
being exchanged; or (ii) an amount in immediately available funds equal to the
Current Market Value of the Microsoft Common Shares otherwise issuable upon
exchange of the Exchangeable Shares ("Cash"). The determination as to whether
holders of Exchangeable Shares will receive Microsoft Common Shares or Cash
upon the exchange will be made by WNI. The "Class A Exchange Rate" shall
initially be 1.0 Microsoft Common Shares for each Exchangeable Share, subject
to adjustment based on certain capital changes in Microsoft Common Shares
following the Recapitalization, as described below. In the event Microsoft
does not exercise its call rights, WNI is obligated to exchange such
Exchangeable Shares for either Microsoft Common Shares or Cash. The "Current
Market Value" of the Microsoft Common Shares shall be the closing price as
publicly reported by The Nasdaq Stock Market at 4:00 p.m. (Eastern time) as of
the date on which a holder of Exchangeable Shares delivers his or her
Certificates and an "Exchange Notice" to the Secretary of WNI, or a person
designated by the Secretary.
No fractional Microsoft Common Shares shall be issued upon the exchange of
Exchangeable Shares. In lieu of such issuance, all Microsoft Common Shares
issued to the WNI shareholders pursuant to the Recapitalization Agreement
shall be rounded to the closest whole Microsoft Common Share.
Microsoft Call Rights
WNI shall immediately notify Microsoft of any exchange request. Microsoft
shall thereafter have one (1) day in which to exercise its right (the "Call
Right") to deliver to such holder, at Microsoft's election, (i) such number of
Microsoft Common Shares as are equal to the product obtained by multiplying
the Class A Exchange Rate in effect at the time the exchange procedure is
initiated by the number of Exchangeable Shares being exchanged; or (ii) Cash.
In addition, Microsoft shall have the right to acquire all, but not less than
all, of the outstanding Exchangeable Shares ("Class Call Right") solely for a
number of Microsoft Common Shares as determined under clause (i) above (except
that the Class A Exchange Rate used will be the Class A Exchange Rate in
effect at the time Microsoft shall exercise its Class Call Right), upon
delivery of an irrevocable written notice by Microsoft to WNI at any time
during the period commencing five years and six months after the Effective
Time and ending six years after the Effective Time. In the event Microsoft
exercises its Class Call Right, Microsoft shall provide each holder of
Exchangeable Shares written notice specifying a closing date for such proposed
action not more than sixty (60) and not less than fifteen (15) days prior to
taking such action.
Adjustments to Class A Exchange Ratio Upon Special Events
Upon the happening of a Special Event (as defined below) after the Effective
Time, the Class A Exchange Rate shall, simultaneously with the happening of
such Special Event, be adjusted by multiplying the then effective Class A
Exchange Rate by a fraction, the numerator of which shall be the number of
Microsoft
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Common Shares outstanding immediately after to such Special Event and the
denominator of which shall be the number of Microsoft Common Shares
outstanding immediately prior to such Special Event, and the product so
obtained shall thereafter be the Class A Exchange Rate. The Class A Exchange
Rate, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive Special Event or Events. "Special Event" shall
mean (i) the issue of additional Microsoft Common Shares either as a dividend
or as other type of distribution in respect of outstanding Microsoft Common
Shares, (ii) a subdivision or split of outstanding Microsoft Common Shares
into a greater number of Microsoft Common Shares, or (iii) a combination of
outstanding Microsoft Common Shares into a smaller number of Microsoft Common
Shares.
WNI Stock Options
At the Effective Time, Microsoft shall replace the outstanding WNI Options
with Microsoft Options subject to terms and conditions as follows: (i) each
new Microsoft Option will be exercisable for a number of whole Microsoft
Common Shares equal to the number of WNI Common Shares subject to the WNI
Option being replaced immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded to the nearest whole Microsoft Common Share; (ii)
the exercise price per Microsoft Common Share shall be the exercise price of
the WNI Option being replaced immediately prior to the Effective Time divided
by the Exchange Ratio; and (iii) such replacement options will be nonqualified
options even if the WNI Options being replaced were incentive stock options
(within the meaning of Section 422 of the Code) before such replacement. For
example, if a holder has options for 1,000 WNI Common Shares priced at $1.00
per share and the Microsoft Closing Price is $100, the Exchange Ratio is
.12841 ($12.841 divided by $100) and such holder's new options would cover 128
Microsoft Common Shares and would be priced at approximately $7.79 per share
($1.00 divided by .12841).
Each Microsoft Option shall be issued pursuant to the Microsoft 1991 Stock
Option Plan, as amended (the "1991 Plan"), and each recipient of a replacement
Microsoft Option shall be deemed to be an "Optionee" under the 1991 Plan. Each
Optionee shall be granted the right to exercise any unexercised replacement
Microsoft Options for three (3) months after termination of employment by WNI
or Microsoft, whichever occurs later, but in no event later than the
expiration date of such option as provided for in the WNI Option.
In addition to the Microsoft Options issued in replacement of WNI Options,
Microsoft shall grant additional Microsoft Options to certain employees of WNI
with a discounted exercise price (but subject to vesting), with an aggregate
discount of $31,774,000. See "Proposal II--Option Grants, Option Acceleration
and Other Compensatory Matters."
Microsoft will cause the Microsoft Options issued in replacement of the WNI
Options to be issued as soon as practicable after the Effective Time, pursuant
to a then effective registration statement on Form S-8 for the 1991 Plan, and
will cause such registration statement to remain effective for so long as such
replacement Microsoft Options remain outstanding.
Effective Time
It is anticipated that the Recapitalization will become effective as
promptly as practicable after the requisite WNI shareholder approval has been
obtained and all other conditions to the Recapitalization have been satisfied
or waived.
SUMMARY OF OTHER PROVISIONS OF THE RECAPITALIZATION AGREEMENT
Representations and Covenants
The Recapitalization Agreement contains certain customary representations
and warranties by WNI and the Principal Shareholders relating to, among other
things: (i) organization and related matters; (ii) the capital structure of
WNI and ownership of any subsidiaries; (iii) authorization, execution,
delivery, performance, and enforceability of the Recapitalization Agreement
and related matters; (iv) required consents and approvals,
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absence of conflicts under charter documents, and non-violation of instruments
and laws; (v) WNI's ownership of patents, trademarks, tradenames, copyrights
and other intellectual property; (vi) WNI's financial statements; (vii) taxes
and related matters; (viii) the accuracy of information supplied by the
parties for inclusion in filings and other documents contemplated under the
Recapitalization Agreement; (ix) an absence of undisclosed material adverse
changes; (x) leases; (xi) title to personal property; (xii) interests of
officers and directors of WNI; (xiii) litigation; (xiv) major contracts; (xv)
insurance and banking facilities; (xvi) employees and employee benefit plans
and payments thereunder by reason of the Recapitalization; (xvii) guarantees;
(xviii) the absence of brokers and finders engaged by WNI, other than DMG;
(xix) absence of unlawful, unrecorded or certain other payments; (xx)
environmental matters; (xxi) the accuracy of WNI's and the Principal
Shareholders' representations and warranties under the Recapitalization
Agreement; and (xxii) the number of subscribers to the WebTV Network service.
Microsoft has made certain customary representations and warranties relating
to (i) organization and related matters; (ii) authorization, execution,
delivery, performance, and enforceability of the Recapitalization Agreement
and related matters; (iii) required consents and approvals, absence of
conflicts under charter documents, and non-violation of instruments and laws;
(iv) Microsoft financial statements and documents filed by Microsoft with the
Commission and the accuracy of the information contained therein; (v) the
accuracy of information supplied by the parties for inclusion in filings and
other documents contemplated under the Recapitalization Agreement; (vi) the
absence of undisclosed material adverse changes; and (vii) the accuracy of
Microsoft's representations and warranties under the Recapitalization
Agreement.
Pursuant to the Recapitalization Agreement, each of WNI and Microsoft have
agreed that until the earlier of the termination of the Recapitalization
Agreement or the Effective Time, except as expressly contemplated by the
Recapitalization Agreement or with the prior written consent of the other
party, they will: (i) not take any action that would breach their respective
representations and warranties; (ii) apply for, and use their best efforts to
obtain, all consents and approvals required for the consummation of the
transactions contemplated by the Recapitalization Agreement; and (iii) use
their best efforts to effectuate the transactions contemplated by the
Recapitalization Agreement.
WNI has agreed that, until the earlier of the termination of the
Recapitalization Agreement or the Effective Time, except as expressly
contemplated by the Recapitalization Agreement and the WNI Disclosure Schedule
or with the prior written consent of Microsoft, WNI will carry on its business
in the ordinary course consistent with past practice, provided that, among
other things, it will not: (i) declare or pay any dividends or make any other
distributions in respect of its capital shares; (ii) issue or agree to issue
any capital stock, options, warrants, calls, conversion rights, or other
similar securities, subject to certain exceptions; (iii) amend its corporate
charter documents; (iv) dispose of any assets, except in the ordinary course
of business; (v) incur any debt; (vi) enter into or amend employee benefit
plans or increase employee remuneration; (vii) settle any claim, action, or
proceeding, except in the ordinary course of business; (viii) enter into any
commitment or transaction (a) to be performed over a period longer than six
(6) months in duration, or (b) to purchase assets (other than raw materials,
supplies, or cash equivalents) for a purchase price in excess of $500,000,
other than certain approved transactions; (ix) grant any bonus, severance, or
termination pay to any officer, director, independent contractor or employee
of WNI in excess of $25,000 individually or $100,000 in the aggregate; (x)
transfer to any person or entity any rights to intellectual property of WNI
other than pursuant to normal licenses to end-users; (xi) enter into or amend
any material agreements pursuant to which any other party is granted
marketing, publishing or distribution rights of any type or scope with respect
to any hardware or software products of WNI; (xii) except in the ordinary
course of business consistent with prior practice, enter into or terminate any
contracts, arrangements, plans, agreements, leases, licenses, franchises,
permits, indentures authorizations, instruments or commitments, or amend or
otherwise change the terms thereof; (xiii) commence a lawsuit other than (a)
for the routine collection of bills, (b) in such cases where WNI in good faith
determines that failure to commence suit would result in a material impairment
of a valuable aspect of WNI's business, provided WNI consults with Microsoft
prior to filing such suit, or (c) for a breach of the Recapitalization
Agreement; (xiv) materially modify existing discounts or other terms and
conditions with dealers, distributors and other resellers of WNI's products;
(xv) materially modify the terms and conditions of existing corporate end-user
licenses or service agreements or
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enter into new corporate end-user licenses or service agreements; (xvi)
maintain inventories other than as necessary to (a) satisfy anticipated demand
during the period between the date of the Recapitalization Agreement and the
Effective Time, and (b) maintain reasonable inventory levels; or (xvii)
accelerate the vesting or otherwise modify any WNI Options, restricted stock,
or other outstanding rights or other securities.
The Recapitalization Agreement also provides that neither WNI nor the
Principal Shareholders shall (and they shall use their best efforts to ensure
that none of their officers, directors, agents, representatives, or affiliates
shall) directly or indirectly solicit, encourage, initiate, or participate in
any negotiation, disclose or afford access to anyone, other than Microsoft or
its representatives, of any information concerning its business, properties or
books and records that is not customary, enter into any agreement, or announce
publicly any statement in support of the foregoing, with respect to any offer
or proposal to acquire all or a substantial portion of its business, assets or
capital shares whether by merger, consolidation, other business combination,
purchase of assets, tender or exchange offer or otherwise; provided, however,
that this covenant does not prohibit or prevent WNI's Board of Directors from
taking any action where the failure to do so would result in a breach of the
Board of Directors' fiduciary duties to WNI and its shareholders, based on
advice of counsel.
WNI also has agreed that, until the earlier of the termination of the
Recapitalization Agreement or the Effective Time, it shall permit Microsoft to
participate in negotiations with Fujitsu regarding a joint venture with WNI
with respect to operations in Japan.
Microsoft has agreed that it will (i) use its best efforts to cause the
Microsoft Common Shares to be issued upon exchange of the Exchangeable Shares,
and the Microsoft Common Shares to be issued upon exercise of the assumed WNI
Options, to be quoted upon the Effective Time on The Nasdaq Stock Market or
listed on such national securities exchange as Microsoft Common Shares are
listed, and (ii) enter into the Line of Credit under which Microsoft agrees to
loan to WNI up to $30 million for reasonable business needs, bearing interest
at 10% per annum, subject to the terms of the Line of Credit. Microsoft has
also agreed that, within eight months after the closing of the
Recapitalization, WNI will provide benefits to its employees that are in the
aggregate at least substantially equivalent to the benefits provided to
Microsoft employees who are in similar positions at similar salary levels.
Nothing, however, requires Microsoft to continue any specific plan or benefit,
or precludes amendments to or reductions in benefits provided through any
specific plan or benefit. Until such time as WNI employees receive equivalent
Microsoft benefits, WNI employees will receive benefits that in the aggregate
are at least substantially equivalent to the benefits they are receiving on
the date of closing of the Recapitalization.
Microsoft and WNI each have agreed to use best efforts to resolve any
objections that may be asserted by any governmental entity with respect to the
Recapitalization or any other transactions provided for in the
Recapitalization Agreement under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act,") and any other antitrust laws. In connection
therewith, if any administrative or judicial action or proceeding is
instituted (or threatened to be instituted) that challenges the
Recapitalization as violative of any antitrust law, and, if by mutual
agreement, Microsoft and WNI decide that litigation is in their best interest,
each of Microsoft and WNI have agreed to cooperate and use best efforts
vigorously to contest and resist any such action or proceeding and to have
vacated or overturned any order that prohibits, prevents, or restricts
consummation of the Recapitalization. Notwithstanding the foregoing, neither
Microsoft, or any of its subsidiaries, nor WNI are required to divest any of
their respective businesses, product lines or assets, or to take or agree to
take any other action or agree to any limitation that would have a material
adverse effect on their respective businesses, product lines, or assets.
Conditions to the Recapitalization
The Recapitalization Agreement provides that, unless waived, the respective
obligations of each party to effect the Recapitalization are subject to the
following material conditions: (i) other than the filing of recapitalization
documents with the Secretary of State of the State of California, all consents
legally required for the consummation of the Recapitalization and the
transactions contemplated by the Recapitalization Agreement shall have been
filed, occurred, or been obtained; (ii) no statute, rule, executive order or
final and nonappealable
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decree or injunction shall be enacted, entered, promulgated or enforced by any
United States court or governmental entity of competent jurisdiction which
enjoins or prohibits the consummation of the Recapitalization; (iii) the
Recapitalization Agreement and the Recapitalization shall have been approved
and adopted by the required vote of holders of WNI Common Shares and WNI
Preferred Shares; (iv) each party shall have received an opinion from its
respective counsel to the effect that the Recapitalization will more likely
than not constitute a reorganization within the meaning of Section
368(a)(1)(E) of the Code; (v) the representations and warranties of the other
party shall be true and correct in all material respects as of the Effective
Time as though made on and as of the Effective Time; (vi) the other party
shall have performed in all material respects all agreements and covenants to
be performed by it under the Recapitalization Agreement; and (vii) each party
shall have received an opinion dated as of the date of Closing of the other
party's legal counsel as to matters customary to transactions of the type
contemplated under the Recapitalization Agreement.
The obligation of Microsoft to effect the Recapitalization is subject to the
receipt by Microsoft of (i) signed offers accepting employment with Microsoft
and such other signed agreements as are customarily executed by new employees
of Microsoft or its subsidiaries in form and content satisfactory to Microsoft
from not less than 75% of WNI's hardware and software engineers (not including
network operations engineers); (ii) an Affiliate Agreement from each Principal
Shareholder and certain officers and directors of WNI, under which such
shareholders agree to transfer their shares in compliance with rules
concerning affiliates promulgated by the Commission; (iii) acceptance of
offers of employment with Microsoft and executed Employment and Noncompetition
Agreements from each of the Principal Shareholders; (iv) executed copies of
third-party consents, approvals, assignments, waivers, authorizations or other
specified certificates, other than those that WNI and Microsoft have agreed
will not be obtained; (v) termination or waiver of any registration rights,
rights of first refusal, rights to any liquidation preference, or redemption
rights relating to any security of WNI, other than rights of no material
consequence, and, except as set forth in the Recapitalization Agreement, WNI
shall have outstanding no warrants, options, convertible securities or other
rights to purchase or acquire securities of WNI; (vi) an amendment, waiver or
other modification, in a manner reasonably acceptable to Microsoft,
prohibiting conversion of WNI Preferred Shares into Common Shares, and no such
conversion shall have occurred; and (vii) an executed counterpart to the
Escrow Agreement from holders of at least 80% of the WNI Preferred Shares and
Warrants and the Principal Shareholders. Also, the obligation of Microsoft to
effect the Recapitalization is subject to the License of Technology between
Mr. Perlman and WNI being in full force and effect and no action shall be
pending or overtly threatened to materially modify or challenge the licenses
and other rights conveyed by such agreement.
The obligation of WNI to effect the Recapitalization is subject to (i) the
receipt by WNI of an executed Make-Well Agreement providing assurances to the
holders of Exchangeable Shares regarding the conversion of Exchangeable Shares
into Microsoft Common Shares or cash and (ii) the quotation on The Nasdaq
National Market, or listing on such national securities exchange as Microsoft
Common Shares are listed, of the Microsoft Common Shares to be issued upon
exchange of the Exchangeable Shares, and the Microsoft Common Shares to be
issued upon exercise of the assumed WNI Options.
A condition of the respective obligations of WNI and Microsoft to consummate
the Recapitalization is that each receive a tax opinion from its respective
legal counsel to the effect that the Recapitalization will more likely than
not constitute a reorganization within the meaning of Section 368(a)(1)(E) of
the Code. The legal opinions of Venture Law Group and Preston Gates & Ellis
will not bind the IRS, will not preclude the IRS or a court from adopting a
contrary position, will be subject to certain assumptions and qualifications,
and will be based on the truth and completeness of certain representations of
WNI, Microsoft, and the Principal Shareholders. See "--Certain U.S. Federal
Income Tax Matters."
At any time on or prior to the Recapitalization, to the extent legally
allowed, Microsoft, on the one hand, or WNI and the Principal Shareholders, on
the other hand, without approval of WNI's other shareholders, may waive
compliance with any of the agreements or conditions contained in the
Recapitalization Agreement for the benefit of that party. Neither Microsoft
nor WNI currently intends to waive compliance with any such agreements or
conditions.
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Indemnification by Shareholders and by Principal Shareholders
In the Recapitalization Agreement, the holders of WNI Shares (other than
holders who exercise their dissenters' rights under California law) and WNI
Warrants, will, by the approval of the Recapitalization and acceptance of the
consideration provided in the Recapitalization Agreement, agree, severally, to
defend, indemnify and hold Microsoft harmless from and against any and all
damages and other amounts (including expenses and attorneys' fees)
("Indemnifiable Amounts") incurred by Microsoft by reason of or arising out of
or in connection with (i) any breach or asserted breach of any representation
or warranty of WNI or the Principal Shareholders contained in the
Recapitalization Agreement or related documents, or (ii) the failure of WNI or
the Principal Shareholders to perform any agreement or covenant in the
Recapitalization Agreement.
At the Closing, Microsoft, WNI, each of the holders of WNI Shares and WNI
Warrants, the Shareholders' Representative and ChaseMellon Shareholder
Services, LLC will enter into an escrow agreement, the purpose of which is to
secure the indemnification obligations of the WNI securities holders under the
Recapitalization Agreement. See "--Related Agreements--Escrow Agreement."
With respect to claims made by third parties, Jeffrey D. Brody, a member of
the WNI Board of Directors, has been nominated to serve as the representative
of the WNI shareholders (the "Shareholders' Representative"). The
Shareholders' Representative has the right to receive notice of any such claim
and the right to contest, negotiate or settle any such claim on behalf of the
holders of WNI Shares and WNI Warrants, solely at their own risk, cost and
expense. The holders of WNI Shares and WNI Warrants cannot settle, compromise,
or offer to settle or compromise any such claim or demand without the prior
written consent of Microsoft, which consent may not be unreasonably withheld.
Microsoft has no right to object to a settlement or compromise which consists
solely of the payment of monetary damages and which is subject to full
indemnification under the Recapitalization Agreement. Approval of the
Recapitalization by the shareholders of WNI will be deemed approval of Mr.
Brody to serve as the Shareholders' Representative.
The obligation of holders of WNI Shares and WNI Warrants to indemnify
Microsoft shall apply only to Indemnifiable Amounts which are incurred or
related to claims made on or prior to the eighteen month anniversary of the
date of closing of the Recapitalization. Nevertheless, the obligation of the
Principal Shareholders (i) to indemnify Microsoft for breaches of
representations, warranties and covenants relating to taxes shall continue
until 30 days after the expiration of all statutes of limitations applicable
to such taxes, and (ii) for Indemnifiable Amounts arising out of fraud (as
defined in the Recapitalization Agreement) or willful misstatements or willful
omissions of WNI or the Principal Shareholders will have no time limit.
Microsoft shall be entitled to indemnification only if the aggregate
Indemnifiable Amounts exceed a threshold of $500,000. At such time as
Indemnifiable Amounts exceed such threshold amount, Microsoft is entitled to
be indemnified up to the full Indemnifiable Amounts, including the threshold
amount. In addition, regardless of whether the threshold amount has been
satisfied, Microsoft shall be entitled to all Indemnifiable Amounts payable
with respect to (i) claims regarding the "WebTV" trademark, regardless of the
fact that WNI settled a known claim with respect to such mark prior to the
execution of the Recapitalization Agreement, and (ii) claims related to taxes.
The aggregate amount to which Microsoft shall be entitled for indemnification
will not exceed an amount equal to the $50 million escrow amount under the
Escrow Agreement, and indemnification is Microsoft's sole remedy against WNI,
or any shareholder, director, officer, employee or agent of WNI for
Indemnifiable Amounts, except for breaches of representations, warranties or
covenants related to tax claims, and fraud, willful misstatements or willful
omissions by WNI or the Principal Shareholders, which are not limited to such
escrow amount or subject to the exclusivity of remedy limitation. No party has
any indemnification obligation for damages arising from a determination that
the Recapitalization is not a tax-free "reorganization" under the Code (except
to the extent that the failure of the Recapitalization to so qualify as a
reorganization shall have as a result of a breach of a term of the
Recapitalization Agreement by such party). Microsoft is required to act in
good faith and in a commercially reasonable manner to mitigate any
Indemnifiable Amounts that it may suffer.
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Termination or Amendment
The Recapitalization Agreement may be terminated by mutual consent of the
parties at any time prior to the Effective Time. Microsoft or WNI may
terminate the Recapitalization Agreement (i) upon the failure of the
shareholders of WNI to approve the Recapitalization and related transactions;
(ii) upon the entry of any court order that declares the Recapitalization
unlawful or enjoins the consummation of the Recapitalization or the enactment
of any statute causing the Recapitalization to be unlawful, or (iii) if the
Effective Time does not occur by September 30, 1997 (the "Outside Date");
provided that if the parties elect to pursue litigation in connection with
antitrust matters, this Outside Date may be extended to March 31, 1998 by
mutual agreement of the parties.
Microsoft may terminate the Recapitalization Agreement (so long as Microsoft
is not in material breach of the Recapitalization Agreement) if there has been
a material breach by WNI of any representation, warranty, covenant, or
agreement contained in the Recapitalization Agreement and such breach has a
material adverse effect on the Recapitalization and has not been cured within
30 days after notice of such breach is given. Even if there has been no such
breach, or a termination is not otherwise permitted, Microsoft may terminate
the Recapitalization Agreement, subject to the payment to WNI of certain fees,
which fees may be offset against amounts due to Microsoft under the Line of
Credit. If such termination relates to (i) objections asserted by a government
entity under any antitrust law, (ii) the failure of the Recapitalization to
close by the Outside Date, or (iii) because the Recapitalization Agreement
terminates for reasons other than by mutual consent, pursuant to a failure to
obtain shareholder approval, because the Recapitalization is unlawful, or due
to a breach thereof by Microsoft or WNI, the fee due WNI by Microsoft shall be
$15 million (the "Termination Fee"). If Microsoft elects to terminate other
than as permitted by the Recapitalization Agreement, or fails to proceed with
the closing of the Recapitalization after all applicable conditions have been
satisfied, the fee due WNI by Microsoft shall be $50 million if such
termination is effective prior to the 60th day after the date of the
Recapitalization Agreement, and $75 million thereafter (the "Break-up Fee").
In the event that WNI and Fujitsu Limited fail to reach agreement with respect
to a joint venture within 30 days after a termination by Microsoft in which
the Termination Fee or Break-up Fee are due to WNI, Microsoft agrees to pay
WNI, in addition to the Termination Fee or Break-up Fee, as applicable, $5
million.
WNI may terminate the Recapitalization Agreement (so long as WNI is not in
material breach of the Recapitalization Agreement) if there has been a
material breach by Microsoft of any representation, warranty, covenant, or
agreement contained in the Recapitalization Agreement and such breach has not
been cured within 30 days after notice of such breach is given. Even if there
has been no such breach, WNI may terminate the Recapitalization Agreement. In
such event, Microsoft shall be entitled to consideration if WNI is acquired on
or before the first anniversary of the effective date of such termination.
Upon such an acquisition, Microsoft is entitled to 50% of the difference
between the net proceeds of the acquisition and the total aggregate
consideration under the Recapitalization Agreement. An acquisition includes
(i) the sale by shareholders of WNI of 50% or more of either their voting
power or liquidation rights, (ii) a merger, consolidation or statutory share
exchange, unless following the completion of such transaction the WNI
shareholders prior to such transaction own or control 50% or more of the
voting power or liquidation rights of the successor of such transaction, (iii)
sale of all or substantially all of the assets of WNI, and (iv) the issuance
of additional shares of stock to a person or group of related persons other
than to the Principal Shareholders in a transaction or series of related
transactions and, as a result, such persons or group owns or controls 50% or
more of the voting power or liquidation rights or the capital shares of WNI
and the Principal Shareholders directly or indirectly receive additional
compensation, remuneration, payments or other economic benefit.
The Recapitalization Agreement may be amended only by an instrument in
writing signed on behalf of each of Microsoft, WNI and the Principal
Shareholders.
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RELATED AGREEMENTS
Escrow Agreement
At the Closing, Microsoft, WNI, each of the holders of WNI Shares and WNI
Warrants (the "Securities Holders"), the Shareholders' Representative and
ChaseMellon Shareholder Services, LLC will enter into an escrow agreement (the
"Escrow Agreement"), the form of which is attached to this Proxy
Statement/Prospectus as Appendix D and is incorporated herein by reference.
The purpose of the Escrow Agreement is to secure the indemnification
obligations of the Securities Holders under the Recapitalization Agreement.
Pursuant to the Escrow Agreement, Fifty Million Dollars ($50,000,000) in
Exchangeable Shares and cash (the "Escrow Amount") will be withheld from the
consideration to be issued or paid in the conversion or sale of the WNI Shares
and WNI Warrants on a basis proportionate to the value of the Exchangeable
Shares (determined in the same manner as in the Recapitalization Agreement)
and/or cash to be received by each Securities Holder and will be placed in an
escrow account. Should Microsoft successfully assert claims for
indemnification under the Recapitalization Agreement, some or all of the
Escrow Withholding Amounts would not be released to holders of WNI Shares or
WNI Warrants. The Escrow Agreement provides for the delivery of Cash Escrow
(as defined in the Escrow Agreement) by the Escrow Agent to Microsoft and
Escrowed Shares to WNI upon the final determination of an indemnifiable claim.
The value of any Escrowed Shares used to satisfy demands or claims under the
Escrow Agreement will be equal to the Microsoft Closing Price. Within twenty
days of the eighteen (18) month anniversary of the Closing, any Escrowed
Shares and Cash Escrow remaining in escrow, other than any amount then held
pending the determination of a claim, will be released to the Securities
Holders in proportion to their contributions to the escrow.
Voting Agreements
Microsoft has entered into agreements (the "Voting Agreements") with each of
the Principal Shareholders, who on the Record Date together owned beneficially
in the aggregate 15,000,000 WNI Common Shares, representing approximately 45%
of the then outstanding WNI Shares, pursuant to which such shareholders have
agreed to vote their WNI Shares in favor of the approval of the
Recapitalization and the adoption of certain documents with respect to the
Recapitalization and against any action or agreement that would impede or
interfere with the performance of such Recapitalization Agreement or the
consummation of the transactions contemplated thereby. Each of such
shareholders have further agreed that until the closing of the
Recapitalization or the termination of the Recapitalization Agreement they
will not sell or otherwise dispose of or limit their right to vote any of
their respective WNI Shares, enter into a voting arrangement with respect to
any of their WNI Shares, or participate in any proxy solicitation for the
purpose of opposing or competing with the consummation of the
Recapitalization. Each of the Voting Agreements terminates on the earlier to
occur of (i) the Effective Time of the Recapitalization, or (ii) such date and
time as the Recapitalization Agreement shall be terminated.
Intellectual Property, License of Technology and Patent License Agreements
Immediately prior to the execution of the Recapitalization Agreement, the
Principal Shareholders executed Intellectual Property, License of Technology,
and Patent License Agreements (the "Intellectual Property Agreements") with
WNI. The purpose of the Intellectual Property Agreements is to ensure that at
the Closing, all of the Intellectual Property (as defined in the
Recapitalization Agreement) is in fact owned by, or licensed to, WNI, and
available for use by WNI.
Amended and Restated Shareholder Agreements
Contemporaneous with the execution of the Recapitalization Agreement,
Microsoft, WNI and each of the Principal Shareholders entered into Amended and
Restated Shareholder Agreements (the "Shareholder Agreements"). The
Shareholder Agreements amended an agreement previously entered into by WNI and
each of the Principal Shareholders in connection with the issuance of their
founders shares (the "Founders Shares"). In addition to deleting various
provisions which would no longer be relevant after the Recapitalization, each
agreement establishes a new vesting schedule. Under the revised agreements,
Messrs. Leak and Goldman will
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have 1,770,830 unvested WNI Common Shares of which 33 1/3% will vest April 5
of 1998, 1999, and 2000, respectively, and Mr. Perlman will have 1,666,667
unvested WNI Common Shares of which 50% will vest on April 5 of 1998 and 1999,
respectively.
Line of Credit Agreement
Contemporaneous with the execution of the Recapitalization Agreement,
Microsoft and WNI entered into a Line of Credit Agreement (the "Credit
Agreement"). In the Credit Agreement, Microsoft agreed to loan WNI, on a
revolving basis, up to Thirty Million Dollars ($30,000,000) (the "Loan").
Interest on the outstanding balance on the Loan will accrue at a rate of ten
percent (10%). The Loan is secured by a security interest granted by WNI to
Microsoft, pursuant to a Security Agreement, covering all of WNI's
Intellectual Property (as defined in the Recapitalization Agreement). As of
the date of this Proxy Statement/Prospectus, $ of principal amount was
outstanding under the Credit Agreement.
In the event the Recapitalization Agreement is terminated, the principal and
interest of the Loan is repayable as follows: (i) if WNI terminates the
Recapitalization Agreement without cause, all outstanding principal and
interest on the Loan is due and payable within ten (10) days of the
termination; (ii) if the Reorganization Agreement is terminated other than by
WNI without cause, all principal and interest on the Loan is due and payable
on that date eighteen (18) months after the effective date of such
termination. Microsoft may elect to forgive any of the Loan payable and such
forgiveness shall be treated as an offset against any Termination Fee, Break-
up Fee or other fee obligations to WNI pursuant to the Recapitalization
Agreement. The principal and interest of the Loan is payable in full at the
Closing of the Recapitalization Agreement.
Affiliates Agreements
WNI and Microsoft will enter into agreements (the "Affiliates Agreements")
with each of the Principal Shareholders and certain other officers and
directors of WNI, pursuant to which such persons will agree that they will not
sell or otherwise dispose of any Exchangeable Shares or Microsoft Common
Shares unless such sale or disposition is permitted pursuant to the provisions
of Rule 145 under the Securities Act, is otherwise exempt from registration
under the Securities Act, or is effected pursuant to a registration statement
under the Securities Act.
Employment and Noncompetition Agreements
Prior to the Closing of the Recapitalization Agreement, each of the
Principal Shareholders will enter into an Employment and Noncompetition
Agreement with Microsoft and WNI (the "Employment Agreements"). The Employment
Agreements define the employment relationship between each of the Principal
Shareholders with Microsoft and WNI after the Closing. The Employment
Agreements provide that each of the Principal Shareholders will be employed by
WNI or Microsoft for three (3) years from the Effective Time, as defined in
the Recapitalization Agreement. After such three year period, the Principal
Shareholder's employment will continue on an at will basis. Each Principal
Shareholder's title and responsibilities shall continue as currently in
effect, and each Principal Shareholder's base salary will continue at its
current level. Each Principal Shareholder shall be entitled to full benefits
of employees of WNI. Further, the vesting rates of each Principal
Shareholder's unvested WNI Common Shares are accelerated under certain
conditions, such as death, disability and material breach of the Employment
Agreements by WNI or Microsoft.
In addition, each of the Employment Agreements contain restrictions on the
Principal Shareholder's ability to engage in a "competing business" with
Microsoft. The Employment Agreements generally define "competing business" as
a business engaged in software and hardware development in connection with a
wide variety of platforms, hardware, applications and operating systems. The
term of such restriction is three (3) years from the Closing Date, as defined
in the Recapitalization Agreement, or one (1) year after the termination of
employment with WNI or Microsoft, whichever is later.
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Finally, each of the Employment Agreements contain restrictions on the
Principal Shareholder's ability to solicit or assist in the solicitation of
any employees or agents of Microsoft to terminate any contract or working
relationship with Microsoft. As with the noncompetition provisions described
above, the term of such restriction is three (3) years from the Closing Date
or one (1) year after the termination of employment with WNI or Microsoft,
whichever is later.
CERTAIN U.S. FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material U.S. federal income tax
consequences of the Recapitalization that are generally applicable to WNI
shareholders. This discussion is based on currently existing provisions of the
Code, existing Treasury Regulations thereunder (including final, temporary or
proposed), and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences described herein.
The following discussion is intended only as a summary of the material U.S.
federal income tax consequences of the Recapitalization and does not purport
to be a complete analysis or listing of all of the potential tax effects
relevant to a decision whether to approve the Recapitalization Agreement. In
particular, this discussion does not deal with all U.S. federal income tax
considerations that may be relevant to particular WNI shareholders in light of
their particular circumstances, such as shareholders who are dealers in
securities, who are subject to the alternative minimum tax provisions of the
Code, who are foreign persons, or who acquired their WNI Shares in connection
with stock option or stock purchase plans or in other compensatory
transactions, nor does it address the tax treatment of holders of WNI
Warrants. In addition, the following discussion does not address the tax
consequences of the Recapitalization under foreign, state or local tax laws or
the tax consequences of transactions effectuated prior to or after the
Recapitalization (whether or not such transactions are in connection with the
Recapitalization), or the treatment of persons receiving or exchanging options
to acquire Microsoft Common Shares or WNI Common Shares except for the matters
specifically set forth below.
HOLDERS OF WNI SHARES AND WARRANTS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE RECAPITALIZATION, INCLUDING THE
APPLICABLE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES TO THEM.
It is a condition to the obligation of WNI and Microsoft to consummate the
Recapitalization that Venture Law Group and Preston Gates & Ellis
(collectively, "Counsel") render opinions (the "Tax Opinions") that it is more
likely than not that the Recapitalization constitutes a reorganization within
the meaning of Section 368(a)(1)(E) of the Code. Each of WNI and Microsoft may
waive the rendering of the Tax Opinions, and in either case WNI will resolicit
proxies from the shareholders of WNI after informing them of any changes in
the tax consequences to them, or of any material changes in the tax
consequences to WNI. Assuming the Recapitalization so qualifies, then, subject
to the assumptions, limitations and qualifications referred to herein and in
the Tax Opinions, the Recapitalization will have the following federal income
tax consequences:
(i) No gain or loss will be recognized by holders of WNI Common Shares
solely upon their receipt in the Recapitalization of Exchangeable Shares in
exchange therefor (except to the extent of cash received in lieu of a
fractional Exchangeable Share).
(ii) The aggregate tax basis of the Exchangeable Shares received by WNI
shareholders in the Recapitalization will be the same as the aggregate tax
basis of the WNI Common Shares surrendered in exchange therefor.
(iii) The capital asset holding period of the Exchangeable Shares
received by each WNI shareholder in the Recapitalization will include the
period for which the WNI Common Shares surrendered in exchange therefor was
considered to be held, provided that the WNI Common Shares so surrendered
are held as a capital asset at the time of the Recapitalization.
(iv) Holders of WNI Shares or WNI Warrants who receive cash for all or a
part of their shares or warrants in the Recapitalization (whether as a
result of exercising dissenters' rights with respect to such
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shares or receiving consideration for part or all of their shares or
warrants in the form of cash) will generally recognize gain or loss
measured by the difference between the amount of cash received and the
holder's basis in the shares or warrants surrendered for such cash, if (i)
the payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a distribution of
a dividend within the meaning of Section 356(a)(2) of the Code
(collectively, a "Dividend Equivalent Transaction") and (ii) if the
"collapsible corporation" rules described below do not apply to the
exchange. The receipt of cash for shares or warrants in the
Recapitalization will generally not be a Dividend Equivalent Transaction
for a holder of WNI Shares or WNI Warrants if such holder owns (actually or
constructively within the meaning of Section 318 of the Code) either no WNI
Common Shares immediately after the Recapitalization or shares having
sufficiently reduced voting power relative to the voting power of the WNI
Shares held by such holder immediately prior to the Recapitalization to
meet the "substantially disproportionate" test of Section 302(b)(2) of the
Code. If, however, the receipt of cash for shares or warrants is a Dividend
Equivalent Transaction, then such holder will generally recognize dividend
income for federal income tax purposes in an amount equal to the entire
amount of cash so received to the extent of the allocable earnings and
profits of WNI, if any, then as a return of basis and then as capital
gains.
The parties have not requested and will not request a ruling from the IRS
with regard to any of the U.S. federal income tax consequences of the
Recapitalization. The Tax Opinions will be based on and subject to certain
assumptions and limitations as well as representations to be received from
Microsoft, WNI and WNI shareholders, discussed below. An opinion of counsel
only represents counsel's best legal judgment, and has no binding effect or
official status of any kind, and no assurance can be given that contrary
positions may not be taken by the IRS or a court considering the issues. The
Recapitalization involves a unique transaction structure that has not been the
subject of a decision or ruling by the courts or the IRS.
A successful IRS challenge to the status of the Recapitalization as a
"reorganization" within the meaning of Section 368(a)(1)(E) of the Code would
result in WNI shareholders who receive Exchangeable Shares being treated as if
they sold their WNI Shares in a taxable transaction. In such event, each WNI
shareholder would be required to recognize gain or loss with respect to the
disposition of each of his or her WNI Shares equal to the difference between
the WNI shareholder's basis in such shares and the fair market value, as of
the date the Recapitalization becomes effective, of the Exchangeable Shares
received in exchange therefor. Such gain or loss would be treated as capital
gain or capital loss for each such shareholder if he or she held his or her
WNI Shares as a capital asset at the time of the Recapitalization (subject to
the "collapsible corporation" rules described below). In such event, a WNI
shareholder's aggregate basis in the Exchangeable Shares so received would
equal their fair market value as of the Effective Time of the
Recapitalization, and the WNI shareholder's capital asset holding period for
such Exchangeable Shares would begin the day after the Recapitalization.
Even if the Recapitalization qualifies as a "reorganization" within the
meaning of Section 368(a)(1)(E) of the Code, a recipient of Exchangeable
Shares at the time of the Recapitalization would recognize gain to the extent
that such shares were considered to be received in exchange for services or
property (other than solely in exchange for WNI Shares). Gain would also have
to be recognized to the extent that an WNI shareholder was treated as
receiving (directly or indirectly) consideration other than Exchangeable
Shares in exchange for WNI Shares. All or a portion of such gain amounts may
be taxable as ordinary income to recipients of Exchangeable Shares.
It is possible that WNI may be treated as a collapsible corporation for U.S.
federal income tax purposes with respect to certain dispositions of WNI Shares
by WNI securities holders who have held, actually or constructively, more than
five percent of the stock of WNI by value (at any time) ("more-than-five-
percent-shareholders"). In such event, gain recognized by such shareholders on
a disposition of WNI Shares in certain types of transactions may be treated as
recognizing ordinary income and not capital gain income. The types of
transactions where such gain may be recharacterized as ordinary income include
redemptions of WNI Shares. More-than-five-percent-shareholders holding WNI
Preferred Shares should, therefore, elect to have their shares purchased by
Microsoft rather than redeemed by WNI in the Recapitalization to avoid this
possibility. See "Proposal I--The Recapitalization and Related Transactions--
The Recapitalization--Effects by
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Recapitalization." Further, gain realized by more-than-five-percent-
shareholders who elect to exchange their Exchangeable Shares for Microsoft
Common Shares (and who do not have their shares purchased by Microsoft through
the exercise of its Call Right) may be taxed as ordinary income. Although
Microsoft expects to exercise its Call Right when holders of Exchangeable
Shares tender such shares for exchange, Microsoft is not required to do so.
Finally, more-than-five-percent-shareholders receiving Exchangeable Shares in
the Recapitalization should be aware that, in the event the exchange of WNI
Common Shares for Exchangeable Shares is treated as a taxable redemption for
federal income tax purposes instead of a tax-deferred reorganization, gain
deemed recognized may constitute ordinary income. Shareholders should consult
their tax advisors regarding the foregoing.
Escrow Agreement
In connection with the Recapitalization, WNI will deposit the Escrow Amount,
consisting of Cash Escrow and Escrowed Shares, in an escrow account with
ChaseMellon Shareholders Services, LLC on behalf of the WNI shareholders. See
"Related Agreements--Escrow Agreement." The Escrow Amount will be held to
satisfy any claims for breaches of representations, warranties, covenants of
WNI and the Principal Shareholders, and their indemnification obligations under
the Recapitalization Agreement. Should Microsoft successfully assert claims for
indemnification under the Recapitalization Agreement, some or all of the Escrow
Withholding Amounts would not be released to holders of WNI Shares or WNI
Warrants.
The Escrowed Shares should be deemed to be owned by the WNI shareholders
receiving Exchangeable Shares for federal income tax purposes. Accordingly, any
distribution of the Escrowed Shares from the Escrow to the WNI shareholders
should not be a taxable event to such shareholders, but they will be taxed on
dividends paid, if any, on the Escrowed Shares.
Assuming the Recapitalization is respected as a reorganization, Federal
income tax law is unclear as to the treatment of holders of Exchangeable Shares
in the event that any Escrowed Shares are used to satisfy any claim for
breaches of representations, warranties, covenants of WNI and the Principal
Shareholders, and indemnification obligations under the Recapitalization
Agreement. It is possible that satisfaction of indemnification obligations
under the Recapitalization Agreement with Escrowed Shares will be treated for
federal income tax purposes as an adjustment to the consideration received by
WNI shareholders in the Recapitalization, with the result that no gain or loss
would be recognized by such shareholders upon the return of such Escrowed
Shares. There is a risk, however, that such shareholders will be deemed to have
disposed of such shares on a proportionate basis and will recognize gain or
loss on such deemed disposition. In that event, each shareholder also would be
deemed to have made a payment to WNI in the amount of the value of such
Escrowed Shares. Such deemed payment could be treated as a cost of acquiring
the Exchangeable Shares received in the Recapitalization, which must be
capitalized into the tax basis of such shares. However, there are also
arguments that each such shareholder should be allowed a capital loss in an
amount equal to the value of the shares allocable to such shareholder which are
used to satisfy any such claim, which loss would be allowable against gain
realized on the deemed disposition of such shares. Shareholders should consult
their tax advisors on the treatment of the use of Escrowed Shares to satisfy
claims under the Recapitalization Agreement.
Considerations Relating to Eligibility for Benefit under Code Section 1202
Subject to the requirements and limitations set forth therein, Section 1202
of the Code provides for the exclusion of up to 50% of the gain recognized by a
non-corporate taxpayer upon the sale or exchange of "qualified small business
stock" that has been held by the taxpayer for more than five years.
Exchangeable Shares which are received in exchange for WNI Common Shares that
constitute "qualified small business stock" within the meaning of Section
1202(c)(1) of the Code will be treated as "qualified small business stock"
acquired on the dates on which such WNI Common Shares were acquired. The
aggregate amount of gain that will qualify for the 50% exclusion under Section
1202 of the Code upon the sale or other disposition of the Exchangeable Shares
which a WNI shareholder receives in the Recapitalization may not exceed the
amount of gain the WNI shareholder would recognize upon the Recapitalization if
the Recapitalization is a taxable exchange rather than a reorganization.
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Whether WNI Common Shares will constitute qualified small business stock in
the hands of any WNI shareholder will depend on a number of factors which are
particular to each shareholder, the history of WNI and its operations in the
future, including whether a portion of such shareholder's WNI Common Shares or
Exchangeable Shares are redeemed in the period beginning two years before and
ending two years after the issuance to such shareholder of his or her WNI
Common Shares (or more than 5% of the aggregate outstanding WNI Shares are
redeemed from WNI shareholders during the period beginning one year before and
ending one year after such issuance). Shareholders should be aware that this
benefit may be available to them and that they will be required to hold their
WNI Common Shares or Exchangeable Shares for the 5-year holding period to
obtain such benefit. Accordingly, if the Recapitalization fails to qualify as
a reorganization for federal income tax purposes or if, under some
circumstances, a portion of the shares of such shareholder are redeemed, such
benefit will not be available to such shareholder. Finally, such benefit will
not be available with respect to Exchangeable Shares sold or exchanged prior
to the time that the required 5-year holding period expires. Shareholders
should consult their tax advisors regarding the availability of this benefit
to them of this provision given their respective circumstances. It should be
noted that the benefits of this provision may be limited due to the
application of the alternative minimum tax, the effect of which will vary from
shareholder to shareholder.
Effect of Exchange of Exchangeable Shares
Holders of Exchangeable Shares who, following the Recapitalization, exchange
such shares for Microsoft Common Shares (whether pursuant to their exchange
rights or exercise by Microsoft of the Class Call Right) will be treated as
making a taxable disposition of such shares unless such exchange qualifies as
a reorganization within the meaning of Section 368(a)(1)(B) of the Code.
Whether such exchange will so qualify is uncertain and will depend in part on
the circumstances as of the time of such exchange, including whether WNI or
Microsoft is the party which acquires the Exchangeable Shares.
In the event that such exchange does not qualify as a reorganization under
Section 368(a)(1)(B) of the Code, holders of Exchangeable Shares would
recognize gain or loss equal to the excess of the fair market value of the
Microsoft Common Shares received in such exchange over their tax basis in the
Exchangeable Shares surrendered therefor, unless such exchange were treated as
a "Dividend Equivalent Transaction" (as defined above) or the "collapsible
corporation" rules described above apply. Holders of Exchangeable Shares would
in all events recognize such gain or loss in the event that they receive cash
in lieu of Microsoft Common Shares upon exercise of their exchange rights
unless such transaction was a Dividend Equivalent Transaction or the
"collapsible corporation" rules described above apply. If the transaction were
a Dividend Equivalent Transaction, a holder would recognize ordinary dividend
income equal to the amount of cash or fair market value of Microsoft Common
Shares received to the extent of such holder's pro rata share of any
accumulated or current year earnings and profits of WNI. Any remaining gain or
loss should be taxable as capital gain or loss in the case of a Dividend
Equivalent Transaction, but as ordinary income if the "collapsible
corporation" rules apply. Holders are advised to consult their own tax
advisors prior to exercising their exchange rights (or upon Microsoft's
exercise of its Class Call Right) regarding the income tax consequences of
such exchange.
Microsoft Option Grants
Certain WNI employees and consultants will be granted Microsoft Options
exercisable at a discount to the current market value of Microsoft Common
Shares at the time of the Recapitalization. These options will become vested
in accordance with the vesting schedule applicable to the WNI Options and/or
WNI Common Shares to which they correspond, treating the Microsoft Options as
allocated pro rata among such corresponding WNI Options and/or WNI Common
Shares. Applicable Treasury Regulations indicate that compensatory options
generally should not be taxable at the time of grant or vesting, but at the
time that the options are exercised by the employees and consultants receiving
the grants. Microsoft intends to treat the options awarded to the WNI
employees and consultants consistently with such Regulations. However, WNI
employees and consultants who receive discounted Microsoft Options should be
aware that there is a risk that they will recognize taxable compensation
income equal to the difference between the value of the Microsoft Common
Shares subject to such options over the exercise price thereof at the time
such Microsoft Options are granted (or, if later, first become
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exercisable). WNI employees and consultants should consult their own tax
advisors with respect to the income tax consequences to them of the grant,
vesting and exercise of such Microsoft Options.
ACCOUNTING TREATMENT
The Recapitalization is anticipated to be accounted for using the purchase
method of accounting under generally accepted accounting principles. Under the
purchase method of accounting, the assets of WNI will be valued at their
estimated fair market value and reflected on the books and records of
Microsoft accordingly. Microsoft expects that an in process research and
development write-off of $300 million will be required in the quarter in which
the Recapitalization closes.
REGULATORY REQUIREMENTS
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Recapitalization may not be consummated until
notifications have been given and certain information has been furnished to
the FTC and the Antitrust Division of the Department of Justice (the
"Department of Justice") and specified waiting period requirements have been
satisfied. Microsoft and WNI each filed its respective notification and report
forms under the HSR Act on April 14, 1997. The parties received a letter from
the FTC dated April 15, 1997 confirming receipt of the filed documents and
indicating that the waiting period began on April 14, 1997, and will expire at
11:59 p.m. on May 14, 1997, unless extended by a request for additional
information or documentary material or unless early termination of the waiting
period is granted. On May 14, 1997, the parties received a request for
additional information from the Department of Justice. The parties are now
complying with such request.
Federal and state antitrust enforcement authorities review the legality of
transactions such as the Recapitalization. At any time before or after the
Effective Time, and notwithstanding that the HSR Act waiting period has
expired, any such agency could take any action under antitrust laws that it
deems necessary or desirable in the public interest. Such action could include
seeking to enjoin the consummation of the Recapitalization or seeking
divestiture of businesses of Microsoft or WNI acquired as a result of the
Recapitalization. Under certain circumstances, private parties may also bring
legal actions under the antitrust laws.
Based on information available to them, Microsoft and WNI believe that the
Recapitalization can be effected in compliance with federal and state
antitrust laws. However, there can be no assurance that a challenge to the
consummation of the Recapitalization on antitrust grounds will not be made or
that, if such a challenge were made, Microsoft and WNI would prevail or would
not be required to accept certain conditions (possibly including certain
divestitures) in order to consummate the Recapitalization. Under the
Recapitalization Agreement, a condition to consummation of the
Recapitalization for each of Microsoft and WNI is that all consents and
approvals legally required for consummation of the Recapitalization shall have
been obtained and no temporary restraining order, preliminary or permanent
injunction, or other order or decree which prevents the consummation of the
Recapitalization or imposes material conditions with respect to the
Recapitalization shall have been issued and remain in effect.
SURRENDER OF CERTIFICATES; LOST CERTIFICATES
Microsoft has selected ChaseMellon Shareholder Services, LLC, the transfer
agent for Microsoft Common Shares, as exchange agent (the "Exchange Agent") to
effect the exchange of Certificates representing WNI Shares and WNI Warrants
in connection with the Recapitalization. Enclosed with this Proxy
Statement/Prospectus are instructions with respect to the surrender of
Certificates representing WNI Shares and WNI Warrants to be exchanged for
Exchangeable Shares or cash. Delivery will be effected, and risk of loss and
title to such certificates will pass, only upon delivery of the Certificates
to the Exchange Agent. Upon surrender to the Exchange Agent of certificates
representing WNI Shares and WNI Warrants in accordance with the instructions,
the holder thereof will be entitled to receive in exchange therefor a
certificate that represents the
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appropriate number of Exchangeable Shares or an amount of cash to which such
holder is entitled, pursuant to the Reorganization Agreement.
No fractional Exchangeable Shares will be issued in the Recapitalization. In
lieu of such issuance, all Exchangeable Shares issued to the holders of WNI
Common Shares pursuant to the Recapitalization Agreement shall be rounded to
the closest whole Exchangeable Share.
Any WNI shareholder who has lost or misplaced a Certificate for any of his
or her WNI Shares or WNI Warrants should immediately contact Bruce A. Leak,
Secretary of WNI, at WNI's principal executive offices or by telephone at
(415) 614-5502 for information regarding the procedures to be followed for
replacing the lost certificate.
AFFILIATES' RESTRICTIONS ON SALE OF SHARES
The Exchangeable Shares to be issued in the Recapitalization, and the
Microsoft Common Shares to be issued upon exchanging the Exchangeable Shares,
have been registered under the Securities Act. All Microsoft Common Shares
will be freely transferable under federal securities laws, except that such
shares received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act) of WNI prior to the Effective Time may be
resold by them only in transactions permitted by the resale provisions of Rule
145(d)(1), (2) or (3) promulgated under the Securities Act or as otherwise
permitted under the Securities Act. Rule 145(d)(1) generally provides that
"affiliates" of either WNI or Microsoft may not sell securities of Microsoft
received in the Recapitalization unless pursuant to an effective registration
statement or unless pursuant to the volume, current public information, manner
of sale and timing limitations of Rule 144 promulgated under the Securities
Act. These limitations generally require that any sales made by an affiliate
of WNI not exceed 1% of the outstanding shares of Microsoft in any three-month
period and that such sales be made in unsolicited, open market "brokers
transactions." Rules 145(d)(2) and (3) generally provide that the foregoing
limitations lapse for non-affiliates of Microsoft after a period of one or two
years, respectively. Persons who may be deemed to be affiliates of an issuer
generally include individuals or entities that control, are controlled by, or
are under common control with, such issuer and may include certain officers
and directors of such issuer as well as principal shareholders of such issuer.
Each of the Principal Shareholders of WNI have agreed not to sell their
Microsoft Common Shares except under certain circumstances, including where
such sale is permitted pursuant to Rule 145 under the Securities Act. See "The
Recapitalization and Related Transactions--Related Agreements--Affiliates
Agreement."
RECAPITALIZATION EXPENSES
Whether or not the Recapitalization is consummated, each party will bear its
own costs and expenses in connection with the Recapitalization Agreement and
the transactions contemplated thereby. Notwithstanding the foregoing, if the
Recapitalization is not consummated, Microsoft and WNI have agreed to share
equally expenses incurred in connection with printing and mailing of the
documents distributed to shareholders of WNI and the filing fee with respect
to the registration statement and this Proxy Statement/Prospectus filed with
the Commission.
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PROPOSAL II--OPTION GRANTS, OPTION ACCELERATION AND OTHER COMPENSATORY MATTERS
Without WNI shareholder approval of certain of the payments and other
consideration to be made pursuant to the Recapitalization Agreement and under
other agreements and arrangements, such payments and other consideration could
be considered "Parachute Payments" under Section 280G of the Code. If deemed
Parachute Payments, such payments and other consideration could cause adverse
tax and other consequences to WNI, WNI shareholders receiving such Parachute
Payments, WNI employees and consultants receiving Parachute Payments, and/or
Microsoft. To avoid treatment as Parachute Payments under Section 280G of the
Code, such payments must be approved by WNI shareholders holding shares
possessing more than 75% of the voting power of the outstanding WNI Shares,
computed as provided in Section 280G(b)(5)(B) of the Code and the Treasury
Regulations proposed thereunder. The determination of whether such 75%
approval requirement is met with respect to a payment is made disregarding
shares owned actually or constructively (within the meaning of Section 318 of
the Code) by or for a person who would be treated as receiving such Parachute
Payment absent such shareholder approval. Such shareholder vote must determine
the right to receive (or, in the case of a payment previously made to retain)
such payment. The individuals receiving payments and other consideration which
may be deemed Parachute Payments absent shareholder approval are employees,
independent contractors or other persons who perform services for WNI and who
are also officers, shareholders or highly-compensated employees of WNI. The
transactions which may involve Parachute Payments generally involve (i)
certain payments to be made by Microsoft under employment agreements, (ii) the
grant of certain options to purchase WNI Common Shares or Microsoft Common
Shares, and (iii) the acceleration of vesting of options to purchase shares
held by certain employees in connection with the Recapitalization. The
payments and other consideration for which approval is sought are described as
follows.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
One condition of Microsoft's obligation to effect the Recapitalization is
that Microsoft shall have received from each of the Principal Shareholders, a
duly executed Employment Agreement. The material provisions of each Employment
Agreement are common to all of the Employment Agreements. See "Proposal I--The
Recapitalization and Related Transactions--Related Agreements--Employment and
Noncompetition Agreements."
GRANT OF OPTIONS TO PURCHASE MICROSOFT COMMON SHARES
Option Grants and Acceleration
A number of WNI employees or consultants who are or could be subject to the
Parachute Payment rules described above were granted WNI Options within the
one-year period preceding the anticipated Effective Time of the
Recapitalization. In addition, certain WNI employees are entitled to
additional vesting of previously granted WNI Options upon termination of
employment without cause following a change of majority ownership or control
of WNI as described below. To the extent such WNI Option grants or additional
vesting could constitute Parachute Payments, the discussion herein discloses
the material terms thereof, and shareholder approval of each such grant or
acceleration (as applicable), as provided above, is being requested. Except as
otherwise stated, all WNI Options vest to the extent of 25% of the shares
subject to such options after one year from the applicable vesting
commencement dates and an additional 1/48 of the remaining shares at the end
of each month thereafter and are otherwise subject to the standard terms of
the WNI 1996 Stock Incentive Plan.
Furthermore, Microsoft has agreed to grant Microsoft Options following the
Closing under its 1991 Plan to certain WNI employees and consultants holding
WNI Options (or WNI Common Shares acquired upon exercise of such WNI Options
or by direct purchase) prior to the execution of the Recapitalization
Agreement. To the extent such Microsoft Options could be treated as Parachute
Payments, the material terms thereof are set forth herein and shareholder
approval as described above will be sought for such grants. In each case, the
specific numbers of shares to be subject to such Microsoft Options and the
exercise prices thereof have not yet been determined, but each such WNI
employee and consultant will be granted Microsoft Options with an aggregate
option spread (i.e., excess of fair market value of a Microsoft Common Share
as of the Closing Date over
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exercise price) equal to (i) $4.779, multiplied by (ii) the sum of the number
of WNI Common Shares owned or subject to WNI Options held by such employee
prior to the Closing. In each case, such Microsoft Options will vest in
accordance with the vesting schedule applicable to the WNI Options and/or WNI
Common Shares to which they correspond, treating the Microsoft Options as
allocated pro rata among such corresponding WNI Options and/or WNI Common
Shares.
David R. Anderson
(a) WNI Options. WNI Options to acquire 15,000 shares were granted and
commenced vesting on September 12, 1996 at an exercise price of $.50 per share
and WNI Options to acquire an additional 5,000 shares were granted on January
17, 1997 (with vesting commencing on January 16, 1997) at an exercise price of
$1.75 per share.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $454,005 will be granted following the Closing, 68.4% of which commence
vesting on December 26, 1995, 3.2% of which commence vesting on February 4,
1996, 7.4% of which commence vesting on June 14, 1996, 15.8% of which commence
vesting on September 12, 1996 and 5.3% of which commence vesting on January
16, 1997.
Jeffrey Barco
(a) WNI Options. WNI Options to acquire 35,000 shares were granted at an
exercise price of $2.50 per share on March 10, 1997 (with vesting commencing
March 3, 1997).
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $167,265 will be granted following the Closing, 100% of which commence
vesting on March 3, 1997.
Peter Barrett
(a) WNI Options. WNI Options to acquire 26,000 shares were granted at an
exercise price of $2.00 per share on February 21, 1997, with 50% of such
options vesting on May 1, 1997 and the remaining 50% of such options vesting
on August 1, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $920,760.37 will be granted following the Closing, 86.5% of which will be
fully immediately vested and 13.5% of which will vest in accordance with the
schedule set forth in (a).
Colleen Bertiglia
(a) WNI Options. WNI Options to acquire 7,500 shares were granted on January
17, 1997 at $1.75 per share, with vesting commencing January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $744,721.13 will be granted following the Closing, 85.6% of which commence
vesting on October 9, 1995, 9.6% of which commence vesting on July 5, 1996,
and 4.8% of which commence vesting on January 16, 1997.
Joseph Britt
(a) WNI Options. WNI Options to acquire 15,000 shares were granted and
commenced vesting on September 12, 1996 at $.50 per share.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $840,626.10 will be granted following the Closing, 90.1% of which commence
vesting on July 24, 1995, 1.4% of which commence vesting on June 14, 1996, and
8.5% of which commence vesting on September 12, 1996.
Tim Bucher
(a) WNI Options. WNI Options to acquire 50,000 shares were granted on
September 12, 1996 at an exercise price of $.50 per share, with vesting
commencing on September 9, 1996.
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(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $1,202,721.37 will be granted following the Closing, 66.2% of which
commence vesting on September 25, 1995, 6.0% of which commence vesting on
November 7, 1995, 7.9% of which commence vesting on February 12, 1996, and
19.9% of which commence vesting on September 9, 1996.
Cary Clark
(a) WNI Options. WNI Options to acquire 3,000 shares at an exercise price of
$.50 per share were granted and commenced vesting on September 12, 1996 and
WNI Options to acquire an additional 1,000 shares at $1.75 per share were
granted on January 17, 1997 and commenced vesting on January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $425,331 will be granted following the Closing, 95.5% of which commence
vesting on October 30, 1995, 3.4% of which commence vesting on September 12,
1996 and 1.1% of which commence vesting on January 16, 1997.
Richard Daley
(a) WNI Options. WNI Options to acquire 15,000 shares were granted and
commenced vesting on September 12, 1996 at an exercise price of $.50 per
share, WNI Options to acquire an additional 3,000 shares were granted on
January 17, 1997 and commenced vesting on January 16, 1997 at an exercise
price of $1.75 per share, and WNI Options to acquire an additional 20,000
shares were granted on March 10, 1997 and commenced vesting on March 7, 1997
at an exercise price of $2.50 per share.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $898,452 will be granted following the Closing, 79.8% of which commence
vesting on October 2, 1995, 8.0% of which commence vesting on September 12,
1996, 1.6% of which commence vesting on January 16, 1997, and 10.6% of which
commence vesting on March 7, 1997.
Valerie Gardner
(a) WNI Options. WNI Options to acquire 15,000 shares were granted on
January 17, 1997 at an exercise price of $1.75 per share, with vesting
commencing January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $789,070.25 will be granted following the Closing, 67.3% of which commence
vesting on September 18, 1995, 9.1% of which commence vesting on April 25,
1996, 14.5% of which commence vesting on July 5, 1996 and 9.1% of which
commence vesting on January 16, 1997.
Zara Tepper Haimo
Microsoft Options having an aggregate option spread of $645,165 will be
granted following the Closing, 100% of which commence vesting on May 16, 1996.
William C. Herman
(a) WNI Options. WNI Options to acquire 25,000 shares were granted on
January 17, 1997 at an exercise price of $1.75 per share, with vesting
commencing January 16, 1997. Although such options, together with WNI Options
to acquire 200,000 shares which were granted on June 26, 1996 and commenced
vesting on June 24, 1996 at an exercise price of $.16 per share, normally vest
on the standard schedule noted above, in the event that his employment is
terminated without cause or his base salary or primary responsibilities are
substantially changed as a result of a change in majority ownership or control
of WNI, Mr. Herman is entitled to receive one year's additional vesting of his
options. Shareholder approval is being sought for the entire January 17, 1997
option grant and for the right to the one year's additional vesting under the
June 26, 1996 option grant.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $1,075,275 will be granted following the Closing, 88.9% of which commence
vesting on June 24, 1996 and 11.1% of which commence vesting on January 16,
1997.
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William Keating
(a) WNI Options. WNI Options to acquire an aggregate of 400,000 shares were
granted on June 26, 1996 at an exercise price of $.16 per share, with 300,000
shares commencing vesting on May 15, 1996 and 100,000 shares commencing
vesting on June 1, 1996. Although such options normally vest on the standard
schedule noted above, in the event that his employment is terminated without
cause as a result of a change in majority ownership or control of WNI Mr.
Keating is entitled to receive one year's additional vesting of his options.
Shareholder approval is being sought solely for the right to the one year's
additional vesting.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $1,911,600 will be granted following the Closing, 75% of which commence
vesting on May 15, 1996 and 25% of which commence vesting on June 1, 1996.
Randy Komisar
(a) WNI Options. WNI Options to acquire 75,000 shares were granted on
January 17, 1997 at an exercise price of $1.75 per share, with vesting
commencing January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $955,800 will be granted following the Closing, 62.5% of which commence
vesting on March 18, 1996, and 37.5% of which commence vesting on January 16,
1997.
Sam Klepper
(a) WNI Options. WNI Options to acquire 25,000 shares were granted on
October 25, 1996 at an exercise price of $.75 per share with vesting
commencing October 14, 1996, and WNI Options to acquire an additional 2,500
shares were granted on January 17, 1997 at an exercise price of $1.75 per
share with vesting commencing January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $131,422.50 will be granted following the Closing, 90.9% of which commence
vesting on October 14, 1996 and 9.1% of which commence vesting on January 16,
1997.
Herb Maeder
Microsoft Options having an aggregate option spread of $585,788.37 will be
granted following the Closing, 93.6% of which commence vesting on September
18, 1995, 4.0% of which commence vesting on February 4, 1996, and 2.4% of
which commence vesting on June 14, 1996.
John Matheny
(a) WNI Options. WNI Options to acquire 25,000 shares were granted and
commenced vesting at an exercise price of $.50 per share on September 12,
1996, and WNI Options to acquire an additional 4,000 shares were granted at an
exercise price of $1.75 per share on January 17, 1997, with vesting commencing
January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $888,894 will be granted following the Closing, 80.6% of which commence
vesting on August 28, 1995, 1.1% of which commence vesting on February 4,
1996, 2.7% of which commence vesting on June 14, 1996, 13.4% of which commence
vesting on September 12, 1996 and 2.2% of which commence vesting on January
16, 1997.
Paul McCabe
(a) WNI Options. WNI Options to acquire 10,000 shares at an exercise price
of $.50 per share were granted and commenced vesting on September 12, 1996,
and WNI Options to acquire an additional 3,000 shares at an exercise price of
$2.00 per share were granted on February 21, 1997 and commenced vesting on
February 18, 1997.
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(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $253,287 will be granted following the Closing, 75.5% of which commence
vesting on May 13, 1996, 18.9% of which commence vesting on September 12,
1996, and 5.7% of which commence vesting on February 18, 1997.
Lee Mighdoll
(a) WNI Options. WNI Options to acquire 25,000 shares were granted and
commenced vesting at an exercise price of $.50 per share on September 12,
1996, and WNI Options to acquire an additional 4,000 shares were granted at an
exercise price of $1.75 per share on January 17, 1997 and commenced vesting on
January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $912,789 will be granted following the Closing, 78.6% of which commence
vesting on August 28, 1995, 3.1% of which commence vesting on February 4,
1996, 3.1% of which commence to vest on June 14, 1996, 13.1% of which commence
vesting on September 12, 1996, and 2.1% of which commence vesting on January
16, 1997.
Kevin Neeson
(a) WNI Options. WNI Options to acquire 10,000 shares of WNI Common Stock at
an exercise price of $.50 per share were granted and commenced vesting on
September 12, 1996, and WNI Options to acquire an additional 1,500 shares at
an exercise price of $2.00 per share were granted on February 21, 1997 and
commenced vesting on February 18, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $270,013.50 will be granted following the Closing, 79.6% of which commence
vesting on December 28, 1995, 17.7% of which commence vesting on September 12,
1996, and 2.7% of which commence vesting on February 18, 1997.
Keith Ohlfs
(a) WNI Options. WNI Options to acquire 16,000 shares were granted and
commenced vesting on September 12, 1996 at an exercise price of $.50 per
share.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $506,574 will be granted following the Closing, 66.0% of which commence
vesting on August 28, 1995, 18.9% of which commence vesting on April 1, 1996,
and 15.1% of which commence to vest on September 12, 1996.
Albert Pimentel
(a) WNI Options. WNI Options to acquire 400,000 shares were granted and
commenced vesting on November 4, 1996 at an exercise price of $1.00 per share.
Although his options generally vest on the standard schedule noted above, in
the event that his employment is terminated without cause as a result of a
change in majority ownership or control of WNI Mr. Pimentel is entitled to
receive one year's additional vesting of his options. Shareholder approval is
being sought for the entire option grant as well as the additional vesting.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $1,911,600 will be granted following the Closing, 100% of which commence
vesting on November 4, 1996.
Andrew E. Rubin
(a) WNI Options. WNI Options to acquire 7,000 shares at an exercise price of
$.50 per share were granted and commenced vesting on September 12, 1996, WNI
Options to acquire an additional 3,000 shares at an exercise price of $1.75
per share were granted on January 17, 1997 and commenced vesting on January
16, 1997, and WNI Options to acquire an additional 5,000 shares at $2.50 per
share were granted on March 10, 1997 and commenced vesting on March 7, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $296,298 will be granted following the Closing, 56.5% of which commence
vesting on February 5, 1996, 19.4% of which commence
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vesting on June 14, 1996, 11.3% of which commence vesting on September 12,
1996, 4.8% of which commence vesting on January 16, 1997, and 8.1% of which
commence vesting on March 7, 1997.
Carol Sacks
(a) WNI Options. WNI Options to acquire 20,000 shares at an exercise price
of $2.50 per share were granted and commenced vesting on March 10, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $95,580 will be granted following the Closing, 100% of which commence
vesting on March 10, 1997.
Christopher White
(a) WNI Options. WNI Options to acquire 12,000 shares at an exercise price
of $.50 per share were granted and commenced vesting on September 12, 1996.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $802,872 will be granted following the Closing, 89.7% of which commence
vesting on August 28, 1995, 1.1% of which commence vesting on February 4,
1996, 2.3% of which commence vesting on March 18, 1996, and 6.9% of which
commence vesting on September 12, 1996.
Larry Yang
Microsoft Options having an aggregate option spread of $301,077 will be
granted following the Closing, 95.2% of which commence vesting on January 15,
1996 and 4.8% of which commence vesting on June 14, 1996.
William Yundt
(a) WNI Options. WNI Options to acquire 25,000 shares were granted at an
exercise price of $1.75 per share on January 17, 1997 and commenced vesting on
January 16, 1997.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $836,325 will be granted following the Closing, 85.7% of which commence
vesting on June 3, 1996, and 14.3% of which commence vesting on January 16,
1997.
Thomas Ziola
(a) WNI Options. WNI Options to acquire 15,000 shares were granted at an
exercise price of $2.50 per share on March 10, 1997, with vesting commencing
December 12, 1995.
(b) Microsoft Options. Microsoft Options having an aggregate option spread
of $716,850 will be granted following the Closing, 100% of which commence
vesting on December 12, 1995.
Other Payments
WNI has agreed to pay Asia Pacific Ventures Co. an aggregate of $600,000
over a period of 12 months as additional consideration for services previously
rendered by that firm to WNI and granted that firm a fully vested option to
purchase 10,000 shares of WNI Common Stock at an exercise price of $2.50 per
share on March 10, 1997. Shareholder approval is being sought for all of the
foregoing amounts.
WNI BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF WNI HAS DETERMINED THAT THE OPTION GRANTS, OPTION
ACCELERATION AND OTHER COMPENSATORY MATTERS ARE IN THE BEST INTERESTS OF WNI
AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE OPTION GRANTS, OPTION ACCELERATION AND OTHER COMPENSATORY
MATTERS.
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WNI'S BUSINESS
GENERAL
WNI offers an on-line service that enables consumers to experience the
Internet through their televisions. WNI has developed a set-top terminal (the
"WebTV set-top terminal") that attaches to a television and telephone line and
enables consumers to access WNI's subscription-based on-line service (the
"WebTV Network"). WNI licenses the design for its set-top terminal to consumer
electronics manufacturers, currently Sony Electronics ("Sony"), Philips
Consumer Electronics ("Philips") and Pace Microtechnology ("Pace"), who offer
the set-top terminal to consumers, while WNI operates the WebTV Network. By
attempting to reduce the cost and complexity barriers to Web access, WNI's
goal is to make the Internet available to a wider audience than has previously
been possible.
PRODUCTS, SERVICES AND TECHNOLOGY
WNI offers an Internet on-line service that can be accessed by consumers via
the WebTV set-top terminal which connects to a television and a telephone
line. Once the WNI set-top terminal is connected, the user pays a flat monthly
fee (currently $19.95/month) for unlimited access to the Internet via the
WebTV Network, which performs all of the underlying operations necessary to
provide the consumer with access to the Internet. In addition, the WebTV
Network offers the user a remote-controlled browser, an e-mail interface and
aggregated content. WNI's solution for connecting consumers to the Internet
via a television and a telephone line is composed of the WNI set-top terminal
and the WebTV Network.
The WebTV Set-Top Terminal
The WebTV set-top terminal connects to a television and a telephone line to
enable the user to access the Internet via the WebTV Network. In addition to
the power cord, the set-top terminal has two cables: one connects to the
consumer's television (or VCR), and the other plugs into the telephone line.
The front panel of the set-top terminal is equipped with an infrared receiver
for the remote control, a smart card slot, and three different LED displays: a
POWER LED to indicate when the terminal is on or off, a CONNECTED LED to
indicate when the terminal is connecting to the WebTV Network or receiving new
information, and a MESSAGE LED to indicate when the user has unread e-mail.
The back panel of the set-top terminal comes with several ports for optional
enhancements, including a S-video connector, a keyboard connector for standard
PC keyboards, audio and video out connectors, and an RF out DC connector for
use with an RF adaptor. The WebTV set-top terminals incorporate the following
features:
. SIMPLE INSTALLATION AND OPERATION: The WebTV set-top terminal utilizes
standard electrical and telephone connections to enable consumers to
attach the unit to a television and telephone line. Once the WebTV set-up
terminal is connected to the television and telephone line, the user
turns the unit on by pressing the power button on the remote control,
bringing up a brief on-screen registration form, which includes name,
address, phone number, credit card information and preference
information.
. HIGH RESOLUTION VIEWING: WNI has developed TVLens technology which
reduces the interlace flicker and blurring which has traditionally been
associated with the projection of computer-based images onto a television
monitor. In addition, WNI's Worldscan technology formats Web content to
help optimize appearance in all television broadcast standards.
. CALL-WAITING COMPATIBILITY: The WebTV set-top terminal allows a user to
receive incoming telephone calls when the set-top terminal is used on a
telephone line that is equipped with a standard call-waiting service.
Thus, when a user receives an incoming call while browsing the World Wide
Web (the "Web"), the WebTV set-top terminal automatically disconnects and
allows the user to answer the call. Upon completion of the incoming
telephone call, the set-top terminal automatically reconnects the user to
the same Web page that he or she was visiting prior to the call. This
function is provided by WNI's LineShare technology but can be disabled if
uninterrupted Web browsing is desired.
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. BROWSING SPEED AND RELIABILITY: WNI utilizes a variety of hardware,
software and network technologies to provide consumers with fast and
reliable Internet access, Web-based content and e-mail communication. The
WebTV set-top terminal comes standard with a 33.6 Kbps v.34bis modem.
Browsing speed is enhanced through the use of advanced caching, the
process of storing popular Web content on the WebTV Network and
delivering it directly in response to user requests rather than requiring
the user to retrieve the information from the original Web site. In
addition, WNI employs network management technology that connects the
user to any one of several alternative ISPs to help provide a reliable
and efficient connection to the Internet even if a particular ISP's
network is overloaded or shut down.
. REMOTE CONTROL: The WebTV set-top terminal comes standard with a
television-like remote control for interface with the WebTV Network. In
addition, the remote control can access the WebTV Network's on-line
keyboard which allows users to enter characters for a particular
universal resource locator ("URL"), conduct Web searches or create short
e-mail messages. The remote control also serves as a standard television
remote control for basic operation of a user's television, including
volume and channel selection for most standard makes or models, as well
as allowing the user to switch between the WebTV Network and regular
television.
. INFRARED KEYBOARD (OPTIONAL): Consumers may purchase a wireless keyboard
sold as an optional accessory for approximately $70 that contains similar
keys and browsing functions as the remote control, as well as offering
the data entry functionality of a traditional computer keyboard.
. SMART CARD CAPABILITIES: A smart card reader is built into the face of
the WebTV set-top terminal. The initial implementation of the smart
card's capabilities will be limited to enabling consumers to use smart
cards to access their own WebTV Network accounts through any WebTV set-
top terminal. As electronic commerce becomes more common, the uses of
smart cards with the WebTV set-top terminal may expand.
. UPGRADING OF WEBTV SET-TOP TERMINALS AND CLIENT SOFTWARE: The WebTV
Network's applications framework supports applications download and
upgrades. Thus, existing applications can be upgraded and entirely new
applications can be delivered on-line to existing users.
The WebTV Network
The WNI Network is accessed through the set-top terminal and consists of
three primary components: user interface and functionality, network content
and features, and network operations technology.
USER INTERFACE AND FUNCTIONALITY
WNI designed the WebTV browser for consumer viewing on a television by
incorporating certain video techniques such as scrolling screens to indicate
vertical page movement and fading to new pages as well as substantially
eliminating certain effects such as the piecemeal construction of Web pages
typical of PC-based browsers, resizable windows and horizontal scroll bars.
The WebTV browser resides on the set-top terminal, but is periodically
upgraded through the WebTV Network. The WebTV browser is compatible with HTTP,
MIME, HTML 3.0 and nearly all Netscape Navigator 3.0 and Microsoft Internet
Explorer 3.0 extensions. In addition, the WebTV Network offers an on-line Help
function which guides users through certain aspects of the browsing process
and introduces the user to certain of the WebTV Network's features.
The WebTV Network includes features designed to help integrate the Web into
the user's everyday life. The WebTV Network provides for up to five users per
household by assigning each user a WebTV "account." Each account has a
personal Internet e-mail address and customized settings and may be protected
by a password. Parental control options utilizing SurfWatch software are
provided for children's accounts, enabling concerned parents to block access
to inappropriate content and e-mail from strangers. It is possible for each
user to save selected Web site locations in a personalized "Favorites"
location. "Favorites" saves not only the site address but also a miniature
view of the page, so individual subscribers can see an overview of their
preferred sites and readily return to such sites in the future.
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In addition, the WebTV Network allows consumers to experience some of the
Web's multimedia functionality, including general MIDI-compatibility with
enhanced eMIDI instrument download capability, studio-quality video MPEG 1 and
2 audio compatibility, JPEG, GIF89a animation, and RealAudio compatibility.
NETWORK CONTENT AND FEATURES
The WebTV Network acts primarily as a content aggregator, attempting to
provide an organizational structure that aids in locating content on the Web.
To locate relevant content for its users, WNI's editorial staff reviews and
culls information from the millions of sites that are already available on the
Web.
The WebTV Network currently offers basic services, including unlimited
access to the Web for a single monthly subscription price. Key features of the
WebTV Network's basic services include the following:
. The WebTV Home Page. The first page seen by the user of the WebTV Network
is the WebTV home page. Represented on the WebTV home page are icons that
symbolize the Explore Directory, the search feature, the mail service,
Around Town, and "Favorites." The body of the Home Page also contains a
selection of icons with links to certain sites on the Web.
. Explore Directory. WNI's editorial staff locates high quality, engaging
and pertinent content from the Web and organizes it for WebTV Network
subscribers into a topical directory called Explore. This "best of"
directory currently includes a substantial number of Web sites and
provides assistance to the consumer by categorizing information into
subject areas such as news, entertainment, sports and travel and then
makes selections for the directory from among the best Web sites that
WNI's editorial staff has discovered.
. Around Town. WNI's editorial staff aggregates local content in an area of
the network called "Around Town." This area is currently available with
limited functionality which WNI intends to enhance over time.
. Search Capability. The WebTV Network subscribers can search the Web
through third-party Web search technology that is integrated into the
WebTV Network. This search capability allows users to search for Web
sites for information on selected topics by key words input by the user.
WNI currently has an agreement with Excite, Inc. ("Excite") for the
incorporation of a modified version of Excite's Internet search engine
into the WebTV Network.
. E-mail. The WebTV Network has e-mail capability called "Mail." Users can
send HTML and multimedia enhanced messages to, and receive messages from,
anyone with an address on the Internet. In addition, subscribers to the
WebTV Network are allocated designated storage space on the WebTV Network
in order to save e-mail messages for future reference. The WebTV set-top
terminal will also indicate to the user when Mail has arrived through a
LED display on the outside of the box. The WebTV Network allows a user to
type a message or a URL using either the software keyboard controlled by
the remote control, the optional infrared keyboard, or a standard PC
keyboard plugged into the set-top terminal.
NETWORK OPERATIONS TECHNOLOGY
WNI's network operations are based in WNI's facilities located in Palo Alto,
California. The technology utilized by the WebTV Network includes the
following:
. Internet Access and Load-Balancing Technology: The WebTV Network provides
users with Internet access service through the use of multiple ISP
relationships which currently provides Internet connectivity to
approximately 90% of the United States, as well as redundant access in
certain major metropolitan areas. WNI currently utilizes a number of
different ISPs in providing Internet access to its subscriber base. WNI's
network management technology enables the WebTV Network to perform load
balancing among various ISPs and to employ a form of least-cost routing
across multiple ISPs.
. Proxy Caching: WNI's TransCache technology caches, transcodes, reformats,
streams and reorders Web data from individual Web sites for downloading
to the user's set-top terminal. The WebTV Network
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determines the timing for content updates from standard periodicity data
incorporated in many Web sites or from learning algorithms where the
periodicity data is not included. The WebTV Network currently has many Web
pages cached on its servers resulting in a substantial number of user
requests for Web data being downloaded directly from WNI's servers rather
than from the original web site.
. Modular Scalablity: WNI currently maintains the WebTV Network through the
use of multiple workstations. The WebTV Network is designed so that it
can be scaled to accommodate increased volumes of activity by adding
additional workstations to WNI's existing inventory.
. Security Encryption: Client/server encryption technology is employed to
help maintain a secure connection between the WebTV Network server and
the WebTV set-top terminal client.
SALES, MARKETING AND DISTRIBUTION
To aid in its sales, marketing and distribution efforts, WNI has entered
into relationships with Sony, Philips and Pace which contemplate the
manufacture, marketing and distribution of the WebTV set-top terminal. The
relationships with these consumer electronics licensees are designed to enable
the consumer electronics licensees to leverage their consumer brand names and
mass market distribution channels, and to provide direct product advertising
and marketing in order to sell their specific branded product. WNI supplements
this effort with its own marketing of the WebTV brand name.
WNI has granted Sony, Philips and Pace non-exclusive licenses to WNI's
technology for incorporation into the WebTV set-top terminals they manufacture
and distribute. In addition, WNI and each of such licensees have agreed to
cooperate with respect to the development of product enhancements, as well as
joint marketing efforts.
The WebTV set-top terminal is distributed primarily through the normal
consumer electronics distribution channels to retail stores by the consumer
electronics licensees. WNI complements this distribution effort by installing
the WebTV Network for demonstration purposes and training the dealers to
demonstrate the use of the WebTV Network.
MANUFACTURING
WNI expects that manufacture of its set-top terminals will be performed by
its consumer electronics licensees. To facilitate timely introduction of the
WebTV set-top terminal, portions of the set-top terminal have been
manufactured under WNI's supervision in Sunnyvale, California pursuant to
purchase orders from Sony and Philips. It is WNI's intention to transition
responsibility for manufacturing operations to its consumer electronics
licensees in the future.
CUSTOMER SERVICE
WNI has retained a third-party customer service and technical support
organization to provide first-level customer support services to subscribers
to the WebTV Network. Complex customer support issues that cannot be addressed
by the third-party customer service organization are escalated to WNI's
internal customer care team. The third-party customer service organization and
the internal WNI customer care team respond to customer service and technical
support issues received via e-mail or telephone. The third-party customer
service organization also offers pre-subscription support to potential WebTV
Network subscribers who are contemplating the purchase of a WebTV set-top
terminal.
PROPRIETARY TECHNOLOGY
WNI's proprietary hardware and client and network software incorporate a
number of technologies designed to simplify and enhance the process of
experiencing the Internet through a television set and telephone line. WNI's
principal proprietary technologies are described briefly below.
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Hardware
WNI's custom designed ASIC uses WNI's TVLens image enhancement technology to
reduce interlace flicker, without blurring, while perceptually enhancing image
detail. WNI's ASIC utilizes custom PhosphoRam on-the-fly image decompression
technology, minimizing memory consumption, and thereby reducing the set-top
terminal's need for additional and costly RAM devices.
WNI's LineShare technology allows incoming calls to be received by a WebTV
Network subscriber while the WebTV Network is on a call-waiting-equipped phone
line. LineShare also automatically determines whether other extensions of a
shared telephone line are active, and prevents network activation when such
extensions are in use.
WNI also offers universal remote control with One Thumb Browsing technology.
This WebTV set-top terminal technology allows the user to navigate between
hypertext links in Web pages displayed on the user's television screen, view
Web pages, as well as download and listen to audio files (through the
television's speakers) all by way of a remote control device similar to the
typical television set remote control unit.
Client Software
The WNI browser is compatible with HTTP, MIME, HTML 3.0 and virtually all
Netscape Navigator 3.0 and Microsoft Internet Explorer 3.0 extensions,
producing quality television images from virtually all Web pages. WNI browser
software is implemented in the processing system housed in the WebTV set-top
terminal to facilitate communications over a wide-area network among the WebTV
set-top terminal client and one or more servers. Document prefetching is used
to enhance system responsiveness. Additionally, the WebTV browser enables
secure, MIME-compatible, multimedia e-mail with graphics and sound capability
and Flash ROM auto-update technology keeps the WebTV browser current with the
latest HTML expansions and plug-ins.
Network System Software
WNI's TransCache technology caches, transcodes, reformats, compresses,
streams and reorders Web site data for optimal download to the set-top
terminal. TransCache first examines an HTML data stream for compressibility.
If compressible, the data stream is then attached to a compression stream, and
compression is performed immediately to generate a compressed data stream. The
compressed data stream is transmitted continuously as it is generated, as an
HTML stream, improving the speed and reliability of WebTV Network data
traffic. WNI's client/server encryption software maintains a secure connection
between the WebTV Network server and set-top terminal using a physically
secure channel.
WNI's other network technologies include MessageWatch and AutoAccess.
MessageWatch technology periodically wakes up the set-top terminal when it is
off-line, dials in and checks for new e-mail and lights a message LED on the
set-top terminal, which notifies the user of new mail. AutoAccess technology
automatically determines local access numbers for optimal Internet access
providers.
PATENTS, COPYRIGHTS AND TRADEMARKS
WNI regards its patents, copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success and WNI relies
upon patent law, copyright law, trademark law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
licensees and others to protect its proprietary rights. WNI has filed United
States and foreign patent applications relating to its hardware, client
software and network system software inventions. WNI pursues the registration
of its copyrights and trademarks in the United States and internationally.
Effective patent, copyright, trademark and trade secret protection may not be
available in every country in which WNI's products and services are
distributed or made available through the Internet. There can be no assurance
that any pending registration or application will be granted or that the
denial of any such registration or application would not have a material
adverse effect on WNI's business.
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WNI has in the past, and it expects that it may in the future, license
elements of its distinctive trademarks, trade dress and similar proprietary
rights to third parties. Although WNI attempts to ensure that the quality of
its brand is maintained by such licensees, no assurances can be given that
such licensees will not take actions that might materially and adversely
affect the value of WNI's proprietary rights or the reputation of its products
and services, either of which could have a material adverse effect on WNI's
business.
There can be no assurance that the steps taken by WNI to protect any of its
proprietary rights will be adequate or that third parties will not infringe or
misappropriate WNI's patents, copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there has been substantial litigation in the
technology industry regarding rights to intellectual property, and WNI is
subject to the risk of claims against it for alleged infringement of the
intellectual property rights of others. The existence of any such claim by a
third party may not become known to WNI until well after it has committed
significant resources to the development of a potentially infringing product.
From time to time, WNI has received claims that it has infringed third
parties' intellectual property rights, and there is no assurance that third
parties will not claim infringement by WNI in the future. Any such claims,
with or without merit, could be time-consuming, result in costly litigation,
cause product shipment delays, or require WNI to enter into royalty or
licensing agreements, any of which could have a material adverse effect on
WNI. There can be no assurance that such royalty or licensing agreements, if
required, will be available on terms acceptable to WNI, or at all.
COMPETITION
The business of providing Internet access services is new, extremely
competitive, rapidly evolving and subject to rapid technological change. WNI
expects that such competition will intensify significantly in the near future.
A large number of companies are developing or have introduced devices and
technologies to facilitate access to the Internet via a television. Such
competitors include suppliers of low-cost Internet access technologies, such
as "network computer" devices promoted by Oracle and others, "set top" boxes
developed by Scientific Atlanta and others, the Apple Pippin, the Viewcall
Webster and devices that are proposed or under development by, companies such
as Navio and Diba, as well as video game devices that provide Internet access
such as the Sega Saturn, the Sony Playstation and the Nintendo 64. In
addition, manufacturers of television sets have announced plans to introduce
Internet access and Web browsing capabilities into their products or through
set-top boxes, using technology supplied by NetChannel, Diba and others.
Personal computer manufacturers such as Gateway 2000 are introducing PCs that
offer full-fledged television viewing combined with Internet access. Operators
of cable television systems also plan to offer Internet access in conjunction
with cable service. WNI also competes with internet service providers, such as
AT&T, MCI, the RBOCs, Netcom and others, and commercial on-line services such
as AOL, Compuserve, ICTV and @Home, Inc. There can be no assurance that WNI's
competitors will not develop Internet access products and services that are
superior to, and priced competitively with, those of WNI, thereby achieving
greater market acceptance than WNI's offerings. Many of WNI's existing
competitors, as well as potential competitors, have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than WNI.
In addition, certain of WNI's current and prospective competitors may be
acquired by, receive investments from or enter into other commercial
relationships with larger, more well-established and well-funded companies.
Such competition could have a material adverse effect on WNI's business,
operating results and financial condition.
WNI believes that the principal competitive factors in its business are
quality and variety of content, consumer acceptance, reliability, ease of use
and installation, technological superiority, brand recognition, product
timing, third party manufacturing and distribution relationships and price.
Although WNI believes that its products and services compete favorably with
respect to the factors outlined above, there can be no assurance that WNI will
be able to compete successfully against current or future competitors or that
the competitive pressures faced by WNI will not have a material adverse effect
on WNI's business, operating results and financial condition.
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EMPLOYEES
As of March 31, 1997, WNI had 215 employees, including 85 in engineering and
product development, 20 in network operations, 18 in customer care, 41 in
marketing and sales, 14 in content/editorial and 37 in finance and
administration.
None of WNI's employees is represented by a labor organization, and WNI is
not a party to any collective bargaining agreement. WNI has never had any
employee strike or work stoppage and considers its relations with its
employees to be good.
FACILITIES
WNI's headquarters, including its executive offices, network operations
center, and engineering, marketing and sales facilities are located in Palo
Alto, California, in six buildings occupying approximately 45,000 square feet.
WNI occupies these facilities under leases that expire in one to five years
and provide options for up to an additional one to five years. WNI believes
that its existing facilities are adequate to meet its requirements for the
foreseeable future and that suitable additional or substitute space will be
available as needed.
LEGAL PROCEEDINGS
From time to time WNI has been, and expects to continue to be, subject to
legal proceedings and claims in the ordinary course of its business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by WNI and its licensees. Such claims, even
if not meritorious, could result in the expenditure of significant financial
and managerial resources.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WNI, which was formed in June 1995, operates an on-line service that enables
consumers to experience the Internet through their televisions. From its
inception to September 1996, WNI's activities related primarily to recruiting
personnel, raising capital and developing technology for the WebTV set-top
terminal and the WebTV Network. In October 1996, WNI delivered initial
shipments of the WebTV set-top terminal through its consumer electronics
licensees and activated the WebTV Network.
Though WNI licenses the WebTV set-top terminal reference design to consumer
electronics manufacturers, it expects its revenues and profits to be derived
from the WebTV Network. WNI expects that its future revenues will be derived
predominantly from monthly subscription fees to the WebTV Network as well as
from the sale of advertising space on the WebTV Network.
WNI has an extremely limited operating history. WNI's business must be
considered in light of the risks, expenses and problems frequently encountered
by companies in their early stage of development, particularly companies in
new and rapidly evolving markets, such as the Internet. The market for WNI's
products and services has recently begun to develop, is rapidly evolving and
is characterized by an increasing number of market entrants with products and
services for use on the Internet. As a result, WNI's mix of products and
services may undergo substantial changes as WNI reacts to competitive and
other developments in the overall Internet market. WNI has recorded limited
revenues to date, has incurred net losses since inception and expects to
continue to operate at a loss in the near term. As of March 31, 1997, WNI had
an accumulated deficit of approximately $46.0 million.
As a result of WNI's extremely limited operating history, WNI has no
meaningful historical financial data upon which to base planned operating
expenses. Accordingly, WNI's expense levels are based in part on its
expectations as to future revenues, particularly future subscriber and
advertising revenues. WNI's expenses to a large extent are fixed. As a result,
any significant shortfall in revenues, whether caused by less than expected
growth in subscribers and subscription revenues or the failure to obtain
paying advertisers, would have an immediate adverse impact on WNI's business,
results of operations and financial condition. In addition, WNI plans to
significantly increase its operating expenses. WNI expects to experience
significant fluctuations in future quarterly operating results and believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as any indication of
future performance.
RESULTS OF OPERATIONS
Amounts from inception (June 30, 1995) to March 31, 1996 are not comparable
to the amounts for the year ended March 31, 1997 due to the different duration
of the periods and the acceleration of WNI's activities and related expenses
throughout fiscal 1997.
REVENUES
WNI derives its revenues principally from on-line service, licenses and
manufacturing. On-line service revenue consists primarily of fees charged to
subscribers to the WebTV Network, which are recognized when services are
provided. Advance payments for on-line services are deferred until the
services are provided. Manufacturing revenue, which is described below, is
recognized at the time the product is shipped. License revenue consists of
certain fees paid by licensees and is recognized ratably over the term of the
license agreements. Prepayments from licenses are deferred until the related
product is shipped.
LICENSING AND MANUFACTURING REVENUES
Licensing and manufacturing revenues were approximately $38.9 million for
the year ended March 31, 1997. These revenues were primarily derived from
WNI's activities in coordinating the manufacture of the first
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release of the WebTV set-top terminal for WNI's consumer electronics licensees
during the second half of fiscal year 1997. WNI does not anticipate recording
significant revenue for manufacturing-related activities beyond June 30, 1997.
For the year ended March 31, 1997, two licensees represented 61% and 39% of
licensing and manufacturing revenues. These revenues were effectively recorded
at WNI's cost and therefore WNI's gross profit on these sales was nominal.
ON-LINE SERVICE REVENUES
In conjunction with the distribution of the WebTV set-top terminal, WNI
launched the WebTV Network. For the year ended March 31, 1997, WNI recorded
approximately $3.5 million of revenue from the WebTV Network. Substantially
all of the on-line service revenue recorded to date is from on-line service
subscription fees. WNI expects to derive the principal portion of its future
revenues from the operation of the WebTV Network. These revenues currently
include subscription fees and limited advertising revenues and may include
transaction fees and pay per use services in the future.
COST OF REVENUES
Cost of licensing and manufacturing revenues consists of the associated
component and labor costs of the manufactured goods sold to WNI's licensees.
Cost of licensing and manufacturing revenues was approximately $37.0 million
for the year ended March 31, 1997.
Cost of on-line service revenues consist of expenses related to the
maintenance and support of the WebTV Network, data communications costs,
customer support costs and royalties and commissions paid to information and
service providers and licensees. Data communications costs are affected
primarily by the number of subscribers and the amount of time those
subscribers use the WebTV Network. Customer support costs, which consist
primarily of employee costs, costs of contracted personnel and communication
costs, are affected primarily by the number of existing and new subscribers in
any particular period. Cost of on-line service revenues for the year ended
March 31, 1997 was approximately $12.4 million.
OPERATING EXPENSES
WNI's operating expenses have increased significantly since WNI's inception
as a result of growth in the costs associated with technology development and
efforts to commercialize WNI's products and services. WNI believes that
continued expansion of its operations will be essential to enhance and extend
the WebTV brand, deliver products and services to targeted markets and expand
WNI's subscriber and advertising base. Accordingly, WNI expects to incur
increased expenses in all operating areas.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries, consulting
fees, materials, depreciation and facilities to support product and network
development. WNI incurs development costs for the design of hardware and
software contained in the WebTV set-top terminal, development of network
service software and development of network programming. Research and
development expenses were approximately $11.3 million for the year ended March
31, 1997, as compared to $2.1 million for the period from inception to March
31, 1996. To date, all software development costs have been expensed as
incurred. WNI believes that significant investments in research and
development are required to remain competitive in the markets it is serving.
Accordingly, WNI intends to increase the absolute amount of its research and
development expenditures in the future.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, consulting fees
and costs of public relations services, advertising and marketing literature.
Sales and marketing expenses were approximately $18.7 million for the year
ended March 31, 1997, as compared to $259,000 for the period from inception to
March 31, 1996. WNI intends to increase the level of sales and marketing
activity in future periods to build WNI's brand value and develop future
revenue sources.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries,
professional services and legal fees. General and administrative expenses were
approximately $6.5 million for the year ended March 31, 1997, as compared to
$853,000 for the period from inception to March 31, 1996. WNI intends to
increase the level of general and administrative expenses to support its
operational growth, its efforts to develop strategic business relationships
and its plans for securing its intellectual property rights.
INCOME TAXES
At March 31, 1997, WNI had federal net operating loss carry forwards of
approximately $43.1 million. The federal net operating loss carry forwards
will expire beginning in 2011 through 2012, if not utilized. An ownership
change, as defined in the Tax Reform Act of 1986, may restrict the utilization
of carry forwards. A valuation allowance has been recorded for the entire
deferred tax asset as a result of uncertainties regarding the realization of
the asset due to the lack of earnings history of WNI. See Note 7 of Notes to
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1997, WNI has financed its operations and
met its capital expenditure requirements primarily from proceeds of the
private sale of equity securities totaling approximately $60.6 million and
equipment leasing activities.
Operating activities used cash of approximately $32.6 million for the year
ended March 31, 1997. The net cash used during this period was primarily due
to the net loss and the increase in accounts receivable and inventory, which
were partially offset by increases in accounts payable, accrued liabilities
and deferred revenue. Investing activities used net cash of approximately $3.6
million during the year ended March 31, 1997 to purchase equipment to support
WNI's business and develop the infrastructure for the WebTV Network. Financing
activities generated cash of approximately $52.4 million during the year ended
March 31, 1997 primarily from the issuance of WNI Preferred Shares.
At March 31, 1997, WNI's principal commitments consisted of obligations
under operating and capital leases of approximately $13.0 million. Future
capital expenditures are anticipated to be primarily for facilities and
equipment to support expansion of the WebTV Network, business operations and
management information and internal network systems. Although WNI has no
material capital commitments, WNI anticipates that its planned purchases of
capital equipment in fiscal year 1998 will require additional expenditures of
approximately $20 million to $25 million, a portion of which may be financed
through capital equipment leases. Additionally, WNI believes that it is likely
that WNI will enter into a joint venture with Fujitsu Limited ("Fujitsu"). The
parties are currently negotiating a letter of intent that reflects the
addition of Microsoft as a principal party to the joint venture in the event
of consummation of the Recapitalization. WNI believes that if the
Recapitalization is consummated, the expected consequences to WNI's operations
and liquidity position will be immaterial, as the WNI financial commitments
will have the support of Microsoft. In the event that the Recapitalization is
not consummated, WNI would still expect to proceed with a joint venture with
Fujitsu. WNI may seek additional debt or equity financing to meet the funding
requirements for such joint venture if the Recapitalization is not
consummated.
WNI expects to require at least $75.0 million to fund its current operating
plan through March 1998. At March 31, 1997, WNI had approximately $20.7
million in cash and cash equivalents. In conjunction with the Recapitalization
Agreement, Microsoft and WNI entered into the Credit Agreement, pursuant to
which Microsoft agreed to loan WNI, on a revolving basis, up to $30,000,000.
See "Proposal I--The Recapitalization and Related Transactions--Related
Agreements--Line of Credit Agreement." Amounts outstanding under the Line of
Credit Agreement will become payable in full at the Closing of the
Recapitalization (but will be intercompany indebtedness at that time), will
become due and payable ten days after termination of the Recapitalization
Agreement by WNI without cause, or will become due and payable eighteen months
after other termination of the Recapitalization Agreement. No amounts are
currently outstanding under the Line of Credit Agreement.
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WNI's cash assets and currently available credit line are not sufficient to
meet its current operating plan requirements through March 1998. If the
Recapitalization is consummated, WNI believes that its financial requirements
will be satisfied through the support of Microsoft. In the event that the
Recapitalization is not consummated, WNI would seek additional debt or equity
financing to meet its financial requirements. Management believes that such
financing would be available, however, no assurance can be given that such
financing would be available on acceptable terms or at all. If such debt or
equity financing is not available on terms acceptable to WNI or at the time
required, WNI would maintain its operations at a level commensurate with its
available funds.
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<PAGE>
MANAGEMENT OF WNI
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of WNI following consummation of the
Recapitalization are expected to be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen G. Perlman............... 35 Chief Executive Officer
Bruce A. Leak.................... 34 Chief Operating Officer and
Executive Vice President
Phillip Y. Goldman............... 32 Senior Vice President, Engineering
Gregory B. Maffei................ 37 President and Director
Jean-Francois Heitz.............. 47 Chief Financial Officer, Treasurer
and Director
Robert A. Eshelman............... 43 Secretary and Director
</TABLE>
Mr. Perlman co-founded WNI in June 1995 and will serve as its Chief
Executive Officer following the Recapitalization. From March 1994 to March
1995, he was Chief Technology Officer of Catapult Entertainment, Inc.
("Catapult"), a company Mr. Perlman co-founded in 1994 to develop and market
technology to enable video games to be played in real-time over computer
networks. Prior to founding Catapult, from December 1990 to March 1994, Mr.
Perlman was a Principal and Managing Director of Advanced Products at General
Magic, Inc. ("General Magic"). At General Magic, he was responsible for its
personal communicator and interactive television projects. He spent the six
years prior to joining General Magic as an engineer at Apple Computer, Inc.
("Apple").
Mr. Leak co-founded WNI and will serve as its Chief Operating Officer and
Executive Vice President following the Recapitalization. From September 1993
to June 1995, he was Vice President, Engineering at Rocket Science Games, Inc.
("RSG"), a company he co-founded to develop and market multiplatform, realtime
CD-ROM authoring tools and systems. Prior to RSG, from July 1992 to September
1993 he was a member of the MagicCap development team at General Magic. From
February 1987 to July 1992, Mr. Leak served as Engineering Lead for Apple.
Mr. Goldman co-founded WNI and will serve as its Senior Vice President,
Engineering following the Recapitalization. From November 1990 to June 1995,
he was Director of Communicating Products at General Magic. Prior to General
Magic, from July 1986 to November 1990, he was Technical Engineering Lead at
Apple.
Mr. Maffei has been employed by Microsoft since April 1993, where he has
served as Director, Business Development & Investment and Treasurer and
currently is Vice President, Corporate Development; Treasurer, in which
capacity he is responsible for Microsoft's external financial activities,
including capital markets, acquisitions and strategic investments, credit use
management, SEC reporting, investor relations and strategic business
decisions. Prior to joining Microsoft, Mr. Maffei was a consultant for several
companies, including Microsoft. From April 1991 to September 1992, Mr. Maffei
was Executive Vice President and Chief Financial Officer of Pay'N Pak Stores,
Inc. Mr. Maffei was also a director of Pay'N Pak.
Mr. Heitz joined Microsoft France in May 1989 as Deputy General Manager, and
became General Manager, Business Operations in July 1991, as well as Director
F&A for Microsoft Southern Europe. In August 1994, Mr. Heitz was transferred
to Microsoft Corporation as Assistant Treasurer and is now responsible for all
capital markets, global cash management, foreign exchange, corporate finance,
credit and risk management activities.
Mr. Eshelman joined Microsoft in April 1993 as a Senior Corporate Attorney
and in 1994 became Associate General Counsel. Prior to joining Microsoft, he
was a partner at Preston Gates & Ellis LLP, Microsoft's primary outside law
firm.
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<PAGE>
DIRECTORS' COMPENSATION
Directors of WNI receive no compensation for their services, but will be
reimbursed for certain expenses in connection with attendance at board and
committee meetings.
EXECUTIVE COMPENSATION
Summary Compensation
The following salary amounts constitute all compensation received for
services rendered to WNI in all capacities for the fiscal year ended March 31,
1997 by Mr. Perlman, WNI's Chief Executive Officer, and Mr. Goldman and Mr.
Leak, WNI's two other most highly compensated executive officers following
consummation of the Recapitalization (collectively, the "Named Officers"): Mr.
Perlman, $150,000; Mr. Goldman, $150,000; Mr. Leak, $150,000.
Messrs. Maffei, Heitz and Eshelman were not employees of WNI during the
fiscal year ended March 31, 1997 and have received no compensation to date
from WNI.
Option Grants
No stock options were granted to any of the Named Officers during the fiscal
year ended March 31, 1997.
Option Exercises in Last Fiscal Year and Holdings and Fiscal Year-End Option
Values
No stock options were exercised by any Named Officers during the fiscal year
ended March 31, 1997, and no stock options were held by any Named Officers as
of March 31, 1997.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with the Recapitalization, Mr. Perlman, Mr. Goldman and Mr.
Leak will enter into Employment and Noncompetition Agreements with Microsoft
and WNI, the terms of which are described above. See "Proposal I--The
Recapitalization and Related Transactions--Related Agreements--Employment and
Noncompetition Agreements." Such individuals also have other interests in the
Recapitalization. See "Proposal I-- The Recapitalization and Related
Transactions--Interests of Certain Persons in the Recapitalization."
LIMITATIONS ON LIABILITIES AND INDEMNIFICATION MATTERS
WNI's Articles of Incorporation provide that WNI shall, to the fullest
extent permissible under California law, indemnify its directors and officers
against any damages arising out of their actions as agents of WNI. WNI's
Bylaws further provide that WNI may similarly indemnify its other employees
and agents. In addition, each director and officer has entered into an
indemnification agreement with WNI, pursuant to which WNI has agreed to
indemnify such director to the fullest extent permitted under California law.
At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of WNI where indemnification will be
required or permitted. WNI is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
Shortly following its incorporation, WNI entered into a Shareholders
Agreement with Steven G. Perlman, Phillip Y. Goldman and Bruce A. Leak,
founders of WNI. Pursuant to the Shareholders Agreement, Mr. Perlman, Mr.
Goldman and Mr. Leak each acquired 5,000,000 shares of WNI's Common Stock at a
purchase price of $0.001 per share. The Shareholders Agreement is being
amended in connection with the Recapitalization. See "Proposal I--The
Recapitalization and Related Transactions--Related Agreements--Amended and
Restated Shareholder Agreements." Messrs. Perlman, Goldman and Leak have been
employed by WNI since inception
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<PAGE>
pursuant to employment agreements that are also being amended and restated in
connection with the Recapitalization. See "--Employment Contracts and
Termination of Employment and Change-in-Control Arrangements." Also in
connection with the Recapitalization, WNI documented its obligation to pay
fees associated with certain patents licensed to WNI by Mr. Perlman. See
"Proposal I--The Recapitalization and Related Transactions--Interests of
Certain Persons in the Recapitalization."
In August, 1995, WNI entered into Technology License Agreements with Steven
G. Perlman, WNI's Chief Executive Officer, and Phillip Y. Goldman, WNI's
Senior Vice President, Engineering. Pursuant to the Technology License
Agreements, Messrs. Perlman and Goldman granted WNI an exclusive, world wide
license to certain proprietary technologies developed by Messrs. Perlman and
Goldman and incorporated into WNI's products and services. The Technology
License Agreements are being amended in connection with the Recapitalization.
See "Proposal I--The Recapitalization and Related Transactions--Interests of
Certain Persons in the Recapitalization" and "--Related Agreements--
Intellectual Property, License of Technology and Patent License Agreements."
WNI has entered into indemnification agreements with each of its directors
and executive officers. The agreements require WNI to indemnify such
individuals for certain liabilities to which they may be subject as a result
of their affiliation with WNI, to the fullest extent allowed by California
law. See "--Limitations on Liabilities and Indemnification Matters." In
addition, Microsoft has agreed, among other things, to guarantee and assume
WNI's indemnification obligations for a period of six years following the
Effective Time. See "Proposal I--The Recapitalization and Related
Transactions--Interests of Certain Persons in the Recapitalization."
In February 1996, WNI issued a promissory note (the "Perlman Family Note")
to Drs. Adele and Sidney Perlman, parents of Steven G. Perlman, WNI's Chief
Executive Officer, in the amount of $30,000. According to its terms, the
Perlman Family Note accrued no interest and was convertible into shares of
WNI's Common Stock at a conversion price of $2.00 per share. In March 1996,
the Perlman Family Note was repaid in full by WNI, and WNI issued Drs. Perlman
a warrant to purchase 3,000 shares of WNI's Common Stock at a purchase price
of $.05 per share.
Between September 1995 and February 1996, WNI issued several promissory
notes to Phillip Goldman, WNI's Senior Vice President, Engineering, in the
aggregate amount of $200,000 (the "Goldman Notes"). The Goldman Notes accrued
interest at eight percent per annum and were repaid in full by WNI in April
1996.
Between July 1995 and February 1996, WNI issued several promissory notes to
Stephen G. Perlman, WNI's Chief Executive Officer, in the aggregate amount of
$201,500 (the "Perlman Notes"). The Perlman Notes accrued interest at eight
percent per annum and were repaid in full by WNI in April 1996.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF WNI
The following table sets forth certain information regarding beneficial
ownership of WNI as of April 5, 1997 (i) by each person known by WNI to own
beneficially more than 5% of an outstanding class of WNI Shares, (ii) by each
of the directors of WNI and (iii) by all of WNI's directors and officers as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
BENEFICIALLY BENEFICIALLY
OWNED CLASS OF SECURITIES OWNED(1)
---------------- ------------------- ----------------
<S> <C> <C> <C>
Phillip Y. Goldman....... 5,000,000 Common 26.16%
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Bruce A. Leak............ 5,000,000 Common 26.16%
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Stephen G. Perlman....... 5,000,000 Common 26.16%
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Brentwood Associates VII, 3,559,541 Preferred 25.44%
L.P.(2).................
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
Citicorp. ............... 1,124,701 Preferred 8.04%
153 E. 53rd Street, 6th
Floor
New York, New York 10043
Microsoft Corporation.... 702,939 Preferred 5.02%
One Microsoft Way
Redmond, WA 98052
Seagate Technology, 1,343,570 Preferred 9.60%
Inc. ...................
920 Disc Drive
Scotts Valley, CA 95066
Soros Capital, L.P.(3)... 755,267 Preferred 5.40%
c/o Westbroke Limited
Richmond House
12-Par-La-Ville Road
Hamilton, Bermuda HMDX
St. Paul Fire & Marine 702,939 Preferred 5.02%
Insurance Co. ..........
c/o St. Paul Venture
Capital
8500 Normandale Lake
Blvd.,
Suite 194
Bloomington, MN 55437
Times Mirror Company .... 702,939 Preferred 5.02%
220 West First Street
Los Angeles, CA 90012
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
BENEFICIALLY BENEFICIALLY
OWNED CLASS OF SECURITIES OWNED(1)
---------------- ------------------- ----------------
<S> <C> <C> <C>
Vulcan Ventures, Inc.(4). 3,251,256 Preferred 23.24%
110 110th Avenue, N.E.
Suite 550
Bellevue, WA 98004
Jeffrey D. Brody(5)...... 3,559,541 Preferred 25.44%
c/o Brentwood Associates
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
G. Kevin Doren(6)........ 3,251,256 Preferred 23.24%
c/o Vulcan Ventures Inc.
110--110th Avenue N.E.
Suite 550
Bellevue, WA 98004
Randy Komisar(7)......... 200,000 Common 1.04%
WebTV Networks, Inc. 61,349 Preferred 0.44%
305 Lytton Avenue
Palo Alto, CA 94301
All directors and
officers as a group
(13 persons)(8)......... 16,196,668 Common 83.87%
6,879,175 Preferred 49.17%
</TABLE>
- --------
(1) Based on 19,110,873 WNI Common Shares and 13,990,346 WNI Preferred Shares.
(2) Includes 70,294 shares held by Brentwood Affiliates Fund. The general
partner of Brentwood Affiliates Fund is Brentwood VII Ventures, L.P.
Brentwood VII Ventures, L.P. is also the general partner of Brentwood
Associates VII, L.P. Brentwood Associates VII, L.P. disclaims beneficial
ownership of the shares held by Brentwood Affiliates Fund.
(3) Soros Capital L.P. ("Soros Capital") is a Bermuda limited partnership. The
number of shares indicated above includes 371,350 shares held for the
account of Soros Capital Coinvestment Partners L.L.C. ("Soros
Coinvestment"), a Delaware limited liability company. Mr. Steven J.
Gilbert may be deemed to have voting and dispositive power over the shares
held for the account of each of Soros Capital and Soros Coinvestment. Each
of Soros Capital and Soros Coinvestment expressly disclaims ownership of
any shares not held for its account.
(4) Includes 30,674 shares held by G. Kevin Doren. Mr. Doren, a director of
WNI, is an employee of the Paul Allen Group, an affiliate of Vulcan
Ventures Inc. See footnote (6) below.
(5) Represents 3,489,247 shares held by Brentwood Associates VII, L.P., and
70,294 shares held by Brentwood Affiliates Fund. Mr. Brody may be deemed
to beneficially own such shares by virtue of his status as a general
partner of Brentwood VII Ventures, L.P., the general partner of Brentwood
Associates VII, L.P. and Brentwood Affiliates Fund. Mr. Brody disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.
(6) Includes 3,220,582 shares held by Vulcan Ventures Inc. See footnote (4)
above. Mr. Doren, as acting President of The Paul Allen Group, an
affiliate of Vulcan Ventures Inc., may be deemed to beneficially own such
shares, although Mr. Doren disclaims beneficial ownership of all such
shares except to the extent of his pecuniary interest therein.
(7) Includes 200,000 shares issuable pursuant to currently exercisable WNI
Options.
(8) See footnotes (5), (6) and (7) above. Also, includes 7,000 shares owned by
trusts for the benefit of the children of Albert A. Pimentel, an officer
of WNI. Mr. Pimentel disclaims beneficial ownership of such shares.
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<PAGE>
DESCRIPTION OF CAPITAL SHARES OF WNI
The currently authorized capital shares of WNI consists of 100,000,000 WNI
Common Shares, no par value, and 25,000,000 WNI Preferred Shares, no par
value, 1,510,533 of which are designated Series A Shares, 6,567,484 of which
are designated Series B Shares, 4,920,568 of which are designated Series C
Shares and 9,596,928 of which are designated Series D Shares.
COMMON SHARES
As of April 5, 1997, 19,110,873 WNI Common Shares were outstanding and held
of record by 86 shareholders. The holders of WNI Common Shares are entitled to
one vote per share on all matters to be voted upon by the shareholders.
Subject to preferences that may be applicable to any outstanding WNI Preferred
Shares, the holders of WNI Common Shares are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
Liquidation, the holders of WNI Common Shares are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior rights of
holders of Preferred Shares then outstanding, if any. WNI Common Shares have
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to WNI Common Shares. All
outstanding shares of WNI Common Shares are fully paid and non-assessable.
PREFERRED SHARES
WNI Preferred Shares have preferences over WNI Common Shares on dividends
and in the event of a Liquidation of WNI. Additionally, the Series D Shares
have the right, under certain circumstances, to elect and remove one member of
the WNI Board of Directors.
WNI Preferred Shares are convertible, at the option of the holder thereof,
into WNI Common Shares. All WNI Preferred Shares are currently convertible on
a one-for-one basis into WNI Common Shares, except for the Series A Shares,
which convert on a one-for-1.1 basis. Under certain circumstances involving an
initial public offering, the WNI Preferred Shares are automatically converted
into WNI Common Shares. The conversion rates for each series of WNI Preferred
Shares are adjusted in the event of certain issuances of securities below the
initial price paid for the shares of such series of WNI Preferred Shares.
Further, the existing Series A Shares and Series B Shares are mandatorily
redeemable under certain circumstances beginning in March 2003.
Additionally, the Board of Directors has the authority to issue up to
2,404,487 WNI Preferred Shares and to determine the powers, preferences and
rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued shares of undesignated WNI Preferred Shares
and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the shareholders. The
issuance of such WNI Preferred Shares may have the effect of delaying,
deferring, or preventing a change in control of WNI without further action by
the shareholders and may adversely affect the voting and other rights of the
holders of WNI Common Shares.
WARRANTS
WNI has issued a warrant (the "Series B Warrant") to purchase 86,000 Series
B Shares, of which 46,000 shares are exercisable at $2.50 per share, 20,000
shares are exercisable at $5.00 per share, and 20,000 shares are exercisable
at $7.113 per share. The Series B Warrant provides that the holder may
exercise the Series B Warrant without payment of cash by surrendering the
Series B Warrant at the time of exercise and receiving a number of Series B
Shares equal to the shares subject to the Series B Warrant less a number of
Series B Shares that, when multiplied by the fair market value of a Series B
Share at the time of exercise, is equal to the aggregate exercise price of the
Series B Warrant being exercised.
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<PAGE>
Additionally, WNI has issued warrants (the "Series C Warrants") to purchase
36,553 Series C Shares, all of which shares are exercisable at $7.113 per
share. The Series C Warrants provide that the holder may exercise the Series C
Warrants without payment of cash by surrendering the Series C Warrants at the
time of exercise and receiving a number of Series C Shares equal to the shares
subject to the Series C Warrants less a number of Series C Shares that, when
multiplied by the fair market value of a Series C Share at the time of
exercise, is equal to the aggregate exercise price of the Series C Warrants
being exercised.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of law and of WNI's Articles of Incorporation and Bylaws
could make more difficult the acquisition of WNI by means of a tender offer, a
proxy contest or otherwise, and the removal of incumbent officers and
directors. These provisions include authorization of the issuance of up to
2,404,487 WNI Preferred Shares, with such characteristics, and potential
effects on the acquisition of WNI, as are described in "Preferred Shares"
above. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of WNI to negotiate first with it. WNI believes
that the benefits of increased protection of its potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure it outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
CLASS B SHARES AND EXCHANGEABLE SHARES
If the Recapitalization described in this Proxy Statement/Prospectus is
approved at the Special Meeting, then WNI will issue newly created Class B
Shares to Microsoft and Exchangeable Shares to holders of WNI Common Shares,
other than holders who either perfected their dissenters' rights or who have
elected to have their shares purchased by Microsoft, in exchange for their
existing WNI Common Shares. Microsoft will receive four Class B Shares for
each Exchangeable Share that is issued. See "Proposal I--The Recapitalization
and Related Transactions--The Recapitalization--Rights and Preference of
Exchangeable Shares."
COMPARISON OF RIGHTS OF SHAREHOLDERS OF WNI AND MICROSOFT
RIGHTS UNDER EXISTING COMMON SHARES VERSUS RIGHTS UNDER EXCHANGEABLE SHARES
Voting Rights
Under the CGCL and the Articles of Incorporation of WNI (the "WNI
Articles"), holders of WNI Common Shares are entitled to one vote per WNI
Common Share, and holders of WNI Preferred Shares are entitled to the number
of votes equal to the number of WNI Common Shares into which such WNI
Preferred Shares could be converted at the applicable record date. Such votes
are counted together and not separately as a class. So long as the holders of
Series D Shares hold at least 10% of the total number of votes that may be
cast for the election of directors, (i) the holders of Series D Shares, voting
separately as a class, may elect one director, and (ii) such director may be
removed only by the affirmative vote of a majority of the holders of Series D
Shares, voting separately as a class. In addition, without first obtaining the
approval of a majority of the outstanding WNI Series A, Series B and Series D
Shares, voting together as a class, WNI may not take certain corporate action,
including the Recapitalization and similar major corporate changes.
Following the Recapitalization, each holder of Exchangeable Shares shall be
entitled to vote for directors and such other matters as may be submitted to
the shareholders. Except to the extent required by applicable law, each
Exchangeable Share shall have one (1) vote per Exchangeable Share. Each holder
of Exchangeable Shares shall be entitled to receive notice of, or to attend,
any meetings of shareholders of WNI. Microsoft, however, shall be entitled to
receive all of the outstanding Class B Shares which will represent not less
than 80% of the voting power of WNI.
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<PAGE>
Dividends
Pursuant to the WNI Articles, no dividends may be declared or made with
respect to any WNI Common Shares until all declared dividends on the WNI
Preferred Shares have been paid or set apart. The holders of WNI Preferred
Shares are entitled to receive, in preference and priority to any dividend on
the WNI Common Shares, dividends at rates specified in the WNI Articles.
Following the Recapitalization, the WNI Board of Directors may declare and
pay dividends with respect to each Exchangeable Share and Class B Shares so
long as such dividends are identical in amount and character. WNI or
Microsoft, as the case may be, shall provide each holder of Exchangeable
Shares written notice of a dividend record date specifying a date not more
than sixty (60) and not less than fifteen (15) days prior to taking the
foregoing actions and holders of Exchangeable Shares may elect to exchange
their shares.
WNI has not paid any cash dividends on its capital stock to date. WNI
currently anticipates that it will retain all future earnings, if any, to fund
the development and growth of its business and does not anticipate paying any
cash dividends in the foreseeable future. Neither the consummation of the
Recapitalization nor Microsoft's acquisition of WNI Class B Shares is expected
to have any effect on WNI's dividend policy.
Liquidation Rights
Pursuant to the WNI Articles, in the event of any Liquidation of WNI, the
holders of WNI Preferred Shares are entitled to receive, prior and in
preference to any distributions of WNI assets or surplus funds to holders of
WNI Common Shares, liquidation preferences at amounts specified in the WNI
Articles.
Following the Recapitalization, in the event of a Liquidation of WNI, WNI
shall pay to the holders of the Exchangeable Shares from the assets of WNI
available for distribution an amount that is identical in amount and character
with respect to each Exchangeable Share and Class B Share. In the event WNI
adopts a Liquidation plan, WNI is required to provide each holder of
Exchangeable Shares written notice specifying a date not more than sixty (60)
and not less than fifteen (15) days prior to taking such action and holders of
Exchangeable Shares may elect to exchange their shares for Microsoft Common
Shares.
Exchange Rights and Microsoft Call Rights
Under the WNI Articles, holders of WNI Common Shares have no rights to
exchange such shares for any other security, and no person has the right to
call such WNI Common Shares.
Subject to the call rights of Microsoft described below, holders of
Exchangeable Shares shall have the right to exchange each Exchangeable Share
into one Microsoft Common Share at any time prior to the end of fifty-one (51)
months after the Effective Time. Each Exchangeable Share shall be exchanged,
at WNI's election, for Microsoft Common Shares or cash at the Exchange Ratio.
Upon notification of an exchange request, Microsoft shall have one (1) day
in which to exercise its Call Right. In addition, Microsoft shall have a Class
Call Right during the period commencing five years and six months after the
Effective Time and ending six years after the Effective Time.
RIGHTS UNDER WASHINGTON LAW VERSUS RIGHTS UNDER CALIFORNIA LAW
Upon exchange of the Exchangeable Shares for Microsoft Common Shares, the
shareholders of WNI will become shareholders of Microsoft whose rights will
cease to be defined and governed by the CGCL, and instead will be defined and
governed by the Washington Business Corporation Act ("WBCA"). In addition, WNI
shareholders' rights will no longer be defined and governed by the WNI
Articles and Bylaws ("WNI Bylaws"). Upon receipt of Microsoft Common Shares,
each WNI shareholder will become a new shareholder of Microsoft, whose rights
as a shareholder will be defined and governed by Microsoft's Restated Articles
of Incorporation (the "Microsoft Articles") and Bylaws ("Microsoft Bylaws").
Although the rights and privileges of
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<PAGE>
shareholders of a California corporation are, in many instances, comparable to
those of a shareholder of a Washington corporation, there are certain
differences. These differences arise from differences between California and
Washington law, between the CGCL and the WBCA, and between the WNI Articles
and WNI Bylaws and the Microsoft Articles and Microsoft Bylaws. Certain of the
significant differences that could materially affect the rights of WNI
shareholders are discussed below.
Amendment to Articles of Incorporation
Under the CGCL, once shares of a corporation have been issued, an amendment
to the corporation's articles of incorporation may be made by the board alone
if (i) the amendment extends the corporate existence or makes the corporate
existence perpetual if such corporation was organized prior to August 14,
1929; (ii) the corporation has only one class of stock outstanding and the
amendment effects only a stock split; or (iii) the amendment deletes the names
and addresses of the first directors or the name and address of the initial
agent. Otherwise, an amendment must be approved both by the board of directors
and by the affirmative vote of a majority of the outstanding shares entitled
to vote. This approval must include the affirmative vote of a majority of the
outstanding shares of each class or series entitled to vote unless a greater
proportion is specified in the articles of incorporation. The WNI Articles
entitle certain holders of WNI Preferred Shares to vote separately as a class
on amendments that amend or repeal any provision of, or add any provision to,
the WNI Articles that would change the rights, preferences, privileges or
limitations of the WNI Preferred Shares.
The WBCA similarly authorizes a corporation's board of directors to make
various changes to its articles of incorporation without shareholder action.
These so-called housekeeping changes include changes of corporate name, the
number of outstanding shares to effectuate a stock split or stock dividend in
the corporation's own shares, and the par value of its stock. Other amendments
to a corporation's articles of incorporation must be recommended to the
shareholders by the board of directors, unless the board of directors
determines that because of conflict of interest or other special circumstances
it should make no recommendation and communicates the basis for its
determination to the shareholders with the amendment, and must be approved by
a majority of all the votes entitled to be cast by any voting group entitled
to vote thereon unless another requirement is specified in the articles of
incorporation, by the board of directors as a condition to its recommendation,
or by provisions of the WBCA. The Microsoft Articles do not specify another
proportion.
Right to Call Special Meeting of Shareholders
Under the CGCL, a special meeting of shareholders may be called by the board
of directors, the chairman of the board, the president, or the holders of not
less than 10% of all shares entitled to vote at the meeting, or by any other
persons authorized to do so in the articles of incorporation or the bylaws.
The WNI Bylaws authorize the Chairman of the Board and the President to call
special meetings at any time.
The WBCA provides that a special meeting of shareholders of a corporation
may be called by its board of directors, by holders of at least 10% of all the
votes entitled to be cast on any issue proposed to be considered at the
proposed special meeting, or by other persons authorized to do so by the
articles of incorporation or bylaws of the corporation. However, the WBCA
allows the right of shareholders to call a special meeting to be limited or
denied to the extent provided in the articles of incorporation. The Microsoft
Articles deny this right by providing that a special meeting of shareholders
may be called only by the Board of Directors or by a duly designated committee
of the Board.
Anti-Takeover Provisions and Interested Shareholders
The CGCL does not contain provisions regarding control share acquisitions
and procedures for corporate take-overs, or transactions involving the
corporation and one or more of its shareholders.
The WBCA imposes restrictions on certain transactions between a corporation
and certain interested shareholders. First, subject to certain exceptions, a
merger, share exchange, sale of assets other than in the regular course of
business or dissolution of a corporation involving a shareholder owning
beneficially 20% or more of
78
<PAGE>
the corporation's voting securities ("Interested Shareholder") must be
approved by the holders of two-thirds of the corporation's outstanding voting
securities, other than those of the Interested Shareholder. This restriction
does not apply if the consideration received as a result of the transaction by
noninterested shareholders is not less than the highest consideration paid by
the Interested Shareholders for the corporation's shares during the preceding
two years or if the transaction is approved by a majority of directors who are
not affiliated with the Interested Shareholder. A Washington corporation may,
in its articles of incorporation, exempt itself from coverage of this
provision; however, Microsoft has not done so.
Second, Washington law prohibits a corporation, with certain exceptions,
from engaging in certain "significant business transactions" with a person or
group of persons ("Acquiring Person") who beneficially owns 10% or more of the
voting securities of the corporation (the "Target Corporation") for a period
of five (5) years after the acquisition of such securities, unless the
transaction or acquisition of shares is approved by a majority of the members
of the Target Corporation's board of directors prior to the date of the
acquisition. Significant business transactions include, among others, merger
or consolidation with, disposition of assets to or with, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or
more of the employees of the Target Corporation employed in Washington State
as a result of the Acquiring Person's acquisition of 10% or more of the shares
or allowing the Acquiring Person to receive any disproportionate benefit as a
shareholder. Target Corporations include domestic corporations with their
principal executive offices in Washington and either a majority or over 1,000
of their employees resident in Washington. Microsoft currently meets these
standards and is subject to this statute. A corporation may not "opt out" of
this statute. The statute exempts shares acquired prior to March 23, 1988.
Mergers, Sales of Assets and Other Transactions
Under the CGCL, a merger reorganization must be approved by the board of
directors of each corporation. In addition, the principal terms of the
reorganization must be approved by the affirmative vote of a majority of the
outstanding shares entitled to vote, unless the corporation is a close
corporation. This approval must include the affirmative vote of a majority of
the outstanding shares of each class or series entitled to vote unless a
greater proportion is specified in the articles of incorporation. The WNI
Articles entitle holders of WNI Preferred Shares to vote separately as a class
on reorganizations that result in shareholders of the corporation (determined
prior to the transaction) holding 50% or less in interest of the outstanding
voting securities of the surviving corporation. Notwithstanding the foregoing,
no vote of shareholders of a corporation surviving a merger is required
(unless the corporation provides otherwise in its articles of incorporation)
if the corporation or its shareholders immediately before the reorganization,
or both, shall own (immediately after the reorganization) equity securities,
other than any warrant or right to subscribe to or purchase such equity
securities, of the surviving or acquiring corporation or a parent party
possessing more than five-sixths of the voting power of the surviving or
acquiring corporation or parent party.
Under the CGCL, a corporation may be dissolved by the vote of shareholders
holding shares representing 50% or more of the voting power. The board may
dissolve a corporation without shareholder consent if the corporation (i) has
an order for relief under Chapter 7 of the federal bankruptcy law entered
against it, (ii) disposes all its assets and has not conducted any business
for a period of five years immediately preceding the adoption of the
resolution electing to dissolve the corporation, or (iii) has issued no
shares.
Under the WBCA, a merger or share exchange of a corporation must be approved
by the affirmative vote of a majority of directors when a quorum is present,
and by each voting group entitled to vote separately on the plan by two-thirds
of all the votes entitled to be cast on the plan by that voting group, unless
another proportion is specified in the articles of incorporation. The
Microsoft Articles provide that a merger or share exchange must be approved by
a majority of the outstanding shares entitled to vote. The WBCA also provides
that certain mergers need not be approved by the shareholders of the surviving
corporation if (i) the articles of incorporation will not change in the
merger, except for specified permitted amendments, (ii) no change occurs in
the number, designations, preferences, limitations, and relative rights of
shares held by those shareholders who were shareholders prior to the merger;
(iii) the number of voting shares outstanding immediately after the merger,
plus
79
<PAGE>
the voting shares issuable as a result of the merger, will not exceed the
authorized voting shares specified in the surviving corporation's articles of
incorporation immediately prior to the merger; and (iv) the number of shares
entitling their holders to participate without limitation in distributions
("Participating Shares") outstanding immediately after the merger, plus the
number of Participating Shares issuable as a result of the merger, will not
exceed the authorized Participating Shares specified in the corporation's
articles of incorporation immediately prior to the merger.
The WBCA also provides that, in general, a corporation may sell, lease,
exchange, or otherwise dispose of all, or substantially all, of its property,
other than in the usual and regular course of business, or dissolve if the
board of directors recommends the proposed transaction to the shareholders and
the shareholders approve the transaction by two-thirds of all the votes
entitled to be cast in the transaction, unless another proportion is specified
in the articles of incorporation. The Microsoft Articles provide that the
transactions must be approved by a majority of the outstanding shares entitled
to vote.
Transactions With Directors
The CGCL provides a safe harbor for contracts and transactions between a
corporation and one or more of its directors or any other corporation or
entity in which one or more of its directors are directors or officers or are
financially interested. Contracts or transactions involving a director are not
void or voidable if: (i) the material facts as to the transaction and as to
such director's interest are fully disclosed or known to the shareholders and
such contract or transaction is approved by the shareholders in good faith,
with the shares owned by the interested director or directors not being
entitled to vote thereon; (ii) the material facts as to the transaction and as
to such director's interest are fully disclosed or known to the board or
committee, and the board or committee authorizes, approves or ratifies the
contract or transaction in good faith by a vote sufficient without counting
the vote of the interested director or directors and the contract or
transaction is just and reasonable as to the corporation at the time it is
authorized, approved or ratified; or (iii) the contract or transaction was
just and reasonable as to the corporation at the time it was authorized (such
burden of proof resting on the person asserting the validity of the contract
or transaction). Contracts or transactions in which directors or officers are
financially interested are not void or voidable if: (i) the material facts as
to the transaction and as to such director's other directorship are fully
disclosed or known to the board or committee, and the board or committee
authorizes, approves or ratifies the contract or transaction in good faith by
a vote sufficient without counting the vote of the common director or
directors or the contract or transaction is approved by the shareholders in
good faith; or (ii) the contract or transaction is just and reasonable as to
the corporation at the time it is authorized, approved or ratified.
The WBCA also sets forth a safe harbor for transactions between a
corporation and one or more of its directors. A conflicting interest
transaction may not be enjoined, set aside or give rise to damages if: (i) it
is approved by a majority of qualified directors (but no fewer than two); (ii)
it is approved by the affirmative vote of the majority of all qualified shares
after notice and disclosure to the shareholders; or (iii) at the time of
commitment, the transaction is established to have been fair to the
corporation. For purposes of this provision, a "qualified director" is one who
does not have either: (i) a conflicting interest respecting the transaction;
or (ii) a familial, financial, professional, or employment relationship with a
second director who does have a conflicting interest respecting the
transaction, which relationship would, in the circumstances, reasonably be
expected to exert an influence on the first director's judgment when voting on
the transaction. "Qualified shares" are defined generally as shares other than
those beneficially owned, or the voting of which is controlled, by a director
(or an affiliate of the director) who has a conflicting interest respecting
the transaction.
Appraisal or Dissenters' Rights
Under California law, a shareholder of a corporation has the right to
dissent from and to obtain payment for his or her shares in the event of any
reorganization or merger requiring the approval of outstanding shares. If a
dissenting shareholder complies with the prescribed procedures, he or she may
receive cash in the amount of the fair market value of his or her shares.
80
<PAGE>
Under the WBCA, a shareholder is similarly entitled to dissent from and,
upon perfection of his or her appraisal right, to obtain fair value of his or
her shares in the event of certain corporate actions. Among these actions are
certain mergers, consolidations, share exchanges, sales of substantially all
assets of the corporation, and amendments to the corporation's articles of
incorporation that materially and adversely affect shareholder rights.
Dividends
Under the CGCL, a corporation may make a distribution in cash or in property
to its shareholders upon the authorization of its board of directors if, (i)
the amount of the retained earnings of the corporation immediately prior
thereto equals or exceeds the amount of the proposed distribution and or (ii)
if immediately after the distribution, (a) the sum of the assets of the
corporation would be at least equal to 1 1/4 times its liabilities; and (b)
the current assets of the corporation would be at least equal to its current
liabilities or, if the average of the earnings of the corporation before taxes
on income and before interest expense for the two preceding fiscal years was
less than the average of the interest expense of the corporation for such
fiscal years, the current assets would be at least equal to 1 1/4 times its
current liabilities. Neither a corporation nor any of its subsidiaries may
make a distribution to shareholders if the corporation is or as a result of
the distribution would be, likely to be unable to meet its liabilities as they
mature.
Under the WBCA, a corporation may make a distribution in cash or in property
to its shareholders upon the authorization of its board of directors unless,
after giving effect to such distribution, (i) the corporation would not be
able to pay its debts as they become due, or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus, unless the
articles of incorporation permit otherwise, the amount that would be needed,
if the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights of shareholders whose preferential rights are
superior to those receiving the distribution. To date, Microsoft has not paid
cash dividends on its common shares.
Limitation of Liability and Indemnification of Officers and Directors
Under the CGCL, a person who performs the duties of a director in accordance
with guidelines established by law shall have no liability based upon any
alleged failure to discharge the person's obligations as a director. In
addition, the liability of a director for monetary damages may, subject to
some restrictions, be eliminated or limited in a corporation's articles of
incorporation in an action brought by or in the right of the corporation for
breach of a director's duties to the corporation and its shareholders. The WNI
Articles provide that the liability of directors of WNI for monetary damages
shall be eliminated to the fullest extent permissible under California law.
The WBCA provides that a corporation's articles of incorporation may include
a provision that eliminates or limits the personal liability of a director to
the corporation or its shareholders for monetary damages for conduct as a
director. However, the provision may not eliminate or limit liability of a
director for acts or omissions that involve intentional misconduct by a
director, a knowing violation of law by a director, for unlawful
distributions, or for any transaction from which the director will personally
receive a benefit in money, property, or services to which the director is not
legally entitled. Microsoft's Articles adopt this standard.
Under the CGCL and subject to certain parameters (described further below),
a corporation may indemnify directors and officers. However, California law
does not allow corporations to indemnify directors or officers for: (i)
breaches of the director's duty to the corporation or its shareholders unless
a court permits; (ii) amounts paid in settling or otherwise disposing of a
pending action without court approval; (iii) expenses incurred in defending a
pending action which is settled or otherwise disposed of without court
approval. Additionally, indemnification is not permitted where it appears (i)
that it would be inconsistent with a provision of the articles of
incorporation, bylaws, a resolution of the shareholders, or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or (ii) that it would be
inconsistent with any condition expressly imposed by a court in approving a
settlement.
81
<PAGE>
The CGCL provides that a corporation may indemnify any person who is a party
or is threatened to be made a party to an action because the person is a
director, officer, employee or other agent of the corporation if the person
acted in good faith and in a manner he or she reasonably believed to be in the
best interests of the corporation and, in the case of a criminal proceeding,
had no reasonable cause to believe the conduct of the person was unlawful. To
the extent that a director, officer, employee, or agent has been successful on
the merits or otherwise in defending any such proceeding, the CGCL requires
the corporation to indemnify such person against expenses actually and
reasonably incurred in connection therewith. Indemnification under these
provisions shall be made only upon a determination that the applicable
standard of conduct has been met upon determination by a majority vote of a
quorum consisting of directors who are not parties to such proceeding or; if a
quorum is not obtainable, by independent legal counsel in a written opinion;
by approval of the shareholders with the shares owned by the person to be
indemnified not being entitled to vote thereon; or by the court in which the
action is pending.
Under the WBCA, if authorized by the articles of incorporation, a bylaw
adopted or ratified by shareholders, or a resolution adopted or ratified,
before or after the event, by the shareholders, a corporation has the power to
indemnify a director or officer made a party to a proceeding, or advance or
reimburse expenses incurred in a proceeding, under any circumstances, except
that no such indemnification shall be allowed on account of: (i) acts or
omissions of the directors finally adjudged to be intentional misconduct or a
knowing violation of the law; (ii) conduct of the director finally adjudged to
be an unlawful distribution; or (iii) any transaction with respect to which it
was finally adjudged that such director personally received a benefit in
money, property, or services to which the director was not legally entitled.
Written commentary by the drafters of the WBCA, which has the status of
legislative history, specifically indicates that a corporation may indemnify
its directors and officers for amounts paid in settlement of derivative
actions, provided that the director's or officer's conduct does not fall
within one of the categories set forth above. Microsoft's Articles provide
that Microsoft shall indemnify its directors and officers to the fullest
extent not prohibited by law, including indemnification for payments in
settlement of actions brought against the director or officer in the name of
the corporation, commonly referred to as a derivative action. Such limitation
of liability, described above, also may not limit a director's liability for
violation of, or otherwise relieve Microsoft or its directors from the
necessity of complying with, federal or state securities laws, or affect the
availability of non-monetary remedies such as injunctive relief or rescission.
Action by Written Consent
The CGCL authorizes shareholder action without a meeting if consents are
received from holders of a majority of the outstanding shares. Under the WBCA,
shareholder action may be taken without a meeting only if written consents
setting forth such action are signed by all holders of outstanding shares
entitled to vote thereon.
Removal of Directors
Under the CGCL, generally any or all of the directors may be removed without
cause if the removal is approved by the outstanding shares. Likewise, under
the WBCA, the shareholders may remove one or more directors with or without
cause, unless the articles of incorporation provide that directors may be
removed only for cause, only at a special meeting of shareholders called for
the purpose of removing the directors. The Microsoft Articles do not so limit
removal of directors. As discussed above, however, the Microsoft Articles
provide that a special meeting of shareholders may be called only by the Board
of Directors or by a duly designated committee thereof. See "Right to Call
Special Meeting of Shareholders."
Under the CGCL, a court may, in a suit by shareholders holding at least 10%
of the number of outstanding shares of any class, remove from office any
director in case of fraudulent or dishonest acts or gross abuse of authority
or discretion with respect to the corporation and may bar from reelection any
director so removed for a period prescribed by the court. In addition, the
board may declare vacant the office of a director who has been declared of
unsound mind by an order of court or convicted of a felony.
82
<PAGE>
Under the WBCA, the superior court of the county where a corporation's
principal office is located may remove a director of the corporation from
office in a proceeding commenced either by the corporation or by its
shareholders holding at least 10% of the outstanding shares of any class if
the court finds that the director engaged in fraudulent or dishonest conduct
with respect to the corporation, and removal is in the best interest of the
corporation. The court that removes a director may bar the director from
reelection for a period prescribed by the court.
LEGAL MATTERS
The validity of the Exchangeable Shares will be passed upon for WNI by
Venture Law Group, A Professional Corporation, Menlo Park, California. The
validity of the Microsoft Common Shares will be passed upon for Microsoft by
Preston Gates & Ellis LLP, Seattle, Washington. As of the date hereof,
attorneys in Preston Gates & Ellis LLP who work on substantive matters for
Microsoft own less than 250,000 Microsoft Common Shares.
EXPERTS
The financial statements of WNI at March 31, 1996 and 1997 and for the
period from inception (June 30, 1995) to March 31, 1996 and the year ended
March 31, 1997 appearing in this Proxy Statement/Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Microsoft as of June 30, 1996 and 1995 and for
each of the three years in the period ended June 30, 1996, incorporated by
reference in this Prospectus/Proxy Statement from Microsoft's Annual Report on
Form 10-K, have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report which is incorporated herein by reference, and has
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF WNI
WEBTV NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statement of Shareholders' Equity (Net Capital Deficiency).................. F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
WebTV Networks, Inc.
We have audited the accompanying balance sheets of WebTV Networks, Inc. as
of March 31, 1996 and 1997 and the related statements of operations,
shareholders' equity (net capital deficiency), and cash flows for the period
from inception (June 30, 1995) to March 31, 1996 and the year ended March 31,
1997. Our audits also included the financial statement schedule listed in the
Index at Item 21(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WebTV Networks, Inc. at
March 31, 1996 and 1997 and the results of its operations and its cash flows
for the period from inception (June 30, 1995) to March 31, 1996 and the year
ended March 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Palo Alto, California
May 2, 1997
F-2
<PAGE>
WEBTV NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 4,501,745 $ 20,715,502
Accounts receivable (net of reserves of $50,000 at
March 31, 1997).................................. -- 2,807,741
Inventory......................................... -- 4,309,713
Other current assets.............................. 96,316 786,651
----------- ------------
Total current assets................................ 4,598,061 28,619,607
Property and equipment, net......................... 1,140,958 10,332,709
Other assets........................................ 192,631 434,258
----------- ------------
$ 5,931,650 $ 39,386,574
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable.................................. $ 836,506 $ 10,934,896
Accrued payroll and related obligations........... 86,642 711,963
Convertible note payable due to director.......... 150,000 --
Notes payable due to founders..................... 401,500 --
Convertible notes payable......................... 500,000 --
Deferred revenue and other........................ -- 5,468,165
Current portion of capital lease obligations...... 150,398 2,386,527
----------- ------------
Total current liabilities........................... 2,125,046 19,501,551
Capital lease obligations, net of current portion... 524,013 5,062,640
Commitments
Redeemable convertible preferred stock, issuable in
series:
Series A redeemable convertible: 1,510,533 shares
designated, 1,510,533 shares issued and
outstanding at March 31, 1996 and 1997 (aggregate
liquidation preference of $1,500,000 at March 31,
1997)............................................ 1,500,000 1,500,000
Series B redeemable convertible: 6,567,484 shares
designated, 3,067,484 and 6,316,707 shares issued
and outstanding at March 31, 1996 and 1997,
respectively (aggregate liquidation preference of
$10,859,999 at March 31, 1997)................... 5,000,001 10,859,999
Shareholders' equity (net capital deficiency):
Preferred stock, 20,000,000 shares authorized,
issuable in series:
Series C convertible: 4,920,568 shares designated,
4,819,538 shares issued and outstanding at March
31, 1997 (none at March 31, 1996) (aggregate
liquidation preference of $34,281,374)........... -- 34,281,374
Series D convertible: 9,596,928 shares designated,
1,343,570 shares issued and outstanding at March
31, 1997 (none at March 31, 1996) (aggregate
liquidation preference of $13,999,999)........... -- 13,999,999
Common stock, 100,000,000 shares authorized,
15,000,000 and 19,106,373 shares issued and
outstanding at March 31, 1996 and 1997,
respectively...................................... 15,000 2,360,954
Shareholder notes receivable....................... -- (301,639)
Deferred compensation.............................. -- (1,900,000)
Accumulated deficit................................ (3,232,410) (45,978,304)
----------- ------------
Total shareholders' equity (net capital defi-
ciency)........................................ (3,217,410) 2,462,384
----------- ------------
$ 5,931,650 $ 39,386,574
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
WEBTV NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 30, 1995)
TO YEAR ENDED
MARCH 31, MARCH 31,
1996 1997
--------------- ------------
<S> <C> <C>
Revenues:
On-line service................................ $ -- $ 3,456,120
Licensing and manufacturing.................... -- 38,949,810
----------- ------------
Total revenues............................... -- 42,405,930
Cost of revenues:
On-line service................................ -- 12,384,056
Licensing and manufacturing.................... -- 36,968,200
----------- ------------
Total cost of revenues....................... -- 49,352,256
Gross loss....................................... -- (6,946,326)
Operating expenses:
Research and development....................... 2,117,852 11,273,081
Sales and marketing............................ 258,865 18,688,022
General and administrative..................... 853,373 6,506,030
----------- ------------
Total operating costs and expenses........... 3,230,090 36,467,133
----------- ------------
Loss from operations............................. (3,230,090) (43,413,459)
Interest income.................................. 8,383 925,531
Interest expense................................. (10,703) (257,966)
----------- ------------
Net loss......................................... $(3,232,410) $(42,745,894)
=========== ============
Pro forma net loss per share..................... $ (0.22) $ (1.51)
=========== ============
Shares used in computing pro forma net loss per
share........................................... 14,546,887 28,253,713
=========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
WEBTV NETWORKS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
SERIES C SERIES D SHAREHOLDERS'
CONVERTIBLE CONVERTIBLE SHAREHOLDER EQUITY (NET
PREFERRED PREFERRED COMMON NOTES DEFERRED ACCUMULATED CAPITAL
STOCK STOCK STOCK RECEIVABLE COMPENSATION DEFICIT DEFICIENCY)
----------- ----------- ---------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 15,000,000
shares
of common stock........ $ -- $ -- $ 15,000 $ -- $ -- $ -- $ 15,000
Net loss................ -- -- -- -- -- (3,232,410) (3,232,410)
----------- ----------- ---------- --------- ----------- ------------ ------------
Balances at March 31,
1996................... -- -- 15,000 -- -- (3,232,410) (3,217,410)
Issuance of 4,819,538
shares of
Series C convertible
preferred stock ....... 34,281,374 -- -- -- -- -- 34,281,374
Issuance of 4,106,373
shares of common
stock.................. -- -- 391,954 (301,639) -- -- 90,315
Issuance of 1,343,570
shares of Series D
convertible preferred
stock.................. -- 13,999,999 -- -- -- -- 13,999,999
Deferred compensation
related to stock
options, net of
amortization........... -- -- 1,954,000 -- (1,900,000) -- 54,000
Net loss................ -- -- -- -- -- (42,745,894) (42,745,894)
----------- ----------- ---------- --------- ----------- ------------ ------------
Balances at March 31,
1997................... $34,281,374 $13,999,999 $2,360,954 $(301,639) $(1,900,000) $(45,978,304) $ 2,462,384
=========== =========== ========== ========= =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
WEBTV NETWORKS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(JUNE 30, 1995) TO YEAR ENDED
MARCH 31, MARCH 31,
1996 1997
--------------------- ------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.................................. $(3,232,410) $(42,745,894)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred compensation... -- 54,000
Depreciation and amortization........... 126,963 1,996,602
Changes in operating assets and
liabilities:
Accounts receivable................... -- (2,807,741)
Inventory............................. -- (4,309,713)
Other current assets and other assets. (288,947) (934,443)
Accounts payable...................... 836,506 10,098,390
Accrued payroll and related
obligations.......................... 86,642 625,321
Deferred revenue and other............ -- 5,468,165
----------- ------------
Net cash used in operating activities..... (2,471,246) (32,555,313)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures...................... (581,626) (3,646,567)
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Proceeds from issuance of preferred stock. 6,500,001 53,991,371
Proceeds from issuance of common stock.... 15,000 90,315
Proceeds from convertible note payable due
to director.............................. 150,000 --
Proceeds from (payments on) notes payable
to founders.............................. 401,500 (401,500)
Proceeds from (payments on) convertible
notes payable............................ 500,000 (500,000)
Principal payments of capital lease
obligations.............................. (11,884) (764,549)
----------- ------------
Net cash provided by financing activities. 7,554,617 52,415,637
----------- ------------
Net increase in cash and cash equivalents. 4,501,745 16,213,757
Cash and cash equivalents at beginning of
period................................... -- 4,501,745
----------- ------------
Cash and cash equivalents at end of
period................................... $ 4,501,745 $ 20,715,502
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest.................... $ 10,703 $ 257,966
=========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Property and equipment acquired under
capital lease obligations................ $ 686,295 $ 7,539,305
=========== ============
Conversion of convertible note payable due
to director to preferred stock........... $ -- $ 150,000
=========== ============
Issuance of common stock in return for
shareholder notes receivable............. $ -- $ 301,639
=========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
WebTV Networks, Inc. (the "Company") was incorporated in California on June
30, 1995 and operates an on-line service that enables consumers to experience
the Internet through their televisions. Through September 1996, the Company
was in the development stage.
At March 31, 1997, the Company had incurred a cumulative loss since
inception and, as of that date, had an accumulated deficit of $45,978,304.
Company activities to date have been financed through private placements of
equity interests and loans, including loans from Company founders, a member of
the board of directors and other parties. As of March 31, 1997, the Company's
cash assets and currently available credit line are not sufficient to meet its
current operating plan requirements through March 1998. If the Recapitalization
is consummated, which is described in Note 8, the Company believes that its
financial requirements will be satisfied through the support of Microsoft. In
the event that the Recapitalization is not consummated, the Company would seek
additional debt or equity financing to meet its financial requirements.
Management believes that such financing would be available, however, no
assurance can be given that such financing would be available on acceptable
terms or at all. If such debt or equity financing is not available on terms
acceptable to the Company or at the time required, the Company would maintain
its operations at a level commensurate with its available funds.
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from these estimates.
SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from date of purchase of three months or less to be cash equivalents.
The Company's excess cash is invested in an uninsured money market account
with a major international bank. Carrying value of cash and cash equivalents
approximates market value.
Inventories
Inventories consist primarily of raw materials, which are stated at the
lower of standard cost (which approximates actual cost on a first-in, first-
out cost method) or market value.
Revenue Recognition and Concentration of Credit Risk
The Company derives its revenues principally from on-line service, license
and manufacturing revenue. On-line revenue consists primarily of fees charged
to subscribers to the Company's on-line service and are recognized when
services are provided. Advance payments for on-line services are deferred
until the services are provided.
In 1996, the Company entered into 5 year license agreements with two
consumer electronics manufacturers, Sony Electronics and Philips Consumer
Electronics (together, "licensees"). In April 1997, the Company entered into a
five year agreement with Pace Microtechnology. Pursuant to these agreements,
the Company licensed the technology and reference design for its set-top
terminal to the licensees. The licensees are responsible for the promotion,
sale, support and maintenance of the set-top terminals, which they offer to
customers. The Company
F-7
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
is responsible for providing the on-line service to users of the set-top
terminals. Pursuant these agreements, the Company has the right to receive up-
front license and marketing fees. In addition, the Company will share a portion
of the future revenues from its on-line service with the licensees.
Manufacturing revenue is recognized at the time products are shipped.
Prepayments from licensees are deferred until the related product is shipped.
License revenue consists of certain fees paid by licensees and is recognized
ratably over the term of the agreements. All product and license revenue is
generated by two parties which accounted for 56% and 36%, respectively, of
total revenue for the year ended March 31, 1997.
The Company's accounts receivable are from on-line service subscribers and
licensees. The Company generally does not require collateral on accounts
receivable. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations. The concentration of credit
risk with respect to on-line service accounts receivable is limited due to the
large number of subscribers comprising the Company's subscriber base. Licensee
accounts receivable consists of two multinational consumer electronics
companies who have made timely payments to date. These two companies accounted
for 77% and 18%, respectively, of accounts receivable at March 31, 1997.
The Company generates all of its revenues in the United States.
Cost of Revenues
Cost of on-line service revenues consist of expenses related to the
maintenance and support of the Company's network, data communications costs,
customer support costs and royalties and commissions paid to information and
service providers and licenses. Licensing and manufacturing cost of revenue
consists primarily of the associated component and labor costs of the
manufactured goods sold.
Depreciation and Amortization
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets which approximates three years. Equipment
purchased under capital lease obligations is amortized over the shorter of the
lease term or the estimated useful lives of the related assets.
Advertising Costs
Costs related to advertising are expensed the first time an advertisement
appears. Advertising expense was approximately $11,190,000 for the year ended
March 31, 1997 (none for the period from inception (June 30, 1995) to March 31,
1996).
Research and Development and Software Development Costs
Research and development costs incurred to develop software and hardware
products are charged to operations as incurred.
Software development costs have been expensed in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86,
capitalization of software development costs begins upon the establishment of
technological feasibility and ends when a product is available for general
release to customers. Such costs have been immaterial to date.
Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee and director stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement
F-8
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Option grants to all others are
accounted for under the fair value method prescribed by FAS 123.
Net Loss Per Share
Except as noted below, historical net loss per share is computed using the
weighted-average number of common shares outstanding. Common equivalent shares
from stock options, convertible preferred stock and warrants are excluded from
the computation as their effect is antidilutive.
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(JUNE 30, 1995) ENDED
TO MARCH 31, MARCH 31,
1996 1997
--------------- ----------
<S> <C> <C>
Net loss per share............................... $(0.24) $(2.38)
========== ==========
Shares used in computing net loss per share...... 13,462,963 17,934,964
========== ==========
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares issued using the
as if-converted method. Such shares are included from the original date of
issuance.
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, earnings per share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact of Statement 128 is
expected to result in no change to the Company's primary or fully diluted net
loss per share for the year ended March 31, 1997 and the period from inception
(June 30, 1995) to March 31, 1996, as stock options have been excluded from the
current computation as they are antidilutive.
2. OTHER FAIR VALUE DISCLOSURES
At March 31, 1997, the carrying value of notes receivable from shareholders
approximates their fair value. The fair values of notes receivable from
shareholders are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
3. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1996 1997
---------- -----------
<S> <C> <C>
Computer equipment................................... $ 756,248 $ 8,875,652
Office equipment, furniture and fixtures............. 175,984 1,095,230
Purchased software................................... 279,548 1,769,102
Leasehold improvements............................... 56,141 713,809
---------- -----------
1,267,921 12,453,793
Less accumulated depreciation and amortization....... 126,963 2,121,084
---------- -----------
Property and equipment, net.......................... $1,140,958 $10,332,709
========== ===========
</TABLE>
F-9
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS
In December 1995, the Company entered into a $1,000,000 equipment lease line
of credit, of which approximately $374,000 remains available at March 31,
1997. In addition, the Company entered into equipment lease lines totaling
$3,000,000 in 1996 and $4,539,000 in 1997 which were fully drawn down as of
March 31, 1997. The arrangements are secured by the leased property and
equipment of the Company.
In conjunction with the 1996 and 1997 equipment lease lines, the Company
issued warrants to purchase preferred stock (see Note 6).
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$686,000 and $12,000 and $8,226,000 and $1,288,000 at March 31, 1996 and 1997,
respectively.
Future payments under operating and capital lease arrangements at March 31,
1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Years ending March 31:
1998................................................ $1,290,000 $3,090,835
1999................................................ 1,217,000 2,797,231
2000................................................ 952,000 2,272,878
2001................................................ 837,000 368,996
2002 and thereafter................................. 1,218,000 --
---------- ----------
Total minimum payments................................ $5,514,000 8,529,940
==========
Less amount representing interest..................... 1,080,773
----------
Present value of minimum payments..................... 7,449,167
Less current portion.................................. 2,386,527
----------
Long-term portion..................................... $5,062,640
==========
</TABLE>
Rent expense was approximately $62,000 and $906,000 for the period from
inception to March 31, 1996 and the year ended March 31, 1997.
5. NOTES FROM FOUNDERS, SHAREHOLDERS AND OTHER PARTIES
During the year ended March 31, 1996, the Company issued demand promissory
notes to two founders totaling $401,500, net of repayments, for purposes of
initial funding of the Company. These notes were repaid in April 1996.
In February 1996, the Company issued convertible notes to four parties
including a member of the board of directors and relatives of an officer of
the Company for a total of $680,000. In March 1996, the Company repaid one of
the notes totaling $30,000. In April and July 1996, the Company repaid the
remaining notes (with the exception of the note due to the director) totaling
$500,000. In April 1996, the note due to the director was converted into
92,025 shares of Series B redeemable convertible preferred stock at a per
share price of $1.63.
In conjunction with the issuance of certain of these notes, the Company
issued warrants to purchase common stock (see Note 6).
F-10
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In September and October 1995, under a stock purchase agreement, the Company
issued 1,510,533 shares of Series A redeemable convertible preferred stock
("Series A preferred stock") at a price of $0.993 per share. In March and
April 1996, under a stock purchase agreement, the Company issued 5,576,682
shares of Series B redeemable convertible preferred stock ("Series B preferred
stock") at a price of $1.63 per share. Additionally in April 1996, a $150,000
convertible note due to a member of the board of directors was converted into
92,025 shares of Series B redeemable convertible preferred stock. Also, in
July and August of 1996, warrants issued in April 1996 were exercised to
purchase 648,000 Series B redeemable convertible preferred shares at an
exercise price of $2.50 per share. In September 1996, under a stock purchase
agreement, the Company issued 4,819,538 shares of Series C convertible
preferred stock ("Series C preferred stock") at a price of $7.113 per share.
In March 1997, under a stock purchase agreement, the Company issued 1,343,570
shares of Series D convertible preferred stock ("Series D preferred stock") at
a price of $10.42 per share.
Each share of Series A, Series B, Series C and Series D preferred stock is
convertible, at the option of the holder, into common stock, as determined by
dividing $0.993, $1.63, $7.113 and $10.42, respectively, plus an amount equal
to all declared but unpaid dividends on each share into the number of
outstanding shares. The price at which common stock shall be deliverable upon
conversion of the Series A, Series B, Series C and Series D is $0.9027, $1.63,
$7.113 and $10.42, respectively, subject to certain adjustments for dilution,
if any, resulting from future stock issuances. The outstanding shares of
preferred stock automatically convert into common stock either upon the close
of business on the day immediately preceding the closing of an underwritten
public offering of common stock under the Securities Act of 1933 in which the
Company receives at least $10,000,000 in gross proceeds and the price per
share is at least $7.50, in the case of Series A, Series B and Series C
preferred stock, and at least $40,000,000 in gross proceeds and the per share
price is at least $11.50, in the case of Series D preferred stock.
Series A, Series B, Series C and Series D preferred shareholders are
entitled to noncumulative dividends of $0.0794, $0.1141, $0.4979 and $0.7294,
respectively, per share. Dividends will be paid only when declared by the
board of directors out of legally available funds. No dividends have been
declared as of March 31, 1997.
The Series A, Series B, Series C and Series D preferred shareholders are
entitled to receive, upon liquidation, an amount per share equal to the
issuance price, plus all declared but unpaid dividends. Thereafter, the
remaining assets and funds, if any, shall be distributed pro rata among the
common shareholders. If the assets or property were not sufficient to allow
full payment to the Series A, Series B and Series C shareholders, the
available assets shall be distributed ratably among the Series A, Series B,
Series C and Series D shareholders.
The Series A, Series B, Series C and Series D preferred shareholders have
voting rights equal to the common shares issuable upon conversion.
The Company is required to redeem the outstanding Series A and Series B
preferred shares at an amount equal to the issuance price plus all declared
but unpaid dividends in four annual installments beginning in March 2003.
COMMON STOCK
At March 31, 1997, the Company has reserved 14,141,451 shares of its common
stock for issuance upon conversion of its Series A, Series B, Series C and
Series D preferred stock, 3,946,627 common shares for issuance under the 1996
Stock Incentive Plan and 122,553 shares for issuance of common stock upon the
exercise of outstanding warrants to purchase common stock and convertible
preferred stock.
F-11
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
STOCK WARRANTS
In connection with the issuance of convertible notes in February 1996 as
discussed in Note 5, the Company issued warrants to purchase a total of 53,000
shares of common stock, subject to adjustments for stock splits and other
reclassifications in capitalization, at an exercise price of $0.05 per share.
The warrants will be delivered on or before the respective maturity dates of
the convertible promissory notes and may be exercised at any time on or before
the expiration of one year following the issuance to the respective holders.
Shares issued upon exercise of warrants will be subject to the Company's right
of first refusal to purchase these shares prior to an initial public offering
by the Company. The shares of common stock issuable to the holders pursuant to
the exercise of these warrants are subject to the Company's right of first
refusal to purchase the shares, at the market price, prior to the Company's
initial public offering. These warrants were exercised during the year ended
March 31, 1997.
In connection with equipment lease line financing in June 1996, as discussed
in Note 4, the Company issued warrants to purchase a total of 86,000 shares of
Series B redeemable convertible preferred stock, subject to adjustments for
stock splits and other recapitalization, at an exercise price of $2.50, $5.00
and $7.113 per share for 46,000, 20,000 and 20,000 shares, respectively.
In connection with equipment lease line financing in January 1997, as
discussed in Note 4, the Company issued warrants to purchase a total of 36,553
shares of Series C convertible preferred stock, subject to adjustments for
stock splits and other recapitalization, at an exercise price of $7.113 per
share.
The value ascribed to these warrant issuances was determined by the Company
to be immaterial for financial statement purposes.
Warrants outstanding at March 31, 1997 were 122,553.
1996 STOCK INCENTIVE PLAN
Under the 1996 Stock Incentive Plan (the "Plan"), which was adopted in
February 1996, options may be granted for common stock or common stock may be
issued, pursuant to actions by the board of directors, to directors,
consultants, advisors, and employees of the Company. Options granted are
either incentive stock options or nonstatutory stock options and are
exercisable within the times or upon the events determined by the board of
directors as specified in each option agreement. Incentive stock options
granted under the Plan are at prices not less than 100% of the fair value at
the date of grant. Nonstatutory options granted under the Plan are at prices
not less than 85% of the fair value on the date of the grant, as determined by
the board of directors. Stock options granted to a 10% shareholder shall not
be less than 110% of the fair value at the date of grant. Options vest over a
period of time as determined by the board of directors, generally four years.
The term of the Plan is ten years.
F-12
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Plan transactions were as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS WEIGHTED-
--------------------------- AVERAGE
SHARES NUMBER OF PRICE PER PRICE PER
AVAILABLE SHARES SHARE SHARE
---------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Original authorization of
shares.................. 3,180,188 -- -- --
Additional shares
authorized for
issuance.............. 1,819,812 -- -- --
Options granted........ (2,660,849) 2,660,849 $0.05 $0.05
---------- ----------- -------------- -----
Balance at March 31,
1996.................... 2,339,151 2,660,849 $0.05 $0.05
Additional shares
authorized for
issuance.............. 3,000,000 -- -- --
Options granted........ (4,317,832) 4,317,832 $0.05 - $2.50 $0.76
Options exercised...... -- (4,053,373) $0.05 - $0.50 $0.09
Options canceled....... 306,518 (306,518) $0.05 - $1.75 $0.15
---------- ----------- -------------- -----
Balance at March 31,
1997.................... 1,327,837 2,618,790 $0.05 - $2.50 $1.14
========== =========== ============== =====
Weighted-average fair
value of options granted
during the year ended
March 31, 1997 $0.20
=====
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options (see Note 1).
Under APB 25, when the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options granted after December 31, 1994 under the fair value
method of that Statement. The fair value of these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended March 31, 1996 and 1997;
risk-free interest rate of 6%; no dividends paid; volatility factor of the
expected market price of the Company's common stock of zero; and a weighted-
average expected life of the option of five years. The effects of applying FAS
123 for the recognition of compensation expense and provision of pro forma
disclosures in the years ended March 31, 1996 and 1997 are not likely to be
representative of the effects on reported and pro forma net income in future
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-13
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Pro forma net loss.................................. $(3,232,664) $(42,810,550)
Pro forma loss per share............................ $ (0.22) $ (1.52)
</TABLE>
The weighted-average contractual life of options outstanding and exercisable
at March 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-
OPTIONS AVERAGE OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE MARCH 31, CONTRACTUAL MARCH 31,
PRICES 1997 LIFE 1997
-------- -------------- ----------- --------------
(IN YEARS)
<S> <C> <C> <C>
$0.05............................. 139,000 9.00 139,000
$0.16............................. 90,250 9.24 250
$0.50............................. 611,500 9.45 3,150
$0.75............................. 296,600 9.56 5,000
$1.00............................. 573,600 9.67 --
$1.75............................. 456,100 9.79 75,250
$2.00............................. 147,500 9.88 12,000
$2.50............................. 304,240 9.96 14,688
--------- ---- -------
2,618,790 9.62 249,338
========= ==== =======
</TABLE>
At March 31, 1997, there were 2,957,230 shares subject to repurchase under
the Plan (there were none at March 31, 1996).
DEFERRED COMPENSATION
The Company has recorded deferred compensation of $1,954,000 to reflect the
difference between the exercise price and deemed fair value for financial
reporting purposes of certain options to purchase common stock of the Company
granted by the Company during the year ended March 31, 1997. This amount is
being amortized over the vesting period of the individual options, generally a
48-month period. Compensation expense recognized in the year ended March 31,
1997 totaled $54,000.
7. INCOME TAXES
As of March 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $43,100,000 and $42,700,000 respectively. The
federal net operating loss carryforwards will expire at various dates
beginning in 2011 through 2012, if not utilized. The state net operating loss
carryforwards will expire in 2003.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes.
F-14
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 1,200,000 $ 17,200,000
Research credits..................................... -- 500,000
Capitalized research expenses........................ -- 900,000
----------- ------------
Total deferred tax assets.......................... 1,200,000 18,600,000
Valuation allowance for deferred tax assets.......... (1,200,000) (18,600,000)
----------- ------------
Net deferred tax assets.............................. $ -- $ --
=========== ============
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $1,200,000 during the period from inception (June 30, 1995) to
March 31, 1996.
8. SUBSEQUENT EVENTS (UNAUDITED)
In April 1997, the Company and certain shareholders entered into an
Agreement and Plan of Recapitalization (the "Recapitalization Agreement") with
Microsoft Corporation ("Microsoft"). Pursuant to the Recapitalization
Agreement, the Company will undergo a reorganization of its capital ("the
Recapitalization"). If the Recapitalization is approved, the following will
occur:
. Holders of vested common shares of the Company may elect to receive
$12.841 per share in cash directly from Microsoft or receive in the
Recapitalization the equivalent value per share in new Class A common
shares of the Company which will be exchangeable for Microsoft Common
shares initially on a one-to-one basis, in either case less
approximately 11.4% of the cash or Class A common shares to be received
by each holder of common shares of the Company, which amount (the
"Escrow Withholding Amount") will be withheld and placed in an escrow
fund described below, for an effective value per common share of the
Company of approximately $11.381 if none of the Escrow Withholding
Amount is ultimately paid out to the shareholders of the Company (such
lesser amount, the "Adjusted Common Shares Consideration");
. Holders of unvested common shares of the Company will receive in the
Recapitalization the Adjusted Common Shares Consideration in new Class A
Common Shares of the Company which will be exchangeable for Microsoft
common shares initially on a one-to-one basis;
. Holders of options to purchase common shares of the Company will receive
replacement nonqualified options for Microsoft common shares;
. Holders of preferred shares of the Company may elect to receive $13.686
per share (determined on an as-if-converted to common shares of the
Company basis) in cash directly from Microsoft or alternatively receive
$13.686 per share (determined on an as-if-converted to common shares of
the Company basis) in cash from the Company in the Recapitalization, in
either case less the Escrow Withholding Amount, for an effective price
per share of the Company of approximately $12.130 if none of the Escrow
Withholding Amount is ultimately paid out to the holders of preferred
shares of the Company;
. Holders of common shares of the Company or preferred shares of the
Company may exercise dissenters' rights by not voting in favor of the
Recapitalization and strictly following the statutory procedures under
California law; and
F-15
<PAGE>
WEBTV NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
. Holders of warrants to purchase capital shares of the Company may either
elect to receive $13.686 per share (determined on an as-if-converted to
common shares of the Company and as-if-net-exercised basis) in cash
directly from Microsoft or alternatively receive the same cash payment
from WNI in the Recapitalization, in either case less the Escrow
Withholding Amount, for an effective price per underlying preferred
share of the Company of approximately $12.130 if none of the Escrow
Withholding Amount is ultimately paid out to the holders of such
warrants.
In April 1997, in conjunction with the Recapitalization Agreement, Microsoft
and the Company entered into a Line of Credit Agreement (the "Credit
Agreement"), pursuant to which Microsoft agreed to loan the Company, on a
revolving basis, up to $30,000,000 (the "Loan"). Interest on the outstanding
balance on the Loan will accrue at a rate of ten percent (10%). The Loan is
secured by a security interest granted by the Company to Microsoft, pursuant
to a Security Agreement, covering all of the Company's Intellectual Property
(as defined in the Recapitalization Agreement). The principal and interest of
the Loan is payable in full at the Closing of the Recapitalization Agreement.
In the event the Recapitalization Agreement is terminated, the principal and
interest of the Loan is repayable as follows: (i) if the Company terminates
the Recapitalization Agreement without cause, all outstanding principal and
interest on the Loan is due and payable within ten (10) days of the
termination; (ii) if the Reorganization Agreement is terminated other than by
the Company without cause, all principal and interest on the Loan is due and
payable on that date eighteen (18) months after the effective date of such
termination. Microsoft may elect to forgive any of the Loan payable and such
forgiveness shall be treated as an offset against any Termination Fee, Break-
up Fee or other fee obligations to the Company pursuant to the
Recapitalization Agreement (as such terms are defined in the Recapitalization
Agreement).
Microsoft has also agreed that after the Recapitalization is consummated
that additional options to purchase Microsoft common shares will be granted to
the Company's employees so that those employees (other than the principal
shareholders) who held common shares of the Company and options to purchase
common shares of the Company on April 5, 1997 will receive aggregate
consideration of approximately $31,774,000.
Immediately following the effective date of the recapitalization, the
Company will be a controlled subsidiary of Microsoft and the Company expects
that its existing operations will be the same in all material respects.
Although Microsoft officers will be appointed to serve on the board of
directors, current management expects that it will continue to manage the
Company after the recapitalization. In addition, the Company will be engaged
in the same lines of business with the same assets.
F-16
<PAGE>
APPENDIX A
MICROSOFT CORPORATION
WEBTV NETWORKS, INC.
AND
CERTAIN SHAREHOLDERS OF
WEBTV NETWORKS, INC.
AGREEMENT AND PLAN OF RECAPITALIZATION
DATED AS OF APRIL 5, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. THE RECAPITALIZATION................................................ A-2
1.1 Effective Time of the Recapitalization.......................... A-2
1.2 Closing......................................................... A-2
1.3 Conversion of Company Securities................................ A-2
1.3.1 Exchangeable Shares for Common Shares..................... A-2
1.3.2 Cash for Preferred Shares and Warrants and Electing Common
Shares.................................................... A-3
1.3.3 Company Options........................................... A-3
1.3.4 Restricted Shares......................................... A-3
1.4 Capital Contributions and Issuance of Shares to Microsoft....... A-4
1.5 Escrow Agreement................................................ A-4
1.6 Dissenter Rights................................................ A-4
1.7 Fractional Shares............................................... A-5
1.8 Exchange of Certificates........................................ A-5
1.8.1 Exchange Agent............................................ A-5
1.8.2 Company to Provide Common Shares.......................... A-5
1.8.3 Exchange Procedures....................................... A-5
1.8.4 No Further Ownership Rights in Company Shares............. A-6
1.8.5 Return to Company......................................... A-6
1.9 Tax-Free Reorganization......................................... A-6
2. REPRESENTATIONS AND WARRANTIES...................................... A-6
2.1 Representations and Warranties of Company and Principal
Shareholders........................................................ A-6
2.1.1 Organization, Standing and Power........................ A-6
2.1.2 Capital Structure....................................... A-7
2.1.3 Authority............................................... A-8
2.1.4 Compliance with Laws and Other Instruments.............. A-8
2.1.5 Technology.............................................. A-9
2.1.6 Financial Statements..................................... A-10
2.1.7 Taxes.................................................... A-10
2.1.8 Information Supplied..................................... A-11
2.1.9 Absence of Certain Changes and Events.................... A-12
2.1.10 Leases in Effect......................................... A-12
2.1.11 Personal Property........................................ A-12
2.1.12 Certain Transactions..................................... A-12
2.1.13 Litigation and Other Proceedings......................... A-13
2.1.14 Major Contracts ......................................... A-13
2.1.15 Insurance and Banking Facilities......................... A-14
2.1.16 Employees................................................ A-14
2.1.17 Employee Benefit Plans................................... A-14
2.1.18 Certain Agreements....................................... A-15
2.1.19 Guarantees and Suretyships............................... A-15
2.1.20 Brokers and Finders...................................... A-15
2.1.21 Certain Payments......................................... A-15
2.1.22 Distributors, Brokers and Cstomers....................... A-15
2.1.23 Environmental Matters.................................... A-15
2.1.24 Disclosure............................................... A-16
2.1.25 Reliance................................................. A-16
2.1.26 Subscribers.............................................. A-16
2.2 Representations and Warranties of Microsoft..................... A-16
2.2.1 Organization, Standing and Power.......................... A-17
2.2.2 Authority................................................. A-17
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
2.2.3 Compliance with Laws and Other Instruments..................... A-17
2.2.4 SEC Documents; Financial Statements............................ A-17
2.2.5 Information Supplied........................................... A-17
2.2.6 No Defaults.................................................... A-18
2.2.7 No Material Adverse Change..................................... A-18
2.2.8 Disclosure..................................................... A-18
2.2.9 Reliance....................................................... A-18
3. COVENANTS OF COMPANY................................................. A-18
3.1 Conduct of Business............................................ A-18
3.1.1 Ordinary Course................................................ A-18
3.2 Dividends, Issuance of or Changes in Securities................ A-19
3.3 Governing Documents............................................ A-19
3.4 No Dispositions................................................ A-20
3.5 Indebtedness................................................... A-20
3.6 Compensation................................................... A-20
3.7 Claims......................................................... A-20
3.8 Breach of Representation and Warranties........................ A-20
3.9 Consents....................................................... A-20
3.10 Tax Returns and Payments....................................... A-20
3.11 Shareholder Approval........................................... A-20
3.12 Preparation of Disclosure and Solicitation Materials........... A-21
3.13 Exclusivity; No Acquisitions................................... A-21
3.14 Notice of Events............................................... A-21
3.15 Modification or Dissolution of Contracts....................... A-21
3.16 Best Efforts................................................... A-21
3.17 Resignations................................................... A-22
3.18 Negotiations With Fujitsu...................................... A-22
4. COVENANTS OF MICROSOFT............................................... A-22
4.1 Breach of Representations and Warranties....................... A-22
4.2 Consents....................................................... A-22
4.3 Best Efforts................................................... A-22
4.4 Officers and Directors......................................... A-22
4.5 Nasdaq Listing................................................. A-22
4.6 Request for No Action Letter................................... A-23
4.7 Line of Credit................................................. A-23
5. ADDITIONAL AGREEMENTS................................................ A-23
5.1 Legal Conditions to the Recapitalization....................... A-23
5.2 Employee Benefits.............................................. A-23
5.3 Expenses....................................................... A-24
5.4 Additional Agreements.......................................... A-24
5.5 Public Announcements........................................... A-24
5.6 HSR Act Filing................................................. A-24
5.6.1 Filings and Cooperation........................................ A-24
5.6.2 Best Efforts................................................... A-25
5.7 Preparation of Proxy Statement and S-4......................... A-25
5.8 Access to Properties and Records............................... A-25
5.9 Completion of Audit............................................ A-26
6. CONDITIONS PRECEDENT................................................. A-26
6.1 Conditions to Each Party's Obligation to Effect the
Recapitalization............................................... A-26
6.1.1 Governmental Approvals......................................... A-26
6.1.2 No Restraints.................................................. A-26
6.1.3 Stockholder Approval........................................... A-26
6.1.4 Securities Laws................................................ A-26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
6.2 Conditions of Obligations of Microsoft........................... A-27
6.2.1 Representations and Warranties of Company and the
Principal Shareholders.................................... A-27
6.2.2 Performance of Obligations of Company and the Principal
Shareholders.............................................. A-27
6.2.3 Employment of Developrrs.................................. A-27
6.2.4 Affiliates................................................ A-27
6.2.5 Opinion of Counsel........................................ A-27
6.2.6 Employment and Noncompetition Agreements.................. A-27
6.2.7 Consents.................................................. A-28
6.2.8 Termination of Rights and Certain Securities.............. A-28
6.2.9 License of Technology..................................... A-28
6.2.10 Rights and Preferences of Company Preferred Shares........ A-28
6.2.11 Execution of Escrow Agreement............................. A-28
6.2.12 Tax-Free Reorganization................................... A-28
6.3 Conditions of Obligation of Company.............................. A-28
6.3.1 Representations and Warranties of Microsoft................ A-28
6.3.2 Performance Obligations of Microsoft....................... A-28
6.3.3 Opinion of Microsoft's Counsel............................. A-28
6.3.4 Tax-Free Reorganization.................................... A-29
6.3.5 Nasdaq Listing............................................. A-29
6.3.6 Make-Well Agreement........................................ A-29
7. INDEMNIFICATION...................................................... A-29
7.1 Indemnification Relating to Agreement............................ A-29
7.2 Third Party Claims............................................... A-29
7.3 Notice of Claims................................................. A-30
7.4 Binding Effect................................................... A-30
7.5 Time Limit....................................................... A-30
7.6 Limits of Indemnification........................................ A-31
7.7 Tax Consequences................................................. A-31
7.8 Sole Remedy...................................................... A-31
7.9 Duty to Mitigate................................................. A-31
8. TERMINATION.......................................................... A-31
8.1 Mutual Agreement................................................. A-31
8.2 Failure to Obtain Shareholder Approval........................... A-31
8.3 Termination by Microsoft......................................... A-32
8.4 Termination by Company........................................... A-32
8.5 Unlawful Transaction............................................. A-32
8.6 Outside Date..................................................... A-32
8.7 Effect of Termination............................................ A-32
8.7.1 Obligations Upon Termination............................... A-32
8.7.2 Termination Without Breach................................. A-32
8.7.3 Termination by Company Without Cause....................... A-33
8.7.3.1 Right to Consideration Upon Sale of Company........ A-33
8.7.3.2 Definition of Acquired............................. A-33
8.7.3.3 Amount of Consideration............................ A-33
8.7.3.4 Payment of Consideration........................... A-34
8.7.3.5 Exclusive Remedy................................... A-34
8.7.4 Termination by Microsoft Without Cause..................... A-34
8.7.5 Additional Fee With Respect to Fujitsu..................... A-34
9. MISCELLANEOUS........................................................ A-35
9.1 Entire Agreement................................................. A-35
9.2 Governing Law.................................................... A-35
9.3 Notices ......................................................... A-35
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
9.4 Severability.................................................... A-36
9.5 Survival of Representations and Warranties...................... A-36
9.6 Assignment...................................................... A-36
9.7 Counterparts.................................................... A-36
9.8 Amendment....................................................... A-36
9.9 Extension, Waiver............................................... A-36
9.10 Interpretation.................................................. A-36
9.11 Attorneys' Fees................................................. A-37
</TABLE>
iv
<PAGE>
DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
TERM DEFINED
- ---- -------
<S> <C>
1991 Plan............................................................... A-3
acquired................................................................ A-33
Acquisition Transaction................................................. A-21
Additional Fee.......................................................... A-34
affiliate............................................................... A-6
Affiliate Agreements.................................................... A-27
Affiliates.............................................................. A-27
Agreement............................................................... A-2
Antitrust Laws.......................................................... A-25
blue sky................................................................ A-8
Break-up Fee............................................................ A-34
Business Condition...................................................... A-7
Certificate or Certificates............................................. A-5
Charter Documents....................................................... A-7
Class B Common Shares................................................... A-4
Closing................................................................. A-2
Closing Date............................................................ A-2
Code.................................................................... A-6
Company................................................................. A-2
Company Common Share Equivalents........................................ A-7
Company Common Shares................................................... A-7
Company Disclosure Schedule............................................. A-6
Company Options......................................................... A-7
Company Preferred Shares................................................ A-7
Company Restricted Shares............................................... A-3
Company Shareholders Meeting............................................ A-21
Company Shares.......................................................... A-7
Company Stock Option Plan............................................... A-7
Company Voting Debt..................................................... A-8
Company Warrants........................................................ A-7
Confidentiality Agreement............................................... A-26
Consents................................................................ A-8
Effective Time.......................................................... A-2
Eligible Dissenting Shares.............................................. A-4
ERISA................................................................... A-14
Escrow Agent............................................................ A-5
Escrow Agreement........................................................ A-4
Escrow Amount........................................................... A-4
Exchange Act............................................................ A-8
Exchange Agent.......................................................... A-5
Exchange Ratio.......................................................... A-2
Exchangeable Shares..................................................... A-2
Financial Statements.................................................... A-10
Governmental Entity..................................................... A-8
Hazardous Material...................................................... A-16
Holders................................................................. A-29
Holders' Representative................................................. A-29
HSR Act................................................................. A-8
</TABLE>
<TABLE>
<CAPTION>
PAGE
TERM DEFINED
- ---- -------
<S> <C>
Indemnifiable Amounts................................................... A-29
Intellectual Property................................................... A-9
IRS..................................................................... A-11
Lease................................................................... A-12
Leases.................................................................. A-12
Line of Credit.......................................................... A-23
liquidation rights...................................................... A-33
Microsoft............................................................... A-2
Microsoft Closing Price................................................. A-2
Microsoft Common Shares................................................. A-3
Microsoft Disclosure Schedule........................................... A-16
Microsoft Options....................................................... A-3
multiemployer plan...................................................... A-14
Net Acquisition Proceeds................................................ A-33
Optionee................................................................ A-3
Order................................................................... A-25
Outside Date............................................................ A-32
Plan.................................................................... A-14
plan of reorganization.................................................. A-6
Principal Shareholders.................................................. A-2
prohibited transaction.................................................. A-14
Proxy Statement......................................................... A-11
Proxy Statement/Prospectus.............................................. A-11
Real Property........................................................... A-15
Recapitalization........................................................ A-2
Recapitalization Documents.............................................. A-2
Related Agreements...................................................... A-8
reorganization.......................................................... A-6
S-4..................................................................... A-11
SEC..................................................................... A-8
SEC Documents........................................................... A-17
Securities Act.......................................................... A-6
Series A Shares......................................................... A-7
Series B Shares......................................................... A-7
Series C Shares......................................................... A-7
Series D Shares......................................................... A-7
Significant Subsidiaries................................................ A-17
single-employer plan.................................................... A-14
Statutory Tax Period.................................................... A-30
Subsidiary.............................................................. A-7
tax and taxes........................................................... A-11
Tax Claims.............................................................. A-30
Termination Fee......................................................... A-32
Third Party............................................................. A-33
Threshold Amount........................................................ A-31
Total Aggregate Consideration........................................... A-33
Voting Agreements....................................................... A-21
voting power............................................................ A-33
</TABLE>
A-1
<PAGE>
AGREEMENT AND PLAN OF RECAPITALIZATION
AGREEMENT AND PLAN OF RECAPITALIZATION, DATED AS OF April 5, 1997 (this
"AGREEMENT"), by and among Microsoft Corporation, a Washington corporation
("MICROSOFT"), WebTV Networks, Inc., a California corporation ("COMPANY"), and
the undersigned shareholders of Company (the "PRINCIPAL SHAREHOLDERS").
RECITALS
INTENDING TO BE LEGALLY BOUND, and in consideration of the premises and the
mutual representations, warranties, covenants and agreements contained herein,
Microsoft, Company, and the Principal Shareholders hereby agree as follows:
1. THE RECAPITALIZATION
1.1 EFFECTIVE TIME OF THE RECAPITALIZATION.
Amended and Restated Articles of Incorporation and any other required
documents (collectively the "RECAPITALIZATION DOCUMENTS"), consistent with the
term sheet attached as Exhibit 1.1, or in such other form as is reasonably
satisfactory to the parties, will be duly prepared, executed and acknowledged
by Company and thereafter delivered to the Secretary of State of California as
soon as practicable on the Closing Date (as defined in Section 1.4) (the
"RECAPITALIZATION"). The Recapitalization will become effective at such time
as the Recapitalization Documents have been filed with the Secretary of State
of California or at such time thereafter as is provided in the
Recapitalization Documents (the "EFFECTIVE TIME"). Solely for purposes of
clarification, Company and the Principal Shareholders acknowledge and agree
that Microsoft will have no obligation to make any payment or issue any shares
pursuant to the Recapitalization or this Agreement until the Recapitalization
has been confirmed in writing by the Secretary of State of California.
1.2 CLOSING.
The execution and delivery of the documents required to effectuate the
transactions contemplated by this Agreement (the "CLOSING") will take place at
10:00 a.m. local time as soon as practicable after satisfaction or waiver of
the last to be fulfilled of the conditions set forth in Article 6, that by
their terms are not to occur at the Closing (the "CLOSING DATE"), but in no
event more than two business days following the satisfaction of such last
condition, at the offices of Preston Gates & Ellis LLP, Seattle, Washington,
unless another time, date or place is agreed to in writing by the parties
hereto.
1.3 CONVERSION OF COMPANY SECURITIES.
1.3.1 EXCHANGEABLE SHARES FOR COMMON SHARES.
Each of the issued and outstanding Company Common Shares (as defined in
Section 2.1.2), other than vested Company Common Shares of holders who elect
to receive cash pursuant to Section 1.3.2, shall, at the Effective Time, by
virtue of the Recapitalization, be converted, without any action on the part
of the holders thereof, into, and Company shall thereupon issue to the holders
of Company Common Shares, a number of Company Class A Common Shares (the
"EXCHANGEABLE SHARES") having the rights, privileges and conditions set forth
in the Recapitalization Documents pursuant to an exchange ratio determined by
dividing $12.841 by the Microsoft Closing Price (the "EXCHANGE RATIO"). The
"MICROSOFT CLOSING PRICE" shall be the average closing price as publicly
reported by the Nasdaq Stock Market as of 4:00 p.m. Eastern Time over the
twenty consecutive trading days ending two trading days prior to the Closing.
(The following example is inserted solely for purposes of clarification of the
preceding sentence: assume the Closing Date is Friday, June 27, 1997, then the
specified twenty (20) trading day period will end on and include Wednesday,
June 25, 1997.)
A-2
<PAGE>
1.3.2 CASH FOR PREFERRED SHARES AND WARRANTS AND ELECTING COMMON SHARES.
Each of the issued and outstanding Company Preferred Shares (as defined in
Section 2.1.2) shall, at the Effective Time, by virtue of the
Recapitalization, be converted, without any action on the part of the holders
thereof, into the right to receive $13.686 per share (determined on an as-if-
converted to Company Common Shares basis) in cash. Subject to each of their
terms, each issued and outstanding Company Warrant (as defined in Section
2.1.2) shall, at the Effective Time, by virtue of the Recapitalization, be
converted, without any action on the part of the holders thereof, into the
right to receive $13.686 per share (determined on an as-if-exercised and
converted to Company Common Shares basis) in cash, less any applicable
exercise price (whether in cash or through a net exercise) with respect to
such Company Warrants. Holders of Company Common Shares other than Company
Restricted Shares (as defined in Section 1.3.4) may elect effective at the
Effective Time by the execution of documentation to be provided by the Company
at the time the Proxy Statement (as defined in Section 2.1.8) shall be mailed
to the Company's shareholders to receive $12.841 per share from Microsoft in
lieu of receiving Exchangeable Shares pursuant to Section 1.3.1. If no
election to receive cash shall be received by any holder of eligible Company
Common Shares, prior to the Effective Time, such holder shall be deemed to
have elected to receive Exchangeable Shares pursuant to Section 1.3.1 above.
Company agrees that, alternatively, Microsoft may make an offer to purchase
Company Preferred Shares and Company Warrants.
1.3.3 COMPANY OPTIONS.
At the Effective Time, each of the then outstanding Company Options (as
defined in Section 2.1.2) will by virtue of the Recapitalization, and without
any further action on the part of any holder thereof, be replaced by one or
more nonqualified stock options ("MICROSOFT OPTIONS") to purchase that number
of Microsoft common shares, $.000025 par value ("MICROSOFT COMMON SHARES"),
determined by multiplying the number of Company Common Shares subject to each
Company Option at the Effective Time by the Exchange Ratio, and at an exercise
price per Microsoft Common Share equal to the exercise price per share of such
Option immediately prior to the Effective Time divided by the Exchange Ratio.
Each Microsoft Option will be issued pursuant to the Microsoft 1991 Employee
Stock Option Plan, as amended (the "1991 PLAN"). If the foregoing calculations
result in a replaced Company Option being exercisable for a fraction of a
Microsoft Common Share, then the number of Microsoft Common Shares subject to
such option will be rounded to the nearest whole number of Microsoft Common
Shares. The vesting schedule for the replacement Microsoft Options for each
holder of Company Options is set forth on Schedule 1.3.3 and the form of the
replacement option is attached as Exhibit 1.3.3. Each recipient of a
replacement Microsoft Option will be deemed to be an "OPTIONEE" under the 1991
Plan and will be granted the right to exercise any unexercised replacement
Microsoft Options for three (3) months after termination by Company or
Microsoft, whichever occurs later, but in no event later than the expiration
date of such option which will be the same date as provided for in the Company
Option.
In addition to the Microsoft Options issued in replacement of Company
Options pursuant to the preceding paragraph Microsoft shall grant additional
Microsoft Options so that the total aggregate value in Exchangeable Shares,
cash or Microsoft Options received by holders (other than Principal
Shareholders) of Company Common Shares and/or Company Options equals $17.62
per Company Common Share Equivalent, which amount in the aggregate shall equal
not more than $31,774,000.
Microsoft will cause the Microsoft Options issued in replacement of the
Company Options to be issued as soon as practicable after the Effective Time,
pursuant to a then effective registration statement on Form S-8 for the 1991
Plan, and will cause such registration statement to remain effective for so
long as such replacement Microsoft Options remain outstanding.
1.3.4 RESTRICTED SHARES.
Company Shares which are subject to repurchase by Company in the event a
Company employee ceases to be employed by Company ("COMPANY RESTRICTED
SHARES") shall be converted into Exchangeable Shares on the same basis as
provided in Section 1.3.1 and shall be registered in the holder's name, but
shall be held by
A-3
<PAGE>
Company pursuant to existing agreements in effect as of the date of this
Agreement; provided, however, that the existing agreements with the Principal
Shareholders shall be modified in the manner set forth in Exhibit 3.15.
Holders of the Company Restricted Shares are set forth on Schedule 1.3.4.,
along with the vesting schedule for such shares.
1.4 CAPITAL CONTRIBUTION AND ISSUANCE OF SHARES TO MICROSOFT.
At the Closing Microsoft shall transfer cash, in the form of immediately
available funds, equal to not less than the amount required to satisfy the
conversion rights of holders of Company Preferred Shares, Company Warrants and
Company Common Shares which are eligible and elect to convert to cash pursuant
to Section 1.3.2. At the Closing Microsoft shall also transfer, at its
election, either Microsoft Common Shares equal to not less than the amount
required to satisfy the exchange rights of the Exchangeable Shares issued
pursuant to Section 1.3.1 and the Exchangeable Shares issued to Microsoft
pursuant to the next sentence, or cash, in the form of immediately available
funds, equal to not less than the amount required to purchase such Microsoft
Common Shares at the Microsoft Closing Price. Such Microsoft Common Shares or
cash shall be held by the Company on a segregated basis earmarked solely to
satisfy the Company's obligations in connection with the exchange rights of
the holders of Exchangeable Shares following the Effective Time. In
consideration for such transfers Microsoft shall receive: one or more Company
"CLASS B COMMON SHARES" which shall have the rights, privileges and conditions
as provided for in the Recapitalization Documents and such other shares as
Microsoft may deem appropriate.
1.5 ESCROW AGREEMENT.
Fifty Million Dollars ($50,000,000) in value, allocated between Exchangeable
Shares (valued at the Microsoft Closing Price) and cash in the same manner as
the total amounts to be provided under Sections 1.3.1 and 1.3.2 are allocated
(the "ESCROW AMOUNT"), will be withheld from the Exchangeable Shares and cash
to be issued in the conversion of the Company Shares pursuant to Section 1.3
and shall be deposited with the Exchange Agent (as defined in Section 1.8.1)
pursuant to an escrow agreement in substantially the form attached as Exhibit
1.5 ("ESCROW AGREEMENT,") solely to serve as a fund to satisfy possible claims
by Microsoft for indemnification pursuant to Article 7. Deductions from the
Escrow Amount shall be made on a pro rata basis (i.e., an equal amount per
each Company Common Share Equivalent, as defined in Section 2.1.2) from all
holders of Company Shares and Company Warrants. In no event shall any holder
of Company Shares or Company Warrants be required to contribute more than such
holder's pro rata portion of the Escrow Amount as of the Effective Time.
1.6 DISSENTER RIGHTS.
Notwithstanding any provision of this Agreement to the contrary, any holder
of Company Common Shares or Company Preferred Shares that are outstanding on
the record date for the determination of those shares entitled to vote for or
against the Recapitalization who has demanded and perfected appraisal rights
for such shares in accordance with California law and who, as of the Effective
Time, has not effectively withdrawn or lost such appraisal right ("ELIGIBLE
DISSENTING SHARES"), shall not be converted into or represent a right to
receive Exchangeable Shares or cash pursuant to Section 1.3, but rather the
holder thereof shall only be entitled to such rights as are granted by
California law.
Notwithstanding the foregoing, if any holder of Company Common Shares or
Company Preferred Shares who demands appraisal of such shares under California
law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
or the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Exchangeable Shares or
cash in accordance with Section 1.3 hereof, without interest thereon, upon
surrender of the certificate representing such Company Common Shares or
Company Preferred Shares in the manner provided in Section 1.8.
A-4
<PAGE>
Company shall give Microsoft (i) prompt notice of any written demands for
appraisal of any Company Common Shares or Company Preferred Shares,
withdrawals of such demands, and any other instruments served pursuant to
California law and received by Company which relate to any such demand for
appraisal and (ii) the opportunity to participate in and/or direct all
negotiations and proceedings which take place prior to the Effective Time with
respect to demands for appraisal under California law. Company shall not,
except with prior written consent of Microsoft or as may be required by
applicable law, voluntarily make any payment with respect to any demands for
appraisal of Company Common Shares or Company Preferred Shares or offer to
settle or settle any such demands.
1.7 FRACTIONAL SHARES.
No fractional Exchangeable Shares will be issued in the Recapitalization. In
lieu of such issuance, all Exchangeable Shares issued to the holders of
Company Common Shares pursuant to the terms of this Agreement shall be rounded
to the closest whole Exchangeable Share.
1.8 EXCHANGE OF CERTIFICATES.
1.8.1 EXCHANGE AGENT.
Prior to the Closing Date, Company shall appoint ChaseMellon Shareholder
Services LLC., or other company reasonably satisfactory to Company, to act as
exchange agent (the "EXCHANGE AGENT") on behalf of Company in the
Recapitalization.
1.8.2 COMPANY TO PROVIDE COMMON SHARES.
Promptly after the Effective Time, Company shall make available to the
Exchange Agent the certificates representing Exchangeable Shares and cash to
be issued in the conversion of Company Shares and Company Warrants pursuant to
Section 1.3 in exchange for outstanding certificates of Company Shares and
Company Warrants ("CERTIFICATE" or "CERTIFICATES").
1.8.3 EXCHANGE PROCEDURES.
As of the Effective Time or as soon thereafter as practical, the Exchange
Agent shall mail to each holder of record of a Certificate or Certificates,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent), (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing Exchangeable Shares or cash payable with respect to Company
Preferred Shares, Company Warrants or eligible electing Company Common Shares,
and (iii) an execution copy of the Escrow Agreement. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal, Escrow Agreement and such other documents as
the Exchange Agent shall require, the holder of such Certificate shall be
entitled to receive in exchange therefor the number of whole Exchangeable
Shares to which the holder of Company Common Shares is entitled pursuant to
Section 1.3.1 or the cash to which the holder of Company Preferred Shares,
Company Warrants or eligible electing Company Common Shares are entitled to
pursuant to Section 1.3.2. The Certificate so surrendered shall forthwith be
canceled. Notwithstanding any other provision of this Agreement, until holders
of Certificates have surrendered them for exchange as provided herein, (i) no
dividends, or other distributions shall be paid with respect to any shares
represented by such Certificates, and (ii) without regard to when such
Certificates are surrendered for exchange as provided herein, no interest
shall be paid on any cash payable for Company Preferred Shares, Company
Warrants or eligible electing Company Common Shares or dividends or other
distributions payable with respect to Exchangeable Shares if and when
declared. Upon surrender of a Certificate in exchange for Company Common
Shares, there shall be paid to the holder of such Certificate the amount of
any dividends or other distributions which became payable at or after the
Effective Time, but which were not paid by reason of the foregoing, with
respect to the number of whole Exchangeable Shares represented by the
certificate or certificates issued upon such surrender. If any certificate for
Exchangeable Shares or any cash payment for Company Preferred Shares or
Company Warrants is to be issued in a name other than in which the Certificate
surrendered in exchange therefore is registered, it shall be a condition of
such exchange that the person requesting such exchange pay any
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transfer or other taxes required by reason of the issuance of certificates for
such Exchangeable Shares or cash payment in a name or to a person other than
that of the registered holder of the Certificate surrendered, or establish to
the satisfaction of the Microsoft that such tax has been paid or is not
applicable. Certificates of restricted Exchangeable Shares issued to holders
of Company Restricted Shares shall bear legends substantially similar to the
legends presently on the Company Restricted Shares certificates and as
required by applicable law.
1.8.4 NO FURTHER OWNERSHIP RIGHTS IN COMPANY SHARES.
All Exchangeable Shares or cash delivered upon the surrender for exchange of
Company Common Shares and cash delivered upon the surrender for exchange of
Company Preferred Shares, Company Warrants or eligible electing Company Common
Shares in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such Company Shares
or Company Warrants. After the Effective Time, there shall be no transfers on
the stock transfer books of the Company of Company Shares other than the
Exchangeable Shares or Company Class B Common. If, after the Effective Time,
Certificates are presented to the Company for any reason, they shall be
canceled and exchanged as provided in this Article 1. Certificates surrendered
for exchange by any person constituting an "AFFILIATE" of Company for purposes
of Rule 145(c) under the Securities Act of 1933, as amended (the "SECURITIES
ACT"), shall not be exchanged until Microsoft and Company receive a written
agreement from such persons as provided by Section 5.8.
1.8.5 RETURN TO COMPANY.
Any Exchangeable Shares or cash made available to the Exchange Agent and not
exchanged for Certificates within six months after the Effective Time and any
dividends and distributions held by the Exchange Agent for payment or delivery
to the holders of unsurrendered Certificates representing Company Shares or
Company Warrants and unclaimed at the end of such six month period shall be
redelivered or repaid by the Exchange Agent to Company, after which time any
holder of Certificates who has not theretofore delivered or surrendered such
Certificates to the Exchange Agent, subject to applicable law, shall look as a
general creditor only to Company for payment of the Exchangeable Shares and
the Microsoft Common Shares as to which such Exchangeable Shares shall be
exchangeable and any such dividends or distributions thereon, and any cash
payable with respect to Company Preferred Shares, Company Warrants or eligible
electing Company Common Shares. Notwithstanding any provision of this
Agreement, none of Microsoft, the Exchange Agent, Company or any other party
hereto shall be liable to any holder of Company Shares or Company Warrants for
any Exchangeable Shares or cash delivered to a public official pursuant to
applicable abandoned property, escheat or similar law.
1.9 TAX-FREE REORGANIZATION.
The Recapitalization is intended to be a "REORGANIZATION" within the meaning
of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the
"CODE"), and this Agreement is intended to constitute a "PLAN OF
REORGANIZATION" within the meaning of the regulations promulgated under
Section 368 of the Code. No party shall take any action which is inconsistent
with such intent.
2. REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF COMPANY AND PRINCIPAL SHAREHOLDERS.
Except as disclosed in a document referring specifically to the
representations and warranties in this Agreement attached hereto as Exhibit
2.1 which identifies by section number the section to which such disclosure
relates and is delivered by Company to Microsoft prior to the execution of
this Agreement (the "COMPANY DISCLOSURE SCHEDULE"), Company and the Principal
Shareholders, jointly and severally, represent and warrant to Microsoft as
follows:
2.1.1 ORGANIZATION, STANDING AND POWER.
Company is a corporation duly organized, validly existing and in good
standing under the laws of California, has all requisite power and authority
to own, lease and operate its properties and to carry on its
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businesses as now being conducted, and is duly qualified and in good standing
to do business in each jurisdiction in which a failure to so qualify would
have a material adverse effect on the Business Condition (as hereinafter
defined) of Company. As used in this Agreement, "BUSINESS CONDITION" with
respect to any entity will mean the business, financial condition, results of
operations or assets (without giving effect to the consequences of the
transactions contemplated by this Agreement) of such entity or entities
including its Subsidiaries taken as a whole. In this Agreement, a "SUBSIDIARY"
of any corporation or other entity means a corporation, partnership or other
entity of which such corporation or entity directly or indirectly owns or
controls voting securities or other interests which are sufficient to elect a
majority of the Board of Directors or other managers of such corporation,
partnership or other entity. Company has delivered to Microsoft or its counsel
complete and correct copies of the articles, certificate, bylaws, and/or other
primary charter and organizational documents ("CHARTER DOCUMENTS") of Company,
in each case, as amended to the date hereof. The minute books and stock
records of Company contain correct and complete records of all proceedings and
actions taken at all meetings of, or effected by written consent of, the
shareholders of Company and its Board of Directors, and all original issuances
and subsequent transfers, repurchases, and cancellations of Company's capital
stock. The Company Disclosure Schedule contains a complete and correct list of
the officers and directors of Company.
The Company's two wholly-owned Subsidiaries currently do not conduct, and
have never conducted, any business. The Company has no other Subsidiary.
2.1.2 CAPITAL STRUCTURE.
The authorized capital stock of Company consists of 100,000,000 shares of
Company common stock, without par value, ("COMPANY COMMON SHARES") of which
18,960,873 shares are issued and outstanding, and 25,000,000 shares of
preferred stock, without par value, ("COMPANY PREFERRED SHARES") of which
1,510,533 have been designated as Series A Convertible Preferred Stock
("SERIES A SHARES") of which 1,510,533 are issued and outstanding, 6,567,484
have been designated as Series B Convertible Preferred Stock ("SERIES B
SHARES") of which 6,316,705 are issued and outstanding, 4,920,568 have been
designated as Series C Convertible Preferred ("SERIES C SHARES") of which
4,819,538 are issued and outstanding, and 9,596,928 have been designated as
Series D Convertible Preferred ("SERIES D SHARES") of which 1,343,570 are
issued and outstanding. Each Company Preferred Share is, and will be as of the
Closing, convertible at the rate of one Company Common Share for each Company
Preferred Share, except for the Series A Shares, which are convertible at the
rate of 1.1 Company Common Shares for each Series A Share. Company Common
Shares and Company Preferred Shares are sometimes referred to collectively as
the ("COMPANY SHARES"). The Company has reserved 1,351,227 Company Common
Shares under Company's 1996 Stock Incentive Plan (the "COMPANY STOCK OPTION
PLAN") net of grants and issuances to the date of this Agreement, and options
for 2,745,400 Company Common Shares ("COMPANY OPTIONS") have been granted and
remain outstanding. The Company has issued warrants to purchase 86,000 Series
B Shares and 36,553 Series C Shares (collectively "COMPANY WARRANTS"). Company
Shares, Company Options and Company Warrants are sometimes collectively
referred to as "COMPANY COMMON SHARE EQUIVALENTS." All Company Common Share
Equivalents and other securities outstanding as of the date of this Agreement
are set forth on Schedule 2.1.2, and no Company Common Share Equivalents are
held by Company in its treasury. True and complete copies of the Company Stock
Option Plan and the forms of any other instruments setting forth the rights of
all Company Common Share Equivalents as of the date of this Agreement have
been delivered to Microsoft or its counsel.
All outstanding Company Shares are, and any Company Shares issued upon
exercise of any Company Option or Company Warrant will be, validly issued,
fully paid, nonassessable and not subject to any preemptive rights, repurchase
rights, rights of first refusal or rights to maintain interests. Except for
the shares described above issuable pursuant to the conversion of Company
Preferred Shares and the exercise of Company Options and Company Warrants,
there are not any options, warrants, calls, conversion rights, commitments,
agreements, contracts, understandings, restrictions, arrangements or rights of
any character to which Company is a party or by which Company may be bound
obligating Company to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of the capital stock of Company, or obligating
Company to grant, extend or enter into any such option, warrant, call,
conversion right, conversion payment, commitment, agreement, contract,
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understanding, restriction, arrangement or right. Company does not have
outstanding any bonds, debentures, notes or other indebtedness the holders of
which (i) have the right to vote (or convertible or exercisable into
securities having the right to vote) with holders of Company Shares on any
matter ("COMPANY VOTING DEBT") or (ii) are or will become entitled to receive
any payment as a result of the execution of this Agreement or the completion
of the transactions contemplated hereby.
2.1.3 AUTHORITY.
The execution, delivery, and performance of this Agreement and the Related
Agreements by Company has been duly authorized by all necessary action of the
Board of Directors of Company. Certified copies of the resolutions adopted by
the Board of Directors of Company approving this Agreement and the Related
Agreements and the Recapitalization have been provided to Microsoft. Each of
Company and the Principal Shareholders has duly and validly executed and
delivered this Agreement and the Related Agreements or, as to those Related
Agreements to be executed following the date hereof, will be duly and validly
executed and delivered, and this Agreement each of and the Related Agreements
constitute or, upon execution will constitute, a valid, binding, and
enforceable obligations of each of Company and the Principal Shareholders in
accordance with their respective terms. In this Agreement, the "RELATED
AGREEMENTS," with respect to any party, means those agreements contemplated by
this Agreement to which such party is a signatory.
2.1.4 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS.
Company holds, and at all times has held all licenses, permits, and
authorizations from all Governmental Entities (as defined below), necessary
for the lawful conduct of its business pursuant to all applicable statutes,
laws, ordinances, rules, and regulations of all such authorities having
jurisdiction over it or any part of its operations, excepting, however, when
such failure to hold would not have a material adverse effect on Company's
Business Condition. There are no material violations or claimed violations
known by Company or the Principal Shareholders of any such license, permit, or
authorization or any such statute, law, ordinance, rule or regulation. Neither
the execution and delivery of this Agreement or any of the Related Agreements
by Company and the Principal Shareholders nor the performance by Company and
the Principal Shareholders of their obligations under this Agreement or any of
the Related Agreements will, in any material respects, violate any provision
of laws or will conflict with, result in the breach of any of the material
terms or conditions of, constitute a breach of any of the material terms or
conditions of, constitute a default under, give any party the right to
accelerate any right under, or terminate, require consent, approval, or waiver
by any party under, or result in the creation of any lien, charge,
encumbrance, or restriction upon any of the properties, assets, or Company
Shares pursuant to, any of the Charter Documents or any material agreement
(including government contracts), indenture, mortgage, franchise, license,
permit, lease or other instrument of any kind to which Company is a party or
by which Company or any of its assets is bound or affected. No consent,
approval, order or authorization of or registration, declaration or filing
with or exemption (collectively "CONSENTS") by, any court, administrative
agency or commission or other governmental authority or instrumentality,
whether domestic or foreign (each a "GOVERNMENTAL ENTITY") is required by or
with respect to Company in connection with the execution and delivery of this
Agreement or any of the Related Agreements by Company or the consummation by
Company of the transactions contemplated hereby, except for (i) the filing of
the appropriate Recapitalization Documents with the Secretary of State of
California, (ii) the filing of a premerger notification report and all other
required documents by Microsoft and Company and the expiration of all
applicable waiting periods, under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR ACt", (iii) the filing with the Securities
and Exchange Commission (the "SEC") of the S-4 (as defined in Section 2.1.10),
including the Proxy Statement/Prospectus (as defined in Section 2.1.10), and
such reports and information as may be required under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), the Securities Act and the rules
and regulations promulgated by the SEC under the Exchange Act or the
Securities Act, and the declaration of the effectiveness of the S-4 by the
SEC, (iv) such filings, authorizations, orders and approvals as may be
required under foreign laws, state securities laws and the NASD Bylaws or
"BLUE SKY" laws and (v) such other Consents, which failure to obtain or make
would not have a material adverse effect on Company's Business Condition.
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2.1.5 TECHNOLOGY.
2.1.5.1. "INTELLECTUAL PROPERTY" consists of the following:
2.1.5.1.1 all patents, trademarks, trade names, service marks, trade
dress, copyrights and any renewal rights therefor, mask works, net lists,
schematics, technology, inventions, manufacturing processes, supplier
lists, trade secrets, know-how, moral rights, computer software programs or
applications (in both source and object code form), applications and
registrations for any of the foregoing;
2.1.5.1.2 all software and firmware listings, and updated software
source code, and complete system build software and instructions related to
all software described herein;
2.1.5.1.3 all documents, records and files relating to design, end user
documentation, manufacturing, quality control, sales, marketing or customer
support for all intellectual property described herein;
2.1.5.1.4 all other tangible or intangible proprietary information and
materials; and
2.1.5.1.5 all license and other rights in any third party product,
intellectual property, proprietary or personal rights, documentation, or
tangible or intangible property, including without limitation the types of
intellectual property and tangible and intangible proprietary information
described in Section 2.1.5.1.1 through Section 2.1.5.1.4 above; that are
owned or held by or on behalf of Company, and/or any Principal Shareholder,
or that are being, and/or have been, used, or are currently under
development for use, in the business of Company as it has been, is
currently anticipated or is reasonably anticipated (as of the date of this
Agreement and as of the Closing) by Company and/or the Principal
Shareholders to be, conducted. Each Principal Shareholder shall
specifically identify on the Company Disclosure Schedule any intellectual
property as to which he asserts individual rights and identify any
Intellectual Property which he will not assign or license to the Company in
accordance with Section 6.2.11.
2.1.5.2 The Company Disclosure Schedule lists: (i) all patents,
copyrights, mask works, trademarks, service marks, trade dress, any renewal
rights for any of the foregoing, and any applications and registrations for
any of the foregoing, which are included in the Company Intellectual Property
and owned by or on behalf of Company; (ii) all material hardware products and
tools, software products and tools, and services that are currently published,
offered, or under development by Company; and (iii) all material licenses,
sublicenses and other agreements to which Company is a party and pursuant to
which Company or any other person is authorized to use the Company
Intellectual Property or exercise any other right with regard thereto.
2.1.5.3 The Company Intellectual Property consists solely of items and
rights which are either: (i) owned by Company, (ii) in the public domain or
(iii) rightfully used and authorized for use by Company and its successors
pursuant to a valid license. All material Company Intellectual Property which
consists of license or other rights to third party property is set forth in
the Company Disclosure Schedule. Company has all rights in the Company
Intellectual Property necessary to carry out Company's current, former, and
future, as currently anticipated or reasonably anticipated (as of the date of
this Agreement and as of the Closing) by Company and/or the Principal
Shareholders, activities, including without limitation rights to make, use,
reproduce, modify, adapt, create derivative works based on, translate,
distribute (directly and indirectly), transmit, display and perform publicly,
license, rent, lease, assign, and sell the Company Intellectual Property and
products embodying the Company Intellectual Property in all geographic
locations and fields of use, and to sublicense any or all such rights to third
parties, including the right to grant further sublicenses.
2.1.5.4 Company and each Principal Shareholder is not, nor as a result of
the execution or delivery of this Agreement, or performance of Company's
obligations hereunder, will Company be, in violation of any license,
sublicense or other agreement to which Company or any Principal Shareholder is
a party or otherwise bound. Except as specifically described in the Company
Disclosure Schedule, neither Company nor any Principal Shareholder is
obligated to provide any consideration (whether financial or otherwise) to any
third party, nor is any third party otherwise entitled to any consideration,
with respect to any exercise of rights by Company or Microsoft in the Company
Intellectual Property.
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2.1.5.5 The use, reproduction, modification, distribution, licensing,
sublicensing, sale, or any other exercise of rights in any product, work,
technology, service or process as used, provided or offered at any time, or as
reasonably proposed by Company and/or the Principal Shareholders for use,
reproduction, modification, distribution, licensing, sublicensing, sale or any
other exercise of rights, by Company does not infringe any copyright, patent,
trade secret, trademark, service mark, trade name, firm name, logo, trade
dress, mask work, moral right, other intellectual property right, right of
privacy or right in personal data of any person. No claims (i) challenging the
validity, effectiveness, or ownership by Company of any of the Company
Intellectual Property, or (ii) to the effect that the use, reproduction,
modification, manufacturing, distribution, licensing, sublicensing, sale or
any other exercise of rights in any product, work, technology, service or
process as used, provided or offered at any time, or as currently proposed or
reasonably proposed (as of the date of this Agreement and as of the Closing)
by Company and/or the Principal Shareholders for use, reproduction,
modification, distribution, licensing, sublicensing, sale or any other
exercise of rights, by Company infringes or will infringe on any intellectual
property or other proprietary or personal right of any person have been
asserted or, to the knowledge of Company and each of the Principal
Shareholders, are threatened by any person nor are there any valid grounds for
any bona fide claim of any such kind. All granted or issued patents and mask
works and all registered trademarks listed on the Company Disclosure Schedule
and all copyright registrations held by Company are valid, enforceable and
subsisting. To the knowledge of Company and each of the Principal
Shareholders, there is no unauthorized use, infringement or misappropriation
of any of the Company Intellectual Property by any third party, employee or
former employee.
2.1.5.6 No parties other than Company possess any current or contingent
rights to any source code which is part of the Company Intellectual Property.
2.1.5.7 The Company Disclosure Schedule lists all parties other than
employees who have created any portion of, or otherwise have any rights in or
to, the Company Intellectual Property. Company has secured from all parties
who have created any portion of, or otherwise have any rights in or to, the
Company Intellectual Property valid and enforceable written assignments of any
such work or other rights to Company and has provided true and complete copies
of such assignments to Microsoft.
2.1.5.8 The Company Disclosure Schedule includes a true and complete list
and summary of principal terms relating to support and maintenance agreements
relating to Company Intellectual Property including without limitation the
identity of the parties entitled to receive such service or maintenance, the
term of such agreements and any other provisions relating to the termination
of such agreements.
2.1.6 FINANCIAL STATEMENTS.
Company has delivered to Microsoft audited balance sheet(s) as of March 31,
1996 and unaudited balance sheet(s) as of December 31, 1996, and the related
audited statement(s) of income for the periods(s) ended March 31, 1996 and the
unaudited nine-month period ended December 31, 1996 (such balance sheets and
statements of income are collectively referred to as the "FINANCIAL
STATEMENTS"). Such Financial Statements: (i) are in accordance with the books
and records of Company, (ii) present fairly, in all material respects, the
financial position of Company as of the date indicated and the results of
their operations for each of the periods indicated, and (iii) have been
prepared in accordance with generally accepted accounting principles
consistently applied except as described in the Company Disclosure Schedule.
There are no material off-balance sheet liabilities, claims or obligations of
any nature, whether accrued, absolute, contingent, anticipated, or otherwise,
whether due or to become due, that are not shown or provided for either in the
Financial Statements or the Company Disclosure Schedule. The liabilities of
Company were incurred in the ordinary course of Company's business.
2.1.7 TAXES.
All returns, reports and other forms related to taxes required to be filed
on or before the Closing Date by or on behalf of Company under the laws of any
jurisdiction, domestic or foreign, have been or will be filed, which returns,
reports and forms are true, correct and complete in all respects, and all
taxes which were required to be paid in connection with such returns, reports
and forms have been paid or will have been paid prior to the Closing
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other than taxes for which adequate reserves have been established in
Company's Financial Statements, and no penalties or other charges are due or
will become due with respect to the late filing of any such return, report or
form. All taxes shown to be due from or payable by Company on such returns,
reports and forms have been paid and all other taxes otherwise accruing and
payable prior to Closing will have been paid other than taxes for which
adequate reserves have been established in Company's Financial Statements.
Complete and correct copies of all federal and state income, franchise, sales
and use tax returns of Company for any year or portion of a year or other
applicable tax period, since the Company's incorporation, as filed with the
Internal Revenue Service ("IRS") and all state taxing authorities, will be
supplied to Microsoft within seven (7) days. No subsequent federal income tax
or state tax return has become due or has been filed by Company.
With respect to any taxable year ending on or before March 31, 1996 or any
other "open" year for which the IRS or other taxing authority is not precluded
from assessing a deficiency: (i) Company and the Principal Shareholders have
not been notified that there is any assessment or proposed assessment of
deficiency or additional tax with respect to Company, and (ii) there is no
completed, pending, or, to the knowledge of Company, threatened tax audit or
investigation with respect to Company. Neither Company nor any of the
Principal Shareholders is a party to any agreement, contract or arrangement in
the nature of a tax-sharing agreement, whether in writing or otherwise. No
consent has been filed under Section 341(f) of the Code with respect to
Company. Company is not required to include in income any adjustment pursuant
to Section 481(a) of the Code (or similar provisions of other law or
regulations) in its current or in any future taxable period by reason of a
change in accounting method nor do Company or any of the Principal
Shareholders have any knowledge that the IRS (or other taxing authority) has
proposed, or is considering, any such change in accounting method. Company is
not a party to any agreement, contract or arrangement that would result in the
payment of any "excess parachute payment" within the meaning of Section 280G
of the Code. Alternatively, the disclosure provided to the shareholders of
Company in respect of each and every transaction to be consummated in
connection with this Agreement, whether performed prior to, at or following
the Closing, and the resolutions adopted after review of the foregoing, will
be sufficient to comply with the provisions of Section 280G of the Code of
transactions that might otherwise result in the payment of any "excess
parachute payment" within the meaning of Section 280G of the Code. Company is
not a party to any "safe harbor lease" as defined in Section 168(f)(8) of the
Code as in effect prior to the enactment of the Tax Reform Act of 1986, and
none of the property of Company constitutes tax-exempt use property as defined
in Section 168(h) of the Code. None of the assets of Company secures debt the
interest on which is exempt from tax pursuant to Section 103 of the Code.
The amounts reflected for taxes on the balance sheet included in the
Financial Statements are and will be sufficient for the payment of all unpaid
federal, state, local, and foreign taxes, assessments, and deficiencies for
all periods prior to and including the periods covered in the Financial
Statements. For the purposes of this Agreement, the terms "TAX" and "TAXES"
will include all federal, state, local and foreign taxes, assessments, duties,
tariffs, registration fees, and other similar governmental charges including
without limitation all income, franchise, property, production, sales, use,
payroll, license, windfall profits, severance, withholding, excise, gross
receipts and other taxes, as well as any interest, additions or penalties
relating thereto and any interest in respect of such additions or penalties.
2.1.8 INFORMATION SUPPLIED.
None of the information supplied or to be supplied by Company or its,
auditors, attorneys, financial advisors or other consultants or advisors for
inclusion in (a) the registration statement on Form S-4, and any amendment
thereto, to be filed under the Securities Act with the SEC by Microsoft in
connection with the issuance of the Exchangeable Shares in or as a result of
the Recapitalization (the "S-4"), or (b) the proxy statement and any amendment
or supplement thereto to be distributed in connection with Company's meetings
of shareholders to vote upon this Agreement and the transactions contemplated
hereby (the "PROXY STATEMENT" and, together with the prospectus included in
the S-4, the "PROXY STATEMENT/PROSPECTUS") will, in the case of the Proxy
Statement and any amendment or supplement thereto, at the time of the mailing
of the Proxy Statement and any amendment or supplement thereto, and at the
time of the meeting of shareholders of Company to vote upon this Agreement and
the transactions contemplated hereby, or, in the case of the S-4, as amended
or supplemented, at the time it
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becomes effective and at the time of any post-effective amendment thereto and
at the time of the meeting of shareholders of Company, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. The Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of all applicable laws, including the provisions of the Exchange
Act and the rules and regulations of the SEC thereunder, except that no
representation is made by Company with respect to information that is not
supplied by Company specifically for inclusion therein.
2.1.9 ABSENCE OF CERTAIN CHANGES AND EVENTS.
Except as set forth in the Company Disclosure Schedule, since December 31,
1996, there has not been:
2.1.9.1 Any material adverse effect on the Business Condition of Company
or any development or combination of developments of which management of
Company has knowledge which is reasonably likely to result in such an
effect;
2.1.9.2 Any damage, destruction or loss, whether or not covered by
insurance, having a material adverse effect on the Business Condition of
Company;
2.1.9.3 Any declaration, payment, or setting aside of any dividend or
other distribution to or for the holders of any Company Shares;
2.1.9.4 Any termination, modification, or rescission of, or waiver by
Company of rights under, any existing contract having or likely to have a
material adverse effect on Company's Business Condition;
2.1.9.5 Any discharge or satisfaction by Company of any lien or
encumbrance, or any payment of any obligation or liability (absolute or
contingent) other than current liabilities shown on the balance sheet
included in the Financial Statements as of December 31, 1996 and current
liabilities incurred since December 31, 1996 in the ordinary course of
business; or
2.1.9.6 Any mortgage, pledge, imposition of any security interest, claim,
encumbrance, or other restriction on any of the assets, tangible or
intangible, of Company.
2.1.10 LEASES IN EFFECT.
All real property leases and subleases as to which Company is a party and
any amendments or modifications thereof are listed on the Company Disclosure
Schedule (each a "LEASE" and collectively, the "LEASES"), are valid, in full
force and effect, enforceable, and, to the knowledge of the Company, there are
no existing defaults, and Company has not received or given notice of default
or claimed default with respect to any Lease, nor is there any event that with
notice or lapse of time, or both, would constitute a default thereunder.
2.1.11 PERSONAL PROPERTY.
Company has good and marketable title, free and clear of all title defects,
security interests, pledges, options, claims, liens, encumbrances, and
restrictions of any nature whatsoever (including, without limitation, leases,
chattel mortgages, conditional sale contracts, purchase money security
interests, collateral security arrangements, and other title or interest-
retaining agreements) to all inventory, receivables, furniture, machinery,
equipment, and other personal property, tangible or otherwise, reflected on
the December 31, 1996 balance sheet included in the Financial Statements or
used in Company's business as of the date of such balance sheet even if not
reflected thereon, except for acquisitions and dispositions since December 31,
1996 in the ordinary course of business. All computer equipment and other
personal property listed on the Company Disclosure Schedule and used by
Company in the conduct of its business are in good operating condition and
repair, reasonable wear and tear excepted.
2.1.12 CERTAIN TRANSACTIONS.
None of the directors, officers, or Principal Shareholders of Company, or
any member of any of their families, is presently a party to, or was a party
to during the year preceding the date of this Agreement any transaction with
Company, including, without limitation, any contract, agreement, or other
arrangement:
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(i) providing for the furnishing of services to or by, (ii) providing for
rental of real or personal property to or from, or (iii) otherwise requiring
payments to or from, any such person or any corporation, partnership, trust,
or other entity in which any such person has or had a 5%-or-more interest (as
a shareholder, partner, beneficiary, or otherwise) or is or was a director,
officer, employee, or trustee.
2.1.13 LITIGATION AND OTHER PROCEEDINGS.
Neither Company nor any of its officers, or directors, nor to the best
knowledge of Company or any Principal Shareholders, any employees of Company,
is a party to any pending or, to the best knowledge of Company, threatened
action, suit, labor dispute (including any union representation proceeding),
proceeding, investigation, or discrimination claim in or by any court or
governmental board, commission, agency, department, or officer, or any
arbitrator, arising from the actions or omissions of Company or, in the case
of an individual, from acts in his or her capacity as an officer, director, or
employee of Company which individually or in the aggregate would be materially
adverse to Company. Company is not subject to any order, writ, judgment,
decree, or injunction that has a material adverse effect on Company's Business
Condition.
2.1.14 MAJOR CONTRACTS.
Except as disclosed in the Company Disclosure Schedule, Company is not a
party to or subject to:
2.1.14.1 Any union contract, or any employment contract or arrangement
providing for future compensation, written or oral, with any officer,
consultant, director or employee;
2.1.14.2 Any plan or contract or arrangement, written or oral, providing
for bonuses, pensions, deferred compensation, retirement payments, profit-
sharing, or the like;
2.1.14.3 Any joint venture contract or arrangement or any other agreement
which has involved or is expected to involve a sharing of profits;
2.1.14.4 Any OEM reseller, distribution or equivalent agreement, volume
purchase agreement, corporate end user sales or service agreement or
manufacturing agreement in which the amount involved exceeds annually, or
is expected to exceed in the aggregate over the life of the contract
$1,000,000 or pursuant to which Company has granted or received
manufacturing rights, most favored nation pricing provisions or exclusive
marketing, reproduction, publishing or distribution rights related to any
product, group of products or territory;
2.1.14.5 Any lease for real or personal property in which the amount of
payments which Company is required to make on an annual basis exceeds
$100,000;
2.1.14.6 Any agreement, license, franchise, permit, indenture or
authorization which has not been terminated or performed in its entirety
and not renewed which may be, by its terms, terminated, impaired or
adversely affected by reason of the execution of this Agreement, the
Closing of the Recapitalization, or the consummation of the transactions
contemplated hereby or thereby;
2.1.14.7 Except for trade indebtedness incurred in the ordinary course of
business, any instrument evidencing or related in any way to indebtedness
incurred in the acquisition of companies or other entities or indebtedness
for borrowed money by way of direct loan, sale of debt securities, purchase
money obligation, conditional sale, guarantee, or otherwise which
individually is in the amount of $250,000 or more;
2.1.14.8 Any material license agreement, either as licensor or licensee
(excluding nonexclusive hardware, software and content licenses granted to
or received from distributors or end-users in the ordinary course of
business consistent with prior practice); or
2.1.14.9 Any contract containing covenants purporting to limit Company's
freedom to compete in any line of business in any geographic area.
All contracts, arrangements, plans, agreements, leases, licenses,
franchises, permits, indentures, authorizations, instruments and other
commitments which are listed in the Company Disclosure Schedule
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pursuant to this Section 2.1.14 are valid and in full force and effect and
Company has not, nor, to the best knowledge of Company or any Principal
Shareholder, has any other party thereto, breached in any material respect any
provisions of, or entered into default in any material respect under the terms
thereof.
2.1.15 INSURANCE AND BANKING FACILITIES.
The Company Disclosure Schedule contains a complete and correct list of (i)
all contracts of insurance or indemnity of Company in force at the date of
this Agreement and (ii) the names and locations of all banks in which Company
has accounts or safe deposit boxes. All premiums and other payments due from
Company with respect to any such contracts of insurance or indemnity have been
paid, and Company does not know of any fact, act, or failure to act which has
or might cause any such contract to be canceled or terminated. All known
claims for insurance or indemnity have been presented.
2.1.16 EMPLOYEES.
Company does not have any written contract of employment or other employment
agreement with any of its employees that is not terminable at will by Company.
Company is not a party to any pending, or to Company's knowledge, threatened,
labor dispute. Company has complied with all applicable federal, state, and
local laws, ordinances, rules and regulations and requirements relating to the
employment of labor, including but not limited to the provisions thereof
relating to wages, hours, collective bargaining, payment of Social Security,
unemployment and withholding taxes, and ensuring equality of opportunity for
employment and advancement of minorities and women. There are no claims
pending, or threatened to be brought, in any court or administrative agency by
any former or current Company employees for compensation, pending severance
benefits, vacation time, vacation pay or pension benefits, or any other claim
pending from any current or former employee or any other person arising out of
Company's status as employer, whether in the form of claims for employment
discrimination, harassment, unfair labor practices, grievances, wrongful
discharge or otherwise.
2.1.17 EMPLOYEE BENEFIT PLANS.
Each employee benefit plan ("PLAN") covering active, former or retired
employees of Company is listed in the Company Disclosure Schedule. Company
will make available to Microsoft a copy of each Plan, and where applicable,
any related trust agreement, annuity or insurance contract and, where
applicable, all annual reports (Form 5500) filed with the IRS within 7 days.
To the extent applicable, each Plan complies with the requirements of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
Code, and any Plan intended to be qualified under Section 401(a) of the Code
has been determined by the IRS to be so qualified and has remained tax-
qualified to this date and its related trust is tax-exempt and has been so
since its creation. No Plan is covered by Title IV of ERISA or Section 412 of
the Code. No "PROHIBITED TRANSACTION," as defined in ERISA Section 406 or Code
Section 4975 has occurred with respect to any Plan. Each Plan has been
maintained and administered in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Plans. There are no pending or anticipated claims against
or otherwise involving any of the Plans and no suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Plan activities) has been brought against or with respect to any Plan. All
contributions, reserves or premium payments to the Plan, accrued to the date
hereof, have been made or provided for. Company has not incurred any liability
under Subtitle C or D of Title IV of ERISA with respect to any "SINGLE-
EMPLOYER PLAN," within the meaning of Section 4001(a)(15) of ERISA, currently
or formerly maintained by Company, or any entity which is considered one
employer with Company under Section 4001 of ERISA. Company has not incurred,
and will not incur as a result of the transactions contemplated by this
Agreement, any withdrawal liability under Subtitle E of Title IV of ERISA with
respect to any "MULTIEMPLOYER PLAN," within the meaning of Section 4001(a)(3)
of ERISA. Company has no obligations for retiree health and life benefits
under any Plan, except as set forth on the Company Disclosure Schedule and as
required to avoid excise taxes under Section 4980(B) of the Code and there are
no restrictions on the rights of Company to amend or terminate any Plan
without incurring any liability thereunder. Company has not engaged in nor is
it a successor or parent corporation to an entity that has engaged in a
transaction described in ERISA Section 4069. There have been no amendments to,
written interpretation of,
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or announcement (whether or not written) by Company relating to, or change in
employee participation or coverage under, any Plan that would increase the
expense of maintaining such Plan above the level of expense incurred in
respect thereof for the year ended March 31, 1996. Neither Company nor any of
its ERISA affiliates has any current or projected liability in respect of
post-employment or post-retirement welfare benefits for retired or former
employees of Company, except as required to avoid excise tax under Section
4980 of the Code. No tax under Section 4980B of the Code has been incurred in
respect of any Plan that is a group health plan, as defined in Section
5000(b)(1) of the Code.
2.1.18 CERTAIN AGREEMENTS.
Except as disclosed in the Company Disclosure Schedule or as contemplated by
this Agreement, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby will: (i) result in any
payment by Company (including, without limitation, severance, unemployment
compensation, parachute payment, bonus or otherwise) becoming due to any
director, employee or independent contractor of Company under any Plan,
agreement or otherwise, (ii) increase any benefits otherwise payable under any
Plan or agreement, or (iii) result in the acceleration of the time of payment
or vesting of any such benefits.
2.1.19 GUARANTEES AND SURETYSHIPS.
Company has no powers of attorney outstanding (other than those issued in
the ordinary course of business with respect to tax matters). Company has no
obligations or liabilities (absolute or contingent) as guarantor, surety,
cosigner, endorser, co-maker, indemnitor, or otherwise respecting the
obligations or liabilities of any person, corporation, partnership, joint
venture, association, organization, or other entity.
2.1.20 BROKERS AND FINDERS.
Other than Deutsche Morgan Grenfell Inc., neither Company nor any of the
Principal Shareholders has retained any broker, finder, or investment banker
in connection with this Agreement or any of the transactions contemplated by
this Agreement, nor does or will Company owe any fee or other amount to any
broker, finder, or investment banker in connection with this Agreement or the
transactions contemplated by this Agreement. The fee of Deutsche Morgan
Grenfell Inc. in connection with the Recapitalization is set forth on the
Company Disclosure Schedule.
2.1.21 CERTAIN PAYMENTS.
Neither Company nor the Principal Shareholders acting on behalf of Company,
nor to the best knowledge of Company, any person or other entity acting on
behalf of Company has, directly or indirectly, on behalf of or with respect to
Company: (i) made an unreported political contribution, (ii) made or received
any payment which was not legal to make or receive, (iii) engaged in any
transaction or made or received any payment which was not properly recorded on
the books of Company, (iv) created or used any "off-book" bank or cash account
or "slush fund," or (v) engaged in any conduct constituting a violation of the
Foreign Corrupt Practices Act of 1977.
2.1.22 DISTRIBUTORS, BROKERS AND CUSTOMERS.
None of Company's distributors or brokers has terminated, or intends to
reduce or terminate the amount of its business with or for Company in the
future. Company has maintained its customer lists and related information on a
confidential and proprietary basis and has not granted to any third party any
right to use such customer lists for any purpose unrelated to the business of
Company.
2.1.23 ENVIRONMENTAL MATTERS.
To the best knowledge of Company:
2.1.23.1 There has not been a discharge or release on any real property
owned or leased by Company (the "REAL PROPERTY") of any Hazardous Material
(as defined below) in violation of any federal, state or local statute,
regulation, rule or order applicable to health, safety and the environment,
including without
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limitation, contamination of soil, groundwater or the environment,
generation, handling, storage, transportation or disposal of Hazardous
Materials or exposure to Hazardous Materials;
2.1.23.2 No Hazardous Material has been used by Company in the operation
of Company's business;
2.1.23.3 Company has not received from any Governmental Entity or third
party any request for information, notice of claim, demand letter or other
notification, notice or information that Company is or may be potentially
subject to or responsible for any investigation or clean-up or other
remediation of Hazardous Material present on any Real Property;
2.1.23.4 There have been no environmental investigations, studies,
audits, tests, reviews or other analyses, the purpose of which was to
discover, identify or otherwise characterize the condition of the soil,
groundwater, air, or presence of asbestos at any of the Real Property
sites;
2.1.23.5 There is no asbestos present in any Real Property presently
owned or operated by Company, and no asbestos has been removed from any
Real Property while such Real Property was owned or operated by Company;
and
2.1.23.6 There are no underground storage tanks on, in or under any of
the Real Property and no underground storage tanks have been closed or
removed from any Real Property which are or have been in the ownership of
Company.
"HAZARDOUS MATERIAL" means any substance (i) that is a "hazardous waste" or
"hazardous substance" under any federal, state or local statute, regulation,
rule or order, (ii) that is toxic, explosive, corrosive, flammable,
infectious, radioactive, or otherwise hazardous and is regulated by any
Governmental Entity, (iii) the presence of which on any of the Real Property
causes or threatens to cause a nuisance on any of the Real Property or to
adjacent properties or poses or threatens to pose a hazard to the health or
safety of persons on or about any of the Real Property, or (iv) the presence
of which on adjacent properties could constitute a trespass by Company or the
then current owner(s) of any of the Real Property.
2.1.24 DISCLOSURE.
Neither the representations or warranties made by Company or the Principal
Shareholders in this Agreement, nor the final Company Disclosure Schedule or
any other certificate executed and delivered by Company or the Principal
Shareholders pursuant to this Agreement, when taken together, contains any
untrue statement of a material fact, or omits to state a material fact
necessary to make the statements or facts contained herein or therein not
misleading in light of the circumstances under which they were furnished.
2.1.25 RELIANCE.
The foregoing representations and warranties are made by Company and the
Principal Shareholders with the knowledge and expectation that Microsoft is
placing reliance thereon.
2.1.26 SUBSCRIBERS.
As of April 1, 1997 Company had 56,000 subscribers to its Web TV service,
excluding (i) any subscribers who are receiving their service on a free,
complimentary, approval or other basis which does not require the regular
payment for such service in accordance with the standard terms and conditions
generally offered by the Company; and (ii) any subscribers that are more than
one hundred twenty (120) days past due in the payments required by their
applicable subscription plan.
2.2 REPRESENTATIONS AND WARRANTIES OF MICROSOFT.
Except as disclosed in a document referring specifically to the
representations and warranties in this Agreement attached as Exhibit 2.2 which
identifies by section number the section to which such disclosure relates and
is delivered by Microsoft to Company prior to the execution of this Agreement
(the "MICROSOFT DISCLOSURE SCHEDULE"), Microsoft represent and warrant to
Company and the Principal Shareholders as follows:
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2.2.1 ORGANIZATION, STANDING AND POWER.
Microsoft is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization
(except with respect to any jurisdiction where the concept of good standing is
not recognized), respectively, has all requisite power and authority to own,
lease and operate its properties and to carry on its businesses as now being
conducted, and is duly qualified and in good standing to do business in each
jurisdiction in which a failure to so qualify would have a material adverse
effect on the Business Condition of Microsoft. As of December 31, 1996
Microsoft did not have any "SIGNIFICANT SUBSIDIARIES" as that term is defined
in regulations promulgated under the Securities Act or the Exchange Act
2.2.2 AUTHORITY.
The execution, delivery, and performance of this Agreement and the Related
Agreements by Microsoft has been duly authorized by all necessary corporate
action of Microsoft. Microsoft has duly and validly executed and delivered
this Agreement and the Related Agreements or, as to those Related Agreements
to be executed following the date hereof, will be duly and validly executed
and delivered, and this Agreement and each of the Related Agreements
constitutes or, upon execution will constitute, valid, binding, and
enforceable obligations of Microsoft in accordance with its terms.
2.2.3 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS.
Neither the execution and delivery of this Agreement or any of the Related
Agreements by Microsoft nor the performance by Microsoft of their obligations
under this Agreement or any of the Related Agreements will violate any
provision of law or will conflict with, result in the breach of any of the
terms and conditions of, constitute a default under, permit any party to
accelerate any right under, renegotiate or terminate, require consent,
approval, or waiver by any party under, or result in the creation of any lien,
charge, or encumbrance upon any of the properties, assets, or shares of
capital stock of Microsoft pursuant to any charter document of Microsoft or
any agreement, indenture, mortgage, franchise, license, permit, lease, or
other instrument of any kind to which Microsoft is a party or by which
Microsoft or any of its assets are bound or affected. No Consent is required
by or with respect to Microsoft in connection with the execution and delivery
of this Agreement or any of the Related Agreements by Microsoft or the
consummation by Microsoft of the transactions contemplated hereby or thereby,
(i) except for the filing of the Recapitalization Documents with the Secretary
of State of California, (ii) the filing of a premerger notification by
Microsoft and Company under the HSR Act, and (iii) such other consents,
authorizations, filings, approvals and registrations which failure to obtain
or make would not have a material adverse effect on Microsoft's Business
Condition.
2.2.4 SEC DOCUMENTS; FINANCIAL STATEMENTS.
The Microsoft Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (including those portions of Microsoft's annual report to its
shareholders which are incorporated by reference), the definitive proxy
statement for the annual meeting of Microsoft shareholders held on November
12, 1996, and Microsoft's Form 10-Q's filed for quarters ended September 30,
1996 and December 31, 1996 (collectively the "SEC DOCUMENTS"), as of the time
filed, contained no material misstatement or omission to state any fact
necessary to make the statements therein not misleading. Microsoft has made
all filings currently required to be filed with the SEC under the Exchange
Act. Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Microsoft's SEC Documents was prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as may be indicated
in the notes thereto) and each fairly presented the consolidated financial
position of Microsoft and its Subsidiaries as at the respective dates thereof
and the consolidated results of operations and cash flows for the periods
indicated.
2.2.5 INFORMATION SUPPLIED.
None of the information supplied or to be supplied by Microsoft, auditors,
attorneys, financial advisors, other consultants or advisors for inclusion in
the S-4 or the Proxy Statement/Prospectus, will, in the case of the Proxy
Statement and any amendment or supplement thereto, at the time of the mailing
of the Proxy Statement
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and any amendment or supplement thereto, and at the time of any meeting of
shareholders of Company to vote upon this Agreement and the transactions
contemplated hereby, or in the case of the S-4, as amended or supplemented, at
the time it becomes effective and at the time of any post-effective amendment
thereto contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they are made, not
misleading or necessary to correct any statement in any earlier filing with
the SEC of such Proxy Statement/Prospectus or any amendment or supplement
thereto or any earlier communication (including the Proxy
Statement/Prospectus) to shareholders of Company with respect to the
transactions contemplated by this Agreement. The S-4 and the Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of all applicable laws including the provisions of the Securities
Act and the Exchange Act and the rules and regulations of the SEC thereunder,
except that no representation is made by Microsoft with respect to information
supplied by Company specifically for inclusion therein.
2.2.6 NO DEFAULTS.
Microsoft is not, or has received notice that it would be with the passage
of time, in default or violation of any term, condition or provision of (i)
the Restated Articles of Incorporation or Bylaws of Microsoft; (ii) any
judgment, decree or order applicable to Microsoft; or (iii) any loan or credit
agreement, note, bond, mortgage, indenture, contract, agreement, lease,
license or other instrument to which Microsoft is now a party or by which it
or any of its properties or assets may be bound, except for defaults and
violations which, individually or in the aggregate, would not have a material
adverse effect on the Business Condition of Microsoft.
2.2.7 NO MATERIAL ADVERSE CHANGE.
Since June 30, 1996, Microsoft and its Subsidiaries have conducted their
respective businesses in the ordinary course and there has not been a material
adverse effect on the Business Condition of Microsoft or any development or
combination of developments of which management of Microsoft has knowledge
which is reasonably likely to result in such an effect.
2.2.8 DISCLOSURE.
Neither the representations or warranties made by Microsoft in this
Agreement, nor the final Microsoft Disclosure Schedule or any other
certificate executed and delivered by Microsoft pursuant to this Agreement,
when taken together, contains any untrue statement of a material fact, or
omits to state a material fact necessary to make the statements or facts
contained herein or therein not misleading in light of the circumstances under
which they were furnished.
2.2.9 RELIANCE.
The foregoing representations and warranties are made by Microsoft with the
knowledge and expectation that Company is and the Principal Shareholders are
placing reliance thereon.
3. COVENANTS OF COMPANY
During the period from the date of this Agreement (except as otherwise
indicated) and continuing until the earlier of the termination of this
Agreement or the Effective Time (or later where so indicated), each of Company
and the Principal Shareholders, jointly and severally, agree (except as
expressly contemplated by this Agreement, as specifically permitted by the
Company Disclosure Schedule and as accepted by Microsoft or otherwise
permitted by Microsoft's prior written consent):
3.1 CONDUCT OF BUSINESS.
3.1.1 ORDINARY COURSE.
Company will carry on its business in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use all reasonable efforts
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consistent with past practice and policies to preserve intact its present
business organizations, keep available the services of its present officers,
consultants, and employees and preserve its relationships with customers,
suppliers, distributors and others having business dealings with it. Company
will promptly notify Microsoft of any event or occurrence or emergency which
is not in the ordinary course of business of Company and which is adverse to
Company's Business Condition. The foregoing notwithstanding, Company will not,
except as approved in writing by Microsoft:
3.1.1.1 enter into any commitment or transaction (i) to be performed over
a period longer than six (6) months in duration, or (ii) to purchase assets
(other than raw materials, supplies, or cash equivalents) for a purchase
price in excess of $500,000, other than those proposed transactions set
forth on Schedule 3.1.1.1;
3.1.1.2 grant any bonus, severance, or termination pay to any officer,
director, independent contractor or employee of Company in excess of
$25,000 individually or $100,000 in the aggregate;
3.1.1.3 transfer to any person or entity any rights to the Company
Intellectual Property other than pursuant to normal licenses to end-users;
3.1.1.4 enter into or amend any material agreements pursuant to which any
other party is granted marketing, publishing or distribution rights of any
type or scope with respect to any hardware or software products of Company;
3.1.1.5 except in the ordinary course of business consistent with prior
practice, enter into or terminate any contracts, arrangements, plans,
agreements, leases, licenses, franchises, permits, indentures
authorizations, instruments or commitments, or amend or otherwise change
the terms thereof;
3.1.1.6 commence a lawsuit other than: (i) for the routine collection of
bills, (ii) in such cases where Company in good faith determines that
failure to commence suit would result in a material impairment of a
valuable aspect of Company's business, provided Company consults with
Microsoft prior to filing such suit, or (iii) for a breach of this
Agreement;
3.1.1.7 materially modify existing discounts or other terms and
conditions with dealers, distributors and other resellers of Company's
products;
3.1.1.8 materially modify the terms and conditions of existing corporate
end-user licenses or service agreements or enter into new corporate end-
user licenses or service agreements;
3.1.1.9 maintain inventories other than as necessary to (i) satisfy
anticipated demand during the period between the date of this Agreement and
Closing, and (ii) maintain reasonable inventory levels; or
3.1.1.10 accelerate the vesting or otherwise modify any Company Option,
restricted stock, or other outstanding rights or other securities.
3.2 DIVIDENDS, ISSUANCE OF OR CHANGES IN SECURITIES.
Company will not: (i) declare or pay any dividends on or make other
distributions to its shareholders (whether in cash, shares or property), (ii)
issue, deliver, sell, or authorize, propose or agree to, or commit to the
issuance, delivery, or sale of any shares of its capital stock of any class,
any Company Voting Debt or any securities convertible into its capital stock,
any options, warrants, calls, conversion rights, commitments, agreements,
contracts, understandings, restrictions, arrangements or rights of any
character obligating Company to issue any such shares, Company Voting Debt or
other convertible securities except as any of the foregoing is required by
outstanding Company Options or Company Preferred Shares or as permitted by
Section 3.1.1, (iii) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of capital stock of Company, (iv) repurchase
or otherwise acquire, directly or indirectly, any shares of its capital stock,
except pursuant to existing agreements with employees, consultants and
directors, or (v) propose any of the foregoing.
3.3 GOVERNING DOCUMENTS.
Company will not amend its Charter Documents except in the manner
contemplated by this Agreement.
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3.4 NO DISPOSITIONS.
Company will not sell, lease, license, transfer, mortgage, encumber or
otherwise dispose of any of its assets or cancel, release, or assign any
indebtedness or claim, except in the ordinary course of business consistent
with prior practice.
3.5 INDEBTEDNESS.
Except as contemplated by this Agreement, Company will not incur any
indebtedness for borrowed money by way of direct loan, sale of debt
securities, purchase money obligation, conditional sale, guarantee, or
otherwise.
3.6 COMPENSATION.
Company will not adopt or amend any Plan or pay any pension or retirement
allowance not required by any existing Plan. Company will not enter into or
modify any employment contracts, increase the salaries, wage rates or fringe
benefits of its officers, directors or employees or pay bonuses or other
remuneration except for current salaries and other remuneration for which
Company is obligated pursuant to a written agreement a copy of which has been
provided to Microsoft.
3.7 CLAIMS.
Company will not settle any claim, action or proceeding, except in the
ordinary course of business consistent with past practice.
3.8 BREACH OF REPRESENTATION AND WARRANTIES.
Neither Company or any of the Principal Shareholders will take any action
that would cause or constitute a breach of any of the representations and
warranties set forth in Section 2.1 or that would cause any of such
representations and warranties to be inaccurate in any material respect. In
the event of, and promptly after becoming aware of, the occurrence of or the
pending or threatened occurrence of any event that would cause or constitute
such a breach or inaccuracy, Company will give detailed notice thereof to
Microsoft and will use its best efforts to prevent or promptly remedy such
breach or inaccuracy.
3.9 CONSENTS.
Company will promptly apply for or otherwise seek, and use its best efforts
to obtain, all consents and approvals, and make all filings, required with
respect to the consummation of the Recapitalization.
3.10 TAX RETURNS AND PAYMENTS.
Company will promptly provide Microsoft with copies of all income,
franchise, sales or use tax returns, reports and information statements that
have been filed or are filed prior to the Closing Date. Company will:
(i) fully pay and discharge any and all taxes attributable to Company for all
periods ended on or before the Closing Date, other than taxes for which
adequate reserves have been established in the Company's Financial Statements;
(ii) file all required returns, reports and information statements covering
all periods ending on or before the Closing to the extent that such filings
shall be due prior to such time; and (iii) provide Microsoft with copies of
all income, franchise, sales or use filings at least fifteen (15) calendar
days prior to the projected filing date. All such filings will be reasonably
satisfactory to Microsoft.
3.11 SHAREHOLDER APPROVAL.
Company will call a special Shareholders Meeting to be held no later than 20
business days after the date on which the Proxy Statement shall be mailed to
Company shareholders (which shall be as soon as practicable following the time
the S-4 shall have been declared effective by the SEC) to submit this
Agreement, the
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Recapitalization and related matters for the consideration and approval of
Company's shareholders ("COMPANY SHAREHOLDERS MEETING"). Such approval will be
recommended by Company's Board of Directors and management, unless such
persons shall have received the written advice of counsel that to so recommend
would result in a violation of such person's fiduciary duties to the Company
and its shareholders. Such meeting will be called, held and conducted, and any
proxies will be solicited, in compliance with applicable law. Concurrently
with the execution of this Agreement, the Principal Shareholders have executed
Voting Agreements in the form of Exhibit 3.11 ("VOTING AGREEMENTS") agreeing,
among other things, to vote in favor of the Recapitalization and against any
competing proposals.
3.12 PREPARATION OF DISCLOSURE AND SOLICITATION MATERIALS.
Company will promptly provide to Microsoft and its counsel for inclusion
within the Proxy Statement/Prospectus and the S-4, such information concerning
Company, its operations, capitalization, technology, share ownership and other
information as Microsoft or its counsel may reasonably request. Company will
not provide or publish to the holders of its securities any material
concerning it or its affiliates that violates the California General
Corporation Law, the Securities Act or the Exchange Act with respect to the
transactions contemplated hereby.
3.13 EXCLUSIVITY; NO ACQUISITIONS.
Neither Company nor any of the Principal Shareholders will (and each will
use its best efforts to ensure that none of its officers, directors, agents,
representatives or affiliates) take or cause or permit any person to take,
directly or indirectly, any of the following actions with any party other than
Microsoft and its designees: (i) solicit, encourage, initiate or participate
in any negotiations, inquiries or discussions with respect to any offer or
proposal to acquire all or any significant part of its business, assets or
capital shares whether by merger, consolidation, other business combination,
purchase of assets, tender or exchange offer or otherwise (each of the
foregoing, an "ACQUISITION TRANSACTION"), (ii) disclose, in connection with an
Acquisition Transaction, any information not customarily disclosed to any
person other than Microsoft or its representatives concerning Company's
business or properties or afford to any person other than Microsoft or its
representatives or entity access to its properties, books or records, except
in the ordinary course of business and as required by law or pursuant to a
governmental request for information, (iii) enter into or execute any
agreement relating to an Acquisition Transaction, or (iv) make or authorize
any public statement, recommendation or solicitation in support of any
Acquisition Transaction or any offer or proposal relating to an Acquisition
Transaction other than with respect to the Recapitalization; provided,
however, that no provision of this Section 3.13 shall have the effect of
prohibiting or preventing the Company's Board of Directors from taking any
action where the failure to do so would result in a breach of the Board of
Directors' fiduciary duties to the Company and its shareholders, based upon
written advice of counsel.
3.14 NOTICE OF EVENTS.
Throughout the period between the date of this Agreement and the Closing,
Company will promptly advise Microsoft of any and all material events and
developments concerning its financial position, results of operations, assets,
liabilities, or business or any of the items or matters concerning Company
covered by the representations, warranties, and covenants of Company and the
Principal Shareholders contained in this Agreement.
3.15 MODIFICATION OR DISSOLUTION OF CONTRACTS.
Contemporaneous with the execution of this Agreement, agreements with
respect to intellectual property, technology licensing, patent licensing and
shareholders, substantially in forms attached as Exhibits 3.15.1, 3.15.2,
3.15.3 and 3.15.4, respectively, shall have been executed by the Principal
Shareholders.
3.16 BEST EFFORTS.
Company and the Principal Shareholders will use their best efforts to
effectuate the transactions contemplated hereby and to fulfill and cause to be
fulfilled the conditions to Closing under this Agreement.
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3.17 RESIGNATIONS.
Upon the request of Microsoft, Company and the Principal Shareholders shall
use their respective best efforts to cause such officers and directors of
Company as requested by Microsoft to deliver resignations from their
respective offices, in a form reasonably satisfactory to Microsoft.
3.18 NEGOTIATIONS WITH FUJITSU.
Company shall permit Microsoft to participate in negotiations with Fujitsu
regarding a joint venture with Company with respect to operations in Japan.
Company shall use its best efforts to arrange negotiation meetings among
Fujitsu, Company and Microsoft at such times as are reasonably acceptable to
Microsoft, and Company shall participate in good faith in all proposals
regarding the terms of such a venture presented to Fujitsu by Microsoft.
Company agrees and acknowledges that Microsoft may present to Fujitsu terms of
a joint venture that differ from those terms currently being considered by
Fujitsu and Company.
4. COVENANTS OF MICROSOFT
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time (or later
where so indicated), Microsoft agrees (except as expressly contemplated by
this Agreement or with Company's prior written consent) that it will take or
cause the following actions to be taken:
4.1 BREACH OF REPRESENTATIONS AND WARRANTIES.
Microsoft will not take any action which would cause or constitute a breach
of any of the representations and warranties set forth in Section 2.2 or which
would cause any of such representations and warranties to be inaccurate in any
material respect. In the event of, and promptly after becoming aware of, the
occurrence of or the pending or threatened occurrence of any event which would
cause or constitute such a breach or inaccuracy, Microsoft will give detailed
notice thereof to Company and will use its best efforts to prevent or promptly
remedy such breach or inaccuracy.
4.2 CONSENTS.
Microsoft will promptly apply for or otherwise seek, and use its best
efforts to obtain, all consents and approvals, and make filings, required with
respect to the consummation of the Recapitalization.
4.3 BEST EFFORTS.
Microsoft will use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
Closing under this Agreement.
4.4 OFFICERS AND DIRECTORS.
Subject to Article 7 Microsoft agrees that all rights to indemnification
(including advancement of expenses) existing on the date hereof in favor of
the present or former officers and directors of Company with respect to
actions taken in their capacities as directors or officers of Company prior to
the Effective Time as provided in Company's Articles of Incorporation or
Bylaws and indemnification agreements shall survive the Recapitalization and
continue in full force and effect for a period of six years following the
Effective Time and the obligations related thereto shall be guaranteed and
assumed by Microsoft.
4.5 NASDAQ LISTING.
Microsoft will use its best efforts (i) to cause the Microsoft Common Shares
to be issued upon exchange of the Exchangeable Shares to be quoted upon the
Effective Time on the Nasdaq National Market or listed on such
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national securities exchange as Microsoft Common Shares is listed and (ii) to
cause the Microsoft Common Shares issued upon the exercise of assumed Company
Options to be quoted upon issuance on the Nasdaq National Market or listed on
such national securities exchange as Microsoft Common Shares is listed as of
the Effective Time.
4.6 REQUEST FOR NO ACTION LETTER.
As soon as practicable following the date hereof, Microsoft will request the
Division of Corporate Finance of the SEC to confirm that (i) it will not
recommend any enforcement action to the SEC if the Recapitalization is
consummated without registration under the Securities Act of the Microsoft
Common Shares issuable upon exchange of the Exchangeable Shares in reliance on
the exemption of such shares from registration under Section 3(a)(9) of the
Securities Act, and (ii) that the Microsoft Common Shares to be received upon
the exchange of any Exchangeable Shares will not be deemed to be "restricted
securities" as defined in Rule 144 under the Securities Act. To the extent
that Microsoft shall fail to receive such confirmation as to either such
matter, Microsoft agrees that it shall take all steps necessary to cause the
issuance of Microsoft Common Shares and/or the resale of the Microsoft Common
Shares to be registered under the Securities Act.
4.7 LINE OF CREDIT.
Contemporaneously with the execution of this Agreement, a line of credit
(the "LINE OF CREDIT"), in the form attached as Exhibit 4.7, shall have been
entered into between Company and Microsoft, under which Microsoft shall agree
to loan, from time to time prior to the earlier of the Closing Date, the
Outside Date or the effective date of termination of this Agreement, up to $30
million to Company for reasonable business needs of Company, which Line of
Credit shall bear interest at a per annum rate of 10%.
5. ADDITIONAL AGREEMENTS
In addition to the foregoing, each of Microsoft, Company and the Principal
Shareholders agrees to take the following actions after the execution of this
Agreement:
5.1 LEGAL CONDITIONS TO THE RECAPITALIZATION.
Each of Microsoft and Company will take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on it with
respect to the Recapitalization. Each of Microsoft, Company and the Principal
Shareholders will take all reasonable actions to obtain (and to cooperate with
the other parties in obtaining) any consent required to be obtained or made by
Company, the Principal Shareholders or Microsoft in connection with the
Recapitalization, or the taking of any action contemplated thereby or by this
Agreement.
5.2 EMPLOYEE BENEFITS.
Microsoft and Company agree that within eight months after Closing, Company
will provide benefits to Company employees which are in the aggregate at least
substantially equivalent to the benefits provided to Microsoft employees who
are in similar positions or at similar salary levels, provided, however, that
nothing contained herein shall be considered as requiring Microsoft or Company
to continue any specific plan or benefit or as precluding amendments to or
reductions in the benefits provided through any specific plan or benefit.
Until such time as Company employees are provided with benefits which are in
the aggregate at least substantially equivalent to the benefits provided to
Microsoft employees in similar positions or salary levels, Company employees
shall be given benefits which are in the aggregate at least substantially
equivalent to the benefits they are receiving on the date of Closing. Once
Company employees begin receiving benefits which are in the aggregate at least
substantially equivalent to the benefits provided to Microsoft employees, the
aggregate level of benefits provided to Company employees may be reduced to
reflect a drop in the aggregate level of benefits provided to Microsoft
employees in similar positions or salary levels. Although Company will, within
eight
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months after Closing, provide its employees with benefits which are in the
aggregate at least substantially equivalent to Microsoft's benefits, Microsoft
shall not be required to permit Company employees to participate in the exact
same plans and benefit programs in which Microsoft employees participate, but
instead Company employees may participate in plans which are provided only to
Company employees. For purposes of determining (i) the amount of paid vacation
which Company employees are awarded under a vacation policy, (ii) their vested
percentage in employer contributions to a 401(k) Plan, and (iii) the amount of
severance pay they receive if they are awarded severance benefits, a Company
employee's period of employment with Company immediately prior to Closing
shall also be considered a period of employment with Microsoft. In addition,
with respect to a Company employee who transfers participation from a Company
plan to a similar Microsoft plan which is self-funded, any provision in the
Microsoft plan which limits benefits based upon an employee's preexisting
condition ("Preexisting Condition Provision") shall be waived to the extent
either (i) a similar Preexisting Condition Provision is not contained in the
Company plan from which the employee transferred, or (ii) the Company plan's
Preexisting Condition Provision was satisfied by the Company employee prior to
transfer. If a Company employee is involuntarily terminated from Company
within the first 30 days after Closing and is not rehired by Company nor hired
by Microsoft, the employee shall receive severance pay in an amount which is
equivalent to the amount the employee would receive under Microsoft's
severance plan (provided, however, that the employee shall not receive a job
search period). Nothing expressed or implied in this Agreement shall confer
upon any employee or former employee of Company, or any beneficiary,
dependent, legal representative or collective bargaining agent of such
employee or former employee, any right or remedy of any nature or kind
whatsoever under or by reason of this Agreement, including without limitation
any right (i) to employment or to continued employment for any specified
period, at any specified location or under any specified job category, (ii) to
a specified level of compensation or benefits, or (iii) to enforce the terms
of this Section 5.2.
5.3 EXPENSES.
Whether or not the Recapitalization is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby and thereby will be paid by the party incurring such expense except
that if the Recapitalization is not consummated expenses incurred in
connection with printing and mailing of the documents distributed or to be
distributed to shareholders of Company and the filing fee with respect to the
S-4 and Proxy Statement shall be shared equally by Microsoft and Company.
5.4 ADDITIONAL AGREEMENTS.
If at any time after the Effective Time, any further action is reasonably
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of Company, the proper officers and
directors of each corporation which is a party to this Agreement will take all
such necessary action.
5.5 PUBLIC ANNOUNCEMENTS.
Neither Microsoft, Company or the Principal Shareholders will disseminate
any press release or other announcement concerning this Agreement or the
transactions contemplated herein to any third party without the prior written
consent of each of the other parties hereto, which consent will not be
unreasonably withheld. Notwithstanding the foregoing, the parties acknowledge
and agree that a joint press release announcing the transactions contemplated
by this Agreement shall be made following the execution of this Agreement,
subject to review and approval by each party of the form of such announcement.
5.6 HSR ACT FILING.
5.6.1 FILINGS AND COOPERATION.
Each of Microsoft and Company shall (i) promptly make or cause to be made
the filings required of such party or any of its affiliates or subsidiaries
under the HSR Act with respect to the Recapitalization and the other
transactions provided for in this Agreement, (ii) comply at the earliest
practicable date with any request under
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the HSR Act for additional information, documents, or other material received
by such party or any of its affiliates or subsidiaries from the Federal Trade
Commission or the Department of Justice or other Governmental Entity in
respect of such filings, the Recapitalization, or such other transactions, and
(iii) cooperate with the other party in connection with any such filing and in
connection with resolving any investigation or other inquiry of any such
agency or other Governmental Entity under any Antitrust Laws (as defined in
Section 5.6.2) with respect to any such filing, the Recapitalization, or any
such other transaction. Each party shall promptly inform the other party of
any material communication with, and any proposed understanding, undertaking,
or agreement with, any Governmental Entity regarding any such filings, the
Recapitalization, or any such other transactions. Neither party shall
participate in any meeting with any Governmental Entity in respect of any such
filings, investigation, or other inquiry without giving the other party notice
of the meeting and, to the extent permitted by such Governmental Entity, the
opportunity to attend and participate.
5.6.2 BEST EFFORTS.
Each of Microsoft and Company shall use its best efforts to resolve such
objections, if any, as may be asserted by any Governmental Entity with respect
to the Recapitalization or any other transactions provided for in this
Agreement under the HSR Act, the Sherman Act, as amended, the Clayton Act, as
amended, the Federal Trade Commission Act, as amended, and any other federal,
state or foreign statutes, rules, regulations, orders, or decrees that are
designed to prohibit, restrict or regulate actions having the purpose or
effect of monopolization or restraint of trade (collectively, "ANTITRUST
LAWS"). In connection therewith, if any administrative or judicial action or
proceeding is instituted (or threatened to be instituted) challenging the
Recapitalization as violative of any Antitrust Law, and, if by mutual
agreement, Microsoft and Company decide that litigation is in their best
interests, each of Microsoft and Company shall cooperate and use its best
efforts vigorously to contest and resist any such action or proceeding and to
have vacated, lifted, reversed, or overturned any decree, judgment,
injunction, or other order, whether temporary, preliminary, or permanent (each
an "ORDER"), that is in effect and that prohibits, prevents, or restricts
consummation of the Recapitalization. Each of Microsoft and Company shall use
its best efforts to take such action as may be required to cause the
expiration of the notice periods under the HSR Act or other Antitrust Laws
with respect to the Recapitalization and such other transactions as promptly
as possible after the execution of this Agreement. Notwithstanding anything to
the contrary in Section 5.6.1 or this Section 5.6.2, (x) neither Microsoft nor
any of its Subsidiaries shall be required to divest any of their respective
businesses, product lines, or assets, or to take or agree to take any other
action or agree to any limitation that would have a material adverse effect on
their respective businesses, product lines, or assets, and (y) Company shall
not be required to divest any of its businesses, product lines, or assets, or
to take or agree to take any other action or agree to any limitation would
have a material adverse effect on the Business Condition of Company.
5.7 PREPARATION OF PROXY STATEMENT AND S-4.
As promptly as practicable after the date hereof, Microsoft and Company
shall prepare and file with the SEC the Proxy Statement and any other
documents required by the Exchange Act in connection with the
Recapitalization, and Microsoft shall prepare and file with the SEC the S-4,
in which the Proxy Statement will be included as a prospectus. Each of
Microsoft and Company shall use its best efforts to have the S-4 declared
effective under the Securities Act as promptly as practicable after such
filing. Microsoft shall also take any action required to be taken under any
applicable state securities or "BLUE SKY" laws in connection with the issuance
of the Microsoft Common Shares in the Recapitalization.
5.8 ACCESS TO PROPERTIES AND RECORDS.
Subject to applicable law, throughout the period between the date of this
Agreement and the Closing, Company will give Microsoft and its representatives
full access, during reasonable business hours, and subject to reasonable
notice, and in such a manner as not unduly to disrupt the business of Company,
to its premises, properties, contracts, commitments, books, records, and
affairs, and will provide Microsoft with such financial, technical, and
operating data and other information pertaining to its business as Microsoft
reasonably may
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request; provided, however, that nothing contained herein shall require
Company to provide Microsoft with information regarding its Intellectual
Property, which Company reasonably believes it should not provide prior to the
consummation of the Recapitalization. With Company's prior consent, which will
not be unreasonably withheld, Microsoft will be entitled to make appropriate
inquiries of third parties in the course of its investigation. Company and
Microsoft agree that the non-disclosure agreement, dated February 25, 1997
(the "CONFIDENTIALITY AGREEMENT"), between Company and Microsoft shall
continue in full force and effect and shall be applicable to all Evaluation
Material (as defined in the Confidentiality Agreement) received pursuant to
this Agreement
5.9 COMPLETION OF AUDIT.
Company shall promptly direct Ernst & Young LLP to complete its audit
according to generally accepted auditing standards of Company's balance sheet
as of December 31, 1996 and statements of income, equity and cash flow for the
nine-month period ended December 31, 1996, and the notes thereto, and shall
cause such independent accounting firm to issue to Company a report by
independent auditors with respect to such audit. The fees and expenses
incurred by such independent accounting firm subsequent to the date of this
Agreement shall be applied against the Threshold Amount (as defined at Section
7.6).
6. CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE RECAPITALIZATION.
The respective obligation of each party to effect the Recapitalization will
be subject to the satisfaction prior to the Closing Date of the following
conditions, unless waived by all parties hereto:
6.1.1 GOVERNMENTAL APPROVALS.
Other than the filing of the Recapitalization Documents with the Secretary
of State of California, all Consents legally required for the consummation of
the Recapitalization and the transactions contemplated by this Agreement,
including without limitation expiration or termination of the applicable
waiting period, and any extension thereof, of the HSR Act, will have been
filed, satisfied, occurred, or been obtained, other than such Consents, for
which the failure to obtain would have no material adverse effect on the
consummation of the Recapitalization or the other transactions contemplated
hereby or on the Business Condition of Microsoft or Company.
6.1.2 NO RESTRAINTS.
No statute, rule, regulation, executive order, and no final and
nonappealable decree or injunction will have been enacted, entered,
promulgated or enforced by any United States court or Governmental Entity of
competent jurisdiction which enjoins or prohibits the consummation of the
Recapitalization will be in effect.
6.1.3 STOCKHOLDER APPROVAL.
This Agreement and the Recapitalization shall have been approved and adopted
by the required vote of holders of all Company Shares voting as a group and
all Company Preferred Shares voting as a group.
6.1.4 SECURITIES LAWS.
The S-4 shall have become effective under the Securities Act and shall not
be the subject of any stop order or proceedings seeking a stop order and the
Proxy Statement shall not be at the Effective Time subject to any proceedings
commenced or threatened by the SEC and all necessary qualifications and
filings under applicable blue sky laws shall have been received or made.
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6.2 CONDITIONS OF OBLIGATIONS OF MICROSOFT.
The obligations of Microsoft to effect the Recapitalization are subject to
the satisfaction of the following conditions unless waived by Microsoft:
6.2.1 REPRESENTATIONS AND WARRANTIES OF COMPANY AND THE PRINCIPAL
SHAREHOLDERS.
The representations and warranties of Company and the Principal Shareholders
set forth in this Agreement will be true and correct in all material respects
as of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date, except (i) as otherwise contemplated by this
Agreement, (ii) in respects that do not have a material adverse effect on the
transactions provided for in this Agreement; (iii) as a result of actions
taken or avoided at the direction of Microsoft which Company would not have
otherwise taken or avoided. Microsoft will have received a certificate in
substantially the form attached as Exhibit 6.2.1 signed by each of the
Principal Shareholders, as officers and directors of Company and on behalf of
Company to such effect on the Closing Date.
6.2.2 PERFORMANCE OF OBLIGATIONS OF COMPANY AND THE PRINCIPAL SHAREHOLDERS.
Company and the Principal Shareholders will have performed in all material
respects all agreements and covenants required to be performed by them under
this Agreement prior to the Closing Date, except for breaches that (i) do not
have a material adverse effect on the benefits of the transactions provided
for in this Agreement or (ii) result from or arise out of actions taken or
avoided at the direction of Microsoft which Company would not have otherwise
taken or avoided, and Microsoft will have received a certificate in
substantially the form attached as Exhibit 6.2.1 signed by each of the
Principal Shareholders, as officers and directors of Company and on behalf of
Company to such effect on the Closing Date.
6.2.3 EMPLOYMENT OF DEVELOPERS.
As of the Closing, not less than seventy-five percent (75%) of the Company's
hardware and software engineers (which shall not be deemed to include network
operations engineers), will have signed, and not taken any action or expressed
any intent to terminate or modify, an offer letter accepting employment with
Company or Microsoft together with and such other agreements as are
customarily executed by new employees of Microsoft or its subsidiaries or
other affiliates in form and content satisfactory to Microsoft.
6.2.4 AFFILIATES.
The affiliate agreements (the "AFFILIATE AGREEMENTS") in the form attached
as Exhibit 6.2.4 have been executed with the Company's Principal Shareholders
and certain officers and directors of the Company (the "AFFILIATES").
Microsoft shall be entitled to place appropriate legends on the certificate
evidencing any Exchangeable Shares and Microsoft Common Shares to be received
by the Principal Shareholders and the other Affiliates pursuant to the terms
of this Agreement and to issue appropriate stop transfer instructions to the
transfer agent for such Exchangeable Shares and Microsoft Common Shares
consistent with the terms of the Affiliates Agreements.
6.2.5 OPINION OF COUNSEL.
Microsoft will have received an opinion dated as of the Closing Date of
Venture Law Group, A Professional Corporation, counsel to Company,
substantially in the form attached as Exhibit 6.2.5.
6.2.6 EMPLOYMENT AND NONCOMPETITION AGREEMENTS.
Each of the Principal Shareholders shall have (i) accepted an offer of
employment (which shall commence as of the Effective Time) with Microsoft,
(ii) taken no action to rescind such acceptance, and (iii) executed an
Employment and Noncompetition Agreement substantially in the form attached as
Exhibit 6.2.6.
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6.2.7 CONSENTS.
Company will have received duly executed copies of those third-party
consents, approvals, assignments, waivers, authorizations or other
certificates identified in Section 2.1.4 of the Company Disclosure Schedule,
in each case, in form and substance reasonably satisfactory to Microsoft,
except for such thereof as Microsoft and Company will have agreed in writing
will not be obtained.
6.2.8 TERMINATION OF RIGHTS AND CERTAIN SECURITIES.
Any registration rights, rights of refusal, rights to any liquidation
preference, or redemption rights relating to any security of Company will have
been terminated, waived or of no material consequence as of the Closing.
Except as set forth in Schedule 2.1.1, no warrants, options, convertible
securities or other rights to purchase or acquire any securities of Company
will be outstanding.
6.2.9 LICENSE OF TECHNOLOGY.
The License of Technology between Perlman and Company, amended as of the
date of this Agreement and any subsequent amendments thereto shall be in full
force and effect and no action shall be pending or overtly threatened to
inadvertently or materially modify or challenge the licenses and other rights
conveyed by such Agreement.
6.2.10 RIGHTS AND PREFERENCES OF COMPANY PREFERRED SHARES.
Company Preferred Shares shall not have been converted into Company Common
Shares and the rights and preferences shall have been amended, waived or
otherwise modified, in a manner reasonably acceptable to Microsoft, to
prohibit such conversion.
6.2.11 EXECUTION OF ESCROW AGREEMENT.
Holders of at least 80% of Company Preferred Shares and Company Warrants,
and the Principal Shareholders shall have executed the Escrow Agreement or a
counterpart of such agreement.
6.2.12 TAX-FREE REORGANIZATION.
Microsoft shall have received a written opinion from their counsel to the
effect that the Recapitalization will more likely than not constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code. In
preparing Microsoft tax opinions, counsel may rely on reasonable
representations related thereto.
6.3 CONDITIONS OF OBLIGATION OF COMPANY.
The obligation of Company and the Principal Shareholders to effect the
Recapitalization is subject to the satisfaction of the following conditions
unless waived by Company and the Principal Shareholders:
6.3.1 REPRESENTATIONS AND WARRANTIES OF MICROSOFT.
The representations and warranties of Microsoft set forth in this Agreement
will be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date, except as otherwise contemplated by this Agreement, and Company will
have received a certificate signed on behalf of Microsoft by appropriately
authorized officers of Microsoft to such effect.
6.3.2 PERFORMANCE OBLIGATIONS OF MICROSOFT.
Microsoft will have performed in all material respects all agreements and
covenants required to be performed by it under this Agreement prior to the
Closing Date, and Company will have received a certificate signed on behalf of
Microsoft by appropriately authorized officers of Microsoft to such effect.
6.3.3 OPINION OF MICROSOFT'S COUNSEL.
Company and the Principal Shareholders have received an opinion dated the
Closing Date of Preston Gates & Ellis LLP, counsel to Microsoft, substantially
in the form attached as Exhibit 6.3.3.
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6.3.4 TAX-FREE REORGANIZATION.
Company shall have received a written opinion from their counsel to the
effect that the Recapitalization will more likely than not constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code. In
preparing Company tax opinions, counsel may rely on reasonable representations
related thereto.
6.3.5 NASDAQ LISTING.
The Microsoft Common Shares to be issued upon exchange of the Exchangeable
Shares shall be quoted as of the Effective Time on The Nasdaq National Market
or listed on such national securities exchange as Microsoft Common Shares are
listed as of the Effective Time and the Microsoft Common Shares issued upon
the exercise of assumed Company Options shall be quoted upon issuance on The
Nasdaq National Market or listed on such national securities exchange as
Microsoft Common Shares are listed as of the Effective Time.
6.3.6 MAKE-WELL AGREEMENT.
Microsoft shall have executed and delivered a Make-Well Agreement
substantially in the form attached as Exhibit 6.3.6 and such agreement shall
remain in full force and effect.
7. INDEMNIFICATION
7.1 INDEMNIFICATION RELATING TO AGREEMENT.
Subject to Sections 7.5 and 7.6, the holders of Company Shares (other than
Eligible Dissenting Shares) and Company Warrants (the "HOLDERS,") by reason of
the approval by the Company's shareholders of the Recapitalization and each
Holder's acceptance of the consideration provided for in Section 1.3 by the
execution of the Escrow Agreement, shall severally agree to defend, indemnify,
and hold Microsoft harmless from and against, and to reimburse Microsoft with
respect to, any and all losses, damages, liabilities, claims, judgments,
settlements, fines, costs, and expenses (including reasonable attorneys' fees)
("INDEMNIFIABLE AMOUNTS") of every nature whatsoever incurred by Microsoft by
reason of or arising out of or in connection with (i) any breach, or any claim
(including claims by parties other than Microsoft) that if true, would
constitute a breach, by Company or the Principal Shareholders of any
representation or warranty of Company or the Principal Shareholders contained
in this Agreement or in any certificate or other instrument delivered to
Microsoft pursuant to the provisions of this Agreement, and (ii) the failure,
partial or total, of Company or the Principal Shareholders to perform any
agreement or covenant required by this Agreement to be performed by it or
them. The obligations of any Holder to indemnify Microsoft will be determined
without regard to any right to indemnification to which any Holder may have in
his or her capacity as an officer, director, employee, agent or any other
capacity of Company and no Holder will be entitled to any indemnification from
Company for amounts paid hereunder.
7.2 THIRD PARTY CLAIMS.
With respect to any claims or demands by third parties, whenever Microsoft
will have received a written notice that such a claim or demand has been
asserted or threatened, Microsoft will notify Jeffrey D. Brody (the "HOLDERS'
REPRESENTATIVE") of such claim or demand and of the facts within Microsoft's
knowledge that relate thereto within a reasonable time after receiving such
written notice, but in any event within 15 days of receipt thereof. The
Holders' Representative will then have the right to contest, negotiate or
settle any such claim or demand through counsel of his own selection,
reasonably satisfactory to Microsoft, which will not be unreasonably withheld,
and solely at the Holders' own cost, risk, and expense, which such costs and
expenses shall be payable out of the Escrow Amount. Notwithstanding the
preceding sentence, the Holders' Representative will not settle, compromise,
or offer to settle or compromise any such claim or demand without the prior
written consent of Microsoft, which consent will not be unreasonably withheld.
By way of illustration and not limitation, it is understood that Microsoft may
object to a settlement or compromise which includes any provision which in its
reasonable judgment may have an adverse impact on or establish an adverse
precedent for the Business Condition of Microsoft or any of its Subsidiaries.
Microsoft will not have the right to object to a settlement which
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consists solely of the payment of a monetary damage amount and which is
subject to full indemnification under this Agreement. If the Holders'
Representative fails to give written notice to Microsoft of the intention to
contest or settle any such claim or demand within twenty (20) calendar days
after Microsoft has notified the Holders' Representative that any such claim
or demand has been made in writing and received by Microsoft, or if any such
notice is given but any such claim or demand is not promptly contested by the
Holders' Representative, Microsoft will have the right to satisfy and
discharge the same by payment, compromise, or otherwise, and the Holders will
be entirely liable therefor to Microsoft under this indemnity. Notwithstanding
any of the foregoing, but subject to the remainder of this Section 7.2, the
Holders will have no right under this section to control or participate in any
federal or state income tax audit. In the event any Indemnifiable Amounts
arise out of such audits, Microsoft will notify the Holders' Representative
and allow him to comment on any written submissions relating to any
Indemnifiable Amounts, Microsoft will consult in good faith with Holders'
Representative regarding the conduct of any audit, and will not settle any
claims with respect to any Indemnifiable Amount without the consent of the
Holders' Representative; provided, however, that if Microsoft waives its
rights under this Section 7.2 with respect to an Indemnifiable Amount and
agrees that any amount payable with respect thereto shall not apply against
the Threshold Amount, Holders' Representative will have no consent rights (or
consultation rights under this sentence) with respect thereto. Microsoft will
conduct the audit in good faith in order to minimize the Indemnifiable Amounts
of the Holders. Microsoft may also, if it so elects and entirely within its
own discretion, defend any such claim or demand if the Holders' Representative
fails to give notice within the aforementioned 20-calendar day period of his
intention to contest or settle any such claim or demand, in which event the
Holders will be required to indemnify Microsoft and its affiliates for any and
all costs, losses, liabilities, and expenses whatsoever, including without
limitation reasonable attorneys' and other professional fees, that Microsoft
may sustain, suffer, incur, or become subject to as a result of Microsoft's
decision to defend any such claim or demand.
7.3 NOTICE OF CLAIMS.
In the event that any indemnification involves a claim or legal proceeding
by Microsoft not related to a third party claim, as described above, the
parties will comply with the notice provisions contained in the Escrow
Agreement.
7.4 BINDING EFFECT.
The indemnification obligations of the Holders and Principal Shareholders
contained in this Article 7 are an integral part of this Agreement and
Recapitalization in the absence of which Microsoft would not have entered into
this Agreement.
7.5 TIME LIMIT.
The provisions of this Article 7 shall apply only to Indemnifiable Amounts
which are incurred or relate to claims as to which Microsoft shall have made
an appropriate claim under this Article 7 or the Escrow Agreement on or prior
to the eighteen month anniversary of the Closing; provided (i) that the
obligation of the Principal Shareholders to indemnify Microsoft for breaches
of the representations, warranties and covenants in Sections 2.1.9 and 3.10
relating to taxes (as defined in Section 2.1.9) ("TAX CLAIMS") shall continue
until thirty (30) days after the expiration of all statutes of limitations
applicable to such taxes (the "STATUTORY TAX PERIOD") and (ii) that
obligations of the Principal Shareholders for Indemnifiable Amounts arising
out of Fraud or willful misstatements or willful omissions of Company or the
Principal Shareholders will have no time limit. For all purposes under this
Agreement and any instruments or documents created in connection herewith,
"Fraud" shall mean a material misrepresentation of fact by the company or a
Principal Shareholder under this Agreement or any such document or instrument
or criminal conduct or a criminal act by a Principal Shareholder related to
the business condition of the Company, with actual knowledge of such Principal
Shareholder of its falsity or illegality on which Microsoft has relied to its
detriment or suffered actual damages, as finally determined by a court. No
Principal Shareholder shall be liable to Microsoft for any claim based on
fraud under the terms of this Agreement or any instrument or document executed
in connection herewith without having actual knowledge
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thereof or active and knowing participation therein. The parties acknowledge
that the liability of the Holders other than the Principal Shareholders for
Indemnifiable Amounts shall terminate upon the termination of the escrow
contemplated by the Escrow Agreement.
7.6 LIMITS OF INDEMNIFICATION.
Notwithstanding any other provision in this Article 7, Microsoft shall be
entitled to indemnification only if the aggregate Indemnifiable Amounts exceed
Five Hundred Thousand Dollars ($500,000) (the "THRESHOLD AMOUNT"), provided
that at such time as the amount to which Microsoft is entitled to be
indemnified exceeds the Threshold Amount, Microsoft shall be entitled to be
indemnified up to the full Indemnifiable Amounts including the Threshold
Amount and provided further that Microsoft shall be indemnified on a first
dollar basis regardless of whether the Threshold Amount has been satisfied for
any Indemnifiable Amounts payable with respect to all amounts paid or payable
with respect to claims regardless of the fact that the claim was settled prior
to the execution of this Agreement relating to the "WebTV" trademark. Other
than as provided below, (a) the aggregate amount to which Microsoft shall be
entitled to be indemnified will not exceed, an amount equal to the Escrow
Amount and (b) Microsoft's sole remedy for breaches of this Agreement
including without limitation those matters set forth in Section 7.1(i)-(iii),
shall be claims against the Escrow Amount. The Indemnifiable Amounts for
breaches of representations and warranties or covenants relating to Tax
Claims, and fraud or willful misstatements or willful omissions by Company or
the Principal Shareholders shall be subject to neither the Threshold Amount
nor the Escrow Amount
7.7 TAX CONSEQUENCES.
As stated in Section 1.13, it is the intent of the parties that the
Recapitalization is intended to be a "REORGANIZATION" within the meaning of
Section 368(a)(1)(E) of the Code, and no party shall take any position
inconsistent with this interpretation. However, no party or its counsel shall
have any obligation, of indemnification or otherwise, in the event it is
determined that the tax consequences differ from those intended or those
described in the S-4 or otherwise (except to the extent that the failure of
the Recapitalization to so qualify as a reorganization shall have been as a
result of a breach of the terms of this Agreement by such party).
7.8 SOLE REMEDY.
Except as provided in the last sentence of Section 7.6 above, this Article 7
shall set forth the sole exclusive remedy and recourse (and corresponding
liability for any Holder) of Microsoft and Company arising for any claim,
cause of action or right of any nature against Company or any Company
shareholder, officer, director, employee or agent in connection with this
Agreement.
7.9 DUTY TO MITIGATE.
Microsoft shall act in good faith and in a commercially reasonable manner to
mitigate any Indemnifiable Amounts it may suffer.
8. TERMINATION
8.1 MUTUAL AGREEMENT.
This Agreement may be terminated at any time prior to the Effective Time by
the written consent of Microsoft and Company.
8.2 FAILURE TO OBTAIN SHAREHOLDER APPROVAL.
This Agreement may be terminated by Microsoft or Company (provided that such
party is not then in material breach of any representation, warranty, covenant
or agreement contained in this Agreement), by means
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of written notice to the other party, upon the failure of the shareholders of
Company to approve the transactions contemplated by this Agreement at a the
Company Shareholders Meeting.
8.3 TERMINATION BY MICROSOFT.
This Agreement may be terminated by Microsoft (provided that it is not then
in material breach of any representation, warranty, covenant or agreement
contained in this Agreement) alone, by means of written notice to Company, (i)
if there has been a material breach by Company of any representation,
warranty, covenant or agreement set forth in the Agreement or other ancillary
agreements, which breach would result in a failure to satisfy the Closing
condition contained in Section 6.2.1 and has not been cured within thirty (30)
business days following receipt by Company of notice of such breach, or (ii)
following payment of the Break-Up Fee, in the manner contemplated by Section
8.7.4, or (iii) upon payment of the Termination Fee following the occurrence
of the circumstances contemplated by Section 8.7.2.
8.4 TERMINATION BY COMPANY.
This Agreement may be terminated by Company (provided that it is not then in
material breach of any representation, warranty, covenant or agreement
contained in this Agreement) alone, by means of written notice to Microsoft,
(i) if there has been a material breach by Microsoft of any representation,
warranty, covenant or agreement set forth in the Agreement or other ancillary
agreements, which breach has not been cured within thirty (30) business days
following receipt by Microsoft of notice of such breach, (ii) in the manner
contemplated by Section 8.7.3.
8.5 UNLAWFUL TRANSACTION.
This Agreement may be terminated by Microsoft or Company, alone, by means of
written notice to the other party, upon the entry of an order by any court of
competent jurisdiction declaring the Recapitalization unlawful or enjoining
the consummation of the Recapitalization, or the enactment of any statute
causing the Recapitalization to be unlawful.
8.6 OUTSIDE DATE.
This Agreement may be terminated by Microsoft alone or by Company alone by
means of written notice if the Effective Time does not occur on or prior to
September 30, 1997, provided, however if the parties have agreed to pursue
litigation pursuant to Section 5.6.2, such date shall be extended to March 31,
1998 (the "OUTSIDE DATE").
8.7 EFFECT OF TERMINATION.
8.7.1 OBLIGATIONS UPON TERMINATION.
In the event of termination of this Agreement by either Company or Microsoft
as provided this Article 8, this Agreement will forthwith become void and have
no effect, and, except as set forth in this Article 8, there will be no
liability or obligation on the part of Microsoft, Company or their respective
officers or directors or the Holders or Principal Shareholders, except that
the provisions of Sections 5.3, 5.5, 8.7.3 and 9.2, and any confidentiality
agreement will survive any such termination and abandonment
8.7.2 TERMINATION WITHOUT BREACH.
Microsoft agrees to pay Company (provided that Company is not then in
material breach or any representation, warranty, covenant or agreement
contained in this Agreement), by wire transfer or by forgiveness of Company
indebtedness, the sum of $15 million in immediately available funds (the
"TERMINATION FEE") in the event that following the execution of this
Agreement, and at or prior to the termination of this Agreement (i) with
respect to any administrative or judicial action or proceeding instituted (or
threatened to be instituted) challenging the Recapitalization as violative of
any Antitrust Law, Microsoft and Company, pursuant to
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Section 5.6.2, fail to mutually agree that it is in their best interests to
vigorously contest or resist any such action or proceeding or to have vacated,
lifted, reversed, or overturned any Order that is in effect and that
prohibits, prevents, or restricts consummation of the Recapitalization, (ii)
following such mutual agreement pursuant to Section 5.6.2, Microsoft and
Company fail to successfully contest or resist any such action or proceeding,
or fail to have vacated, lifted, reversed, or overturned any such Order, or
(iii) the Recapitalization shall fail to have been consummated on or prior to
the Outside Date for reasons other than as set forth in Sections 8.1 through
8.5. Microsoft shall have the right to set-off the Termination Fee against any
amounts due under the Line of Credit. The right to payment of the Termination
Fee shall be the exclusive remedy at law or in equity to which Company or any
of the Principal Shareholders may be entitled with respect to objections
asserted by any Governmental Entity with respect to the Recapitalization or
any other transactions provided for in this Agreement under any Antitrust Laws
or for the transactions contemplated by this Agreement otherwise failing to
close by the Outside Date for reasons other than as set forth in Sections 8.1
through 8.5. Company and the Principal Shareholders each agree that receipt of
the Termination Fee pursuant to this Section shall preclude any action for
damages pursuant to this Section 8.7 or otherwise. Upon the payment of the
Termination Fee to the Company upon the occurrence of the circumstances
identified in clauses (i), (ii) and (iii) above, this Agreement shall be
terminated.
8.7.3 TERMINATION BY COMPANY WITHOUT CAUSE.
8.7.3.1 RIGHT TO CONSIDERATION UPON SALE OF COMPANY.
In the event that Company terminates this Agreement other than as permitted
by Sections 8.1, 8.2, 8.4 or 8.5 or fails to proceed with the Closing after
all applicable conditions have been satisfied, then this Agreement will
forthwith become void and have no effect, and Microsoft (provided that it is
not then in material breach of any representation, warranty, covenant or
agreement contained in this Agreement) shall be entitled to consideration in
the event that Company is acquired on or before the first anniversary of the
effective date of such termination, pursuant to the terms and conditions of
this Section 8.7.3.
8.7.3.2 DEFINITION OF ACQUIRED.
As used in this Section 8.7.3, Company shall have been considered to be
"ACQUIRED" in the event that:
(a) The shareholders of Company sell capital shares to a third party
having rights to 50% or more of either the "VOTING POWER" (i.e., the rights
to elect directors or approve a merger, recapitalization, reorganization or
sale of asset) or rights to receive assets of the Company in a liquidation,
dissolution or winding up "LIQUIDATION RIGHTS."
(b) Company is involved in any merger, consolidation or statutory share
exchange unless, following the completion of such transaction, the then
existing shareholders of Company own or control, directly or indirectly, at
least 50% of the voting power or liquidation rights of Company or the
successor of such merger, consolidation or statutory share exchange;
(c) Company sells or transfers all or substantially all of the assets of
Company; or
(d) Company issues additional shares of stock to a person or group of
related persons other than to the Principal Shareholders ("THIRD PARTY") in
a transaction or series of related transactions and as a result of such
transaction or transactions, (i) the Third Party owns or controls 50% or
more of the voting power or liquidation rights of the issued and
outstanding capital shares of the Purchaser or Company and (ii) the
Principal Shareholders directly or indirectly receive additional
compensation, remuneration, payments or other economic benefit.
8.7.3.3 AMOUNT OF CONSIDERATION.
In the event that Company is acquired within the period specified in Section
8.7.3.1, Microsoft shall be entitled to fifty percent (50%) of the proceeds of
such transaction, net of all costs of closing (including, without limitation,
attorneys' fees, financial consultant fees, and other costs incidental to such
transaction) (the "NET ACQUISITION PROCEEDS") that exceed the amount
determined by multiplying Company Common Share Equivalents as of the time of
determination by $13.686 per share (the "TOTAL AGGREGATE CONSIDERATION"). Net
Acquisition Proceeds shall not be deemed to include the assumption of Company
debt to the extent such debt was not incurred by Company for purposes of
making or paying additional compensation, remuneration, or
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payments directly to Company shareholders in connection with the acquisition,
or to any of the Principal Shareholders in their capacities as employees or
for or in connection with noncompetition agreements. If there occurs (i) an
event covered by Section 8.7.3.2(d), (ii) an event covered by Sections
8.7.3.2(a) that involves less than 100% of the issued and outstanding capital
stock of Company, or (iii) an event covered by Section 8.7.3.2(b) that
involves the carryover of some of the interest of the shareholders of Company
into the successor, the amount for purposes of calculation of Total Aggregate
Consideration under this Section 8.7.3 shall be reduced by the percentage of
the total outstanding capital stock of Company that is not sold, transferred
or not carried-over. (The following example is inserted solely for purposes of
clarification of the preceding sentence: assume that the shareholders of
Company sell 60% of the shares of Company capital stock to a third party
pursuant to Section 8.7.3.2(a), then the Total Aggregate Consideration for
purposes of this Section 8.7.3 shall be reduced by 40%.)
8.7.3.4 PAYMENT OF CONSIDERATION.
(a) To the extent Company or its shareholders receives consideration in
cash at the closing of an event contemplated by this Section 8.7.3, the
payment contemplated by this Section in respect of such cash payment shall
be made at such closing of the event giving rise to the payment.
(b) To the extent cash payments are made after closing (for example, by
release from escrow after closing), the payment contemplated by this
Section 8.7.3 shall be made upon receipt of such cash.
(c) To the extent Company or its shareholders receives other forms of
consideration at the closing of an event contemplated by this Section
8.7.3, Microsoft will receive its share of such consideration at such
closing.
(d) In the event Company or its shareholders receives a combination of
cash at closing, cash paid after closing, and other consideration, or any
of them, the payment contemplated by this Section 8.7.3 shall be made as
contemplated for each such type of consideration on a pro rata basis (based
on the relationship of the consideration in question to the total aggregate
consideration received).
8.7.3.5 EXCLUSIVE REMEDY.
The rights pursuant to this section shall be the exclusive remedy at law or
in equity to which Microsoft and its officers, directors, representatives and
other affiliates shall be entitled in the event that the Agreement is
terminated by Company pursuant to Section 8.4(ii) and this Section 8.7.3.
8.7.4 TERMINATION BY MICROSOFT WITHOUT CAUSE.
In the event that Microsoft terminates this Agreement other than as
permitted by Sections 8.1, 8.2 or 8.3 or fails to proceed with the Closing
after all applicable conditions have been satisfied, then this Agreement will
forthwith become void and have no effect, and, provided that Company is not
then in material breach of any representation, warranty, covenant or agreement
contained in this Agreement, Microsoft immediately shall pay to Company, by
wire transfer, in immediately available funds, the Break-up Fee (as defined
below). Microsoft shall have set-off the Break-up Fee against any amounts due
under the Line of Credit. For purposes of this Section 8.5.5, the "BREAK-UP
FEE" shall equal (a) $50 million, in the event that the effective date of
termination by Microsoft hereunder is on or before the sixtieth (60th) day
after the date of this Agreement, or (b) $75 million, in the event the
effective date of termination by Microsoft hereunder is after such sixtieth
day.
The rights pursuant to this section shall be the exclusive remedy at law or
in equity to which Company and its officers, directors, representatives and
other affiliates shall be entitled in the event that the Agreement is
terminated by Microsoft pursuant to Section 8.3(ii) and this Section 8.7.4.
8.7.5 ADDITIONAL FEE WITH RESPECT TO FUJITSU.
In the event that Company and Fujitsu have failed to reach agreement with
respect to a joint venture arrangement within thirty (30) days after
termination of this Agreement pursuant to either Section 8.7.2 or 8.7.4,
Microsoft agrees to pay Company, by wire transfer or by forgiveness of Company
indebtedness, in addition to the Termination Fee or Break-up Fee under
Sections 8.7.2 or 8.7.4, respectively, as applicable, the sum of $5 million in
immediately available funds (the "ADDITIONAL FEE"). Company and the Principal
Shareholders each agree that receipt of the Termination Fee or Break-up Fee,
as applicable, and the Additional Fee shall preclude any action for damages
pursuant to this Section 8.7 or otherwise.
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9. MISCELLANEOUS
9.1 ENTIRE AGREEMENT.
This Agreement, including the exhibits and schedules delivered pursuant to
this Agreement, and any confidentiality agreement between the parties, contain
all of the terms and conditions agreed upon by the parties relating to the
subject matter of this Agreement and supersede all prior agreements,
negotiations, correspondence, undertakings, and communications of the parties,
whether oral or written, respecting that subject matter.
9.2 GOVERNING LAW.
This Agreement will be governed by, and construed in accordance with, the
laws of the State of Washington as applied to agreements entered into and
entirely to be performed within that state.
9.3 NOTICES.
All notices, requests, demands or other communications which are required or
may be given pursuant to the terms of this Agreement will be in writing and
will be deemed to have been duly given: (i) on the date of delivery if
personally delivered by hand, (ii) upon the third day after such notice is (a)
deposited in the United States mail, if mailed by registered or certified
mail, postage prepaid, return receipt requested, or (b) sent by a nationally
recognized overnight express courier, or (iii) by facsimile upon written
confirmation (other than the automatic confirmation that is received from the
recipient's facsimile machine) of receipt by the recipient of such notice:
If to Microsoft: Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attention: Robert A. Eshelman
Telephone No.: (206) 882-8080
Facsimile No.: (206) 869-1327
With a copy to: Preston Gates & Ellis LLP
5000 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7078
Attention: Richard B. Dodd
Telephone No.: (206) 623-7580
Facsimile No.: (206) 623-7022
If to Company: WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Attention: Stephen G. Perlman
Telephone No.: (415) 326-3240
Facsimile No.: (415) 614-1380
With a copy to: Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Joshua Pickus
Telephone No.: (415) 854-4488
Facsimile No.: (415) 854-1121
If to Principal Shareholders Representative:
Such addresses may be changed, from time to time, by means of a notice given
in the manner provided in this Section 9.3.
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9.4 SEVERABILITY.
If any provision of this Agreement is held to be unenforceable for any
reason, it will be modified rather than voided, if possible, in order to
achieve the intent of the parties to this Agreement to the extent possible. In
any event, all other provisions of this Agreement will be deemed valid and
enforceable to the full extent.
9.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representations and warranties contained in this Agreement, including
the exhibits and schedules delivered pursuant to this Agreement, shall
terminate at midnight on the eighteen month anniversary of the Closing of this
Agreement; provided that the representations, warranties and covenants
relating to Tax Claims shall continue until thirty (30) days after the
expiration of the applicable Statutory Tax period.
9.6 ASSIGNMENT.
No party to this Agreement may assign, by operation of law or otherwise, all
or any portion of its rights, obligations, or liabilities under this Agreement
without the prior written consent of the other party to this Agreement, which
consent may be withheld in the absolute discretion of the party asked to grant
such consent. Any attempted assignment in violation of this Section 9.6 will
be voidable and will entitle the other party to this Agreement to terminate
this Agreement at its option.
9.7 COUNTERPARTS.
This Agreement may be executed in two or more partially or fully executed
counterparts each of which will be deemed an original and will bind the
signatory, but all of which together will constitute but one and the same
instrument. The execution and delivery of a "Signature Page--Agreement and
Plan of Reorganization" in the form annexed to this Agreement by any party
hereto who will has been furnished the final form of this Agreement will
constitute the execution and delivery of this Agreement by such party, it
being understood that a signature page may be delivered via facsimile.
9.8 AMENDMENT.
This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto.
9.9 EXTENSION, WAIVER.
At any time prior to the Effective Time, any party hereto may, to the extent
legally allowed: (i) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements, covenants or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver will be valid only if set forth in an instrument
in writing signed on behalf of such party.
9.10 INTERPRETATION.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference will be to a Section, Exhibit or Schedule to this
Agreement unless otherwise indicated. The words "include" and "including" when
used therein will be deemed in each case to be followed by the words "without
limitation." The "knowledge of," "the best of knowledge of," or other
derivations of "know" with respect to Company will mean the knowledge of
Stephen G. Perlman, Bruce A. Leak, Phillip Y. Goldman, Albert A. Pimentel and
William Keating, in each case assuming the exercise of reasonable inquiry
either directly or by representative on his or their behalf. The table of
contents, index to defined terms, and headings contained in this Agreement are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
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9.11 ATTORNEYS' FEES.
In the event of any action to enforce any provision of this Agreement, or on
account of any breach of this Agreement, the prevailing party or parties in
such action shall be entitled to recover, in addition to all other relief,
from the losing party or parties all attorneys' fees in connection with such
action (including, but not limited to, any appeal thereof).
[Remainder of Page Intentionally Omitted]
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SIGNATURE PAGE--AGREEMENT AND PLAN OF RECAPITALIZATION
IN WITNESS WHEREOF, Microsoft, Company, and Principal Shareholders have
executed this Agreement as of the date first written above.
MICROSOFT CORPORATION COMPANY
By /s/ Gregory B. Maffei By /s/ Bruce A. Leak
-------------------------------- -----------------------------------
PRINCIPAL SHAREHOLDERS:
/s/ Stephen G. Perlman /s/ Phillip Y. Goldman
- ----------------------------------- --------------------------------------
Perlman Goldman
/s/ Bruce A. Leak
- -----------------------------------
Leak
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CERTIFICATES OF APPROVAL BY SHAREHOLDERS
The undersigned Secretary of Company hereby certifies that holders of a
majority of the voting power of Company Shares approved the foregoing
Agreement and Plan of Reorganization on .
COMPANY
By
------------------------------------
Secretary
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SCHEDULES AND EXHIBITS INDEX
<TABLE>
<S> <C>
EXHIBITS
Exhibit 1.1 Form of Recapitalization Documents
Exhibit 1.3.3 Form of Replacement Microsoft Option
Exhibit 1.5 Form of Escrow Agreement
Exhibit 2.1 Company Disclosure Schedule
Exhibit 2.2 Microsoft Disclosure Schedule
Exhibit 3.11 Form of Voting Agreements
Exhibit 3.15.1 Form of Intellectual Property Agreement
Exhibit 3.15.2 Form of Technology Licensing Agreement
Exhibit 3.15.3 Form of Patent Licensing Agreement
Exhibit 3.15.4 Form of Shareholders Agreement
Exhibit 4.7 Line of Credit
Exhibit 6.2.1 Form of Certificate of Representations and Warranties;
Performance of Obligations
Exhibit 6.2.4 Form of Affiliates Agreement
Exhibit 6.2.5 Form of Venture Law Group Opinion
Exhibit 6.2.6 Form of Employment and Noncompetition Agreement
Exhibit 6.2.10 Form of Assignment of Copyrights, Patents and other
Intellectual Property
Exhibit 6.3.3 Form of Preston Gates & Ellis LLP Legal Opinion
Exhibit 6.3.6 Form of Make-Well Agreement
SCHEDULES
Schedule 1.3.3 Vesting Schedule for Replacement Microsoft Options
Schedule 1.3.4 List of Holders of Company Restricted Shares
Schedule 2.1.2 Company Common Share Equivalents
Schedule 3.1.1.1 Schedule of Proposed Transactions
</TABLE>
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APPENDIX B
April 5, 1997
Board of Directors
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Members of the Board:
We understand that Microsoft Corporation ("Microsoft"), WebTV Networks, Inc.
("WNI"), and certain shareholders of WNI (the "Principal Shareholders") have
entered into an Agreement and Plan of Recapitalization, dated as of the date
hereof (the "Agreement"). Pursuant to the Agreement, WNI will effect a
recapitalization (the "Transaction") resulting in the exchange of all issued
and outstanding common stock, without par value, of WNI (the "WNI Common
Shares"), preferred stock, without par value, of WNI (the "WNI Preferred
Shares"), options to purchase WNI Common Shares and warrants to purchase WNI
Preferred Shares into a combination of Class A Common Stock of WNI (the
"Exchangeable Shares" as defined in the Agreement) which is exchangeable for
Common Stock of Microsoft, par value $0.000025 per share (the "Microsoft
Common Shares"), cash and options to purchase Microsoft Common Shares, all in
the manner and according to the terms of the Agreement. As a result of the
Transaction, holders of the WNI Common Shares shall receive a total aggregate
value per share in cash and/or Exchangeable Shares equal to $12.841 (the
"Common Consideration") and holders of the WNI Preferred Shares shall receive
$13.686 in cash (the "Preferred Consideration"). The terms and conditions of
the Transaction are more fully set forth in the Agreement.
You have asked for our opinion as to whether the Common Consideration and
the Preferred Consideration pursuant to the Agreement are fair from a
financial point of view to the holders of WNI Common Shares and WNI Preferred
Shares, respectively.
For purposes of the opinion set forth herein, we have:
i. analyzed certain publicly available financial statements and other
information of Microsoft;
ii. analyzed certain internal financial statements and other financial
and operating data concerning WNI prepared by the management of WNI;
iii. analyzed certain financial projections relating to WNI prepared by
the managements of WNI and Microsoft;
iv. discussed the past and current operations and financial condition and
the prospects of WNI with senior executives of WNI and Microsoft;
v. compared the financial performance of WNI with that of certain
publicly-traded companies which we deemed to be relevant;
vi. reviewed the reported prices and trading activity for the Microsoft
Common Shares;
vii. compared the financial performance of Microsoft and the prices and
trading activity of the Microsoft Common Shares with that of certain other
publicly-traded companies which we deemed to be relevant and their
securities;
viii. reviewed the financial terms, to the extent publicly available, of
certain merger and acquisition transactions which we deemed to be relevant;
ix. participated in discussions and negotiations among representatives of
WNI and Microsoft and their respective legal advisors;
x. reviewed the Agreement and certain related agreements; and
xi. performed such other analyses and considered such other factors as we
have deemed appropriate.
B-1
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We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial projections, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of WNI.
We have not made any independent valuation or appraisal of the assets,
liabilities or technology of Microsoft or WNI, respectively, nor have we been
furnished with any such appraisals. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information
made available to us as of, the date hereof.
In arriving at our opinion, we did not solicit interest from, nor did we
negotiate with, any party, other than Microsoft, with respect to a possible
acquisition of or business combination involving all or any part of WNI or any
of its assets.
We have acted as financial advisor to the Board of Directors of WNI in
connection with this transaction and will receive a fee for our services.
It is understood that this letter is for the information of the Board of
Directors of WNI only and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by WNI with the Securities and Exchange Commission
with respect to the transactions contemplated by the Agreement. In addition,
we express no recommendation or opinion as to how the holders of WNI Common
Shares or WNI Preferred Shares should vote at the shareholders' meeting held
in connection with the Transaction.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Common Consideration and the Preferred Consideration pursuant
to the Agreement are fair from a financial point of view to the holders of WNI
Common Shares and WNI Preferred Shares, respectively.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
By: /s/ Frank P. Quattrone
----------------------------------
Frank P. Quattrone
Managing Director
By: /s/ George F. Boutros
----------------------------------
George F. Boutros
Managing Director
B-2
<PAGE>
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
SEC. 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
SEC. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
SEC. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SEC. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
C-2
<PAGE>
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
SEC. 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SEC. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
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<PAGE>
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
SEC. 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
SEC. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
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<PAGE>
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
C-5
<PAGE>
APPENDIX D
ESCROW AGREEMENT
AMONG
MICROSOFT CORPORATION,
A WASHINGTON CORPORATION,
THE SECURITIES HOLDERS OF
WEBTV NETWORKS, INC.,
A CALIFORNIA CORPORATION,
AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
AS CUSTODIAN
DATED
AS OF
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. ESTABLISHMENT OF ESCROW; ACCOUNT...................................... D-2
1.1 DEPOSIT OF EXCHANGEABLE SHARES.................................. D-2
1.2 CASH ESCROW..................................................... D-3
1.3 ESCROW ACCOUNT.................................................. D-3
1.4 DIVIDENDS; VOTING AND RIGHTS OF OWNERSHIP....................... D-3
1.5 NO ENCUMBRANCE.................................................. D-3
1.6 POWER TO TRANSFER TOTAL ESCROW.................................. D-3
2. RESOLUTION OF CLAIMS.................................................. D-3
2.1 INDEMNIFICATION OBLIGATIONS..................................... D-3
2.2 NOTICE OF CLAIMS................................................ D-4
2.3 RESOLUTION OF CLAIMS............................................ D-4
2.3.1 Uncontested Claims....................................... D-4
2.3.2 Contested Claims......................................... D-4
2.3.3 Arbitration.............................................. D-5
3. RELEASE FROM ESCROW................................................... D-6
3.1 RELEASE OF TOTAL ESCROW......................................... D-6
3.2 RELEASE OF RETAINED ESCROW...................................... D-6
3.3 EXPENSES OF REPRESENTATIVE...................................... D-6
4. CUSTODIAN............................................................. D-7
4.1 DUTIES.......................................................... D-7
4.2 LEGAL OPINIONS.................................................. D-7
4.3 SIGNATURES...................................................... D-7
4.4 RECEIPTS AND RELEASES........................................... D-7
4.5 REFRAIN FROM ACTION............................................. D-7
4.6 INTERPLEADER.................................................... D-7
4.7 TAX FORMS....................................................... D-7
5. INDEMNIFICATION....................................................... D-7
5.1 WAIVER AND INDEMNIFICATION...................................... D-7
5.2 CONDITIONS TO INDEMNIFICATION................................... D-7
6. ACKNOWLEDGMENTS BY THE CUSTODIAN...................................... D-8
7. RESIGNATION OR REMOVAL OF CUSTODIAN; SUCCESSOR........................ D-8
7.1 RESIGNATION AND REMOVAL......................................... D-8
7.1.1 Notice................................................... D-8
7.1.2 Successor Custodian Appointment.......................... D-8
7.2 SUCCESSORS...................................................... D-8
7.3 NEW CUSTODIAN................................................... D-8
7.4 RELEASE......................................................... D-8
7.5 CHANGE OF TRANSFER AGENT........................................ D-8
8. FEE................................................................... D-8
9. SECURITIES HOLDERS' REPRESENTATIVE.................................... D-9
10. TERMINATION........................................................... D-9
11. INDEMNITY............................................................. D-9
12. MISCELLANEOUS PROVISIONS.............................................. D-9
12.1 PARTIES IN INTEREST............................................. D-9
12.2 ATTORNEYS' FEES................................................. D-10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
12.3 ENTIRE AGREEMENT........................................ D-10
12.4 NOTICES................................................. D-10
12.5 AMENDMENT............................................... D-11
12.6 SEVERABILITY............................................ D-11
12.7 COUNTERPARTS............................................ D-11
12.8 HEADINGS................................................ D-11
12.9 GOVERNING LAW........................................... D-11
12.10 BINDING EFFECT.......................................... D-11
</TABLE>
ii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
TERM DEFINED
- ---- -------
<S> <C>
Additional Shares....................................................... D-3
Arbitrable Claims....................................................... D-4
Cash Escrow............................................................. D-3
Chase................................................................... D-8
Claim................................................................... D-4
Closing Date............................................................ D-2
Company................................................................. D-2
Company Securities...................................................... D-2
Contested Claim......................................................... D-4
Custodian............................................................... D-2
Damages................................................................. D-3
Escrow Adjustments...................................................... D-3
Escrow Agreement........................................................ D-2
Escrow Amount........................................................... D-2
Escrowed Shares......................................................... D-3
Exchangeable Shares..................................................... D-2
Initial Escrowed Shares................................................. D-2
Microsoft............................................................... D-2
Microsoft Closing Price................................................. D-4
Microsoft Common Shares................................................. D-2
Microsoft Demand........................................................ D-4
Microsoft Distribution Notice........................................... D-4
Notice of Claim......................................................... D-4
Prevailing Party Award.................................................. D-3
Principal Shareholders.................................................. D-2
Recapitalization........................................................ D-2
Recapitalization Agreement.............................................. D-2
Release Date............................................................ D-6
Release Notice.......................................................... D-6
Released Escrow......................................................... D-6
Representative.......................................................... D-2
Representative Distribution Notice...................................... D-4
Retained Escrow......................................................... D-6
Securities Holders...................................................... D-2
Total Escrow............................................................ D-3
Transfer Agent.......................................................... D-2
</TABLE>
D-1
<PAGE>
ESCROW AGREEMENT
This Escrow Agreement (this "ESCROW AGREEMENT") is made and entered into as
of , 1997 (the "CLOSING DATE"), by and among Microsoft Corporation, a
Washington corporation ("MICROSOFT"), the undersigned holders of the equity
securities and certain warrants to purchase securities ("COMPANY SECURITIES")
of WebTV Networks, Inc., a California corporation ("COMPANY") (the "SECURITIES
HOLDERS"), Jeffrey D. Brody as the Representative of the Securities Holders
("REPRESENTATIVE"), and ChaseMellon Shareholder Services, L.L.C., as Custodian
(the "CUSTODIAN").
RECITALS
Whereas, Microsoft, Company, and certain principal shareholders of Company
(the "PRINCIPAL SHAREHOLDERS") have entered into an Agreement and Plan of
Recapitalization dated as of April 5, 1997 (the "RECAPITALIZATION AGREEMENT")
setting forth certain terms and conditions pursuant to which the securities of
Company will be reclassified and whereby Microsoft will acquire all of the
outstanding shares of a new issue of Class B Common Shares which will
represent the general voting rights and residual liquidation rights of
Company's capital shares (the "RECAPITALIZATION");
Whereas, pursuant to the Recapitalization Agreement, upon the closing of the
Recapitalization, the Securities Holders will receive Class A Common Shares
("EXCHANGEABLE SHARES"); which are exchangeable into Microsoft Common Shares,
par value $.000025 per share ("MICROSOFT COMMON SHARES"), or cash, from either
the Company or Microsoft, having a total value of approximately $ ;
Whereas, the Recapitalization Agreement provides that Fifty Million Dollars
($50,000,000) (the "ESCROW AMOUNT") will be withheld from the Exchangeable
Shares and cash to be issued in the conversion of the Company Securities on a
basis proportionate to the value of the Exchangeable Shares (determined in the
same manner as in the Recapitalization Agreement) and/or cash to be received
by each Securities Holder and will be placed in an escrow account to secure
certain indemnification obligations of the Holders, as defined in Section 7.1
of the Recapitalization Agreement, to Microsoft under Article 7 of the
Recapitalization Agreement on the terms and conditions set forth therein and
herein;
Whereas, it is a condition of the Closing of the Recapitalization Agreement
that the Principal Shareholders and holders of at least 80% of Company
Preferred Shares and Company Warrants execute an escrow agreement in
substantially the form of this Escrow Agreement; and
Whereas, capitalized terms not otherwise defined herein will have the same
meaning as set forth in the Recapitalization Agreement, which is incorporated
herein by this reference.
Now Therefore Intending to be Legally Bound, in consideration of the mutual
promises contained herein and other good and valid consideration, the receipt
and adequacy of which are hereby acknowledged, the parties agree as follows:
1. ESTABLISHMENT OF ESCROW; ACCOUNT
1.1 Deposit of Exchangeable Shares. The Company shall, immediately upon the
date of this Escrow Agreement, deposit on the Securities Holders behalf with
the Custodian an aggregate of Exchangeable Shares issued in the respective
names of the Securities Holders and in the relative amounts as set forth on
Exhibit 1.1 hereto (the "INITIAL ESCROWED SHARES") and shall promptly deliver
to the Custodian duly authorized share certificates for the Initial Escrowed
Shares registered in the respective names of the Shareholders as set forth on
Exhibit 1.1 hereto. In lieu of issuing share certificates, the issuance of
Escrowed Shares (as defined below) provided for in this Escrow Agreement may
be recorded by journal entry in the stock transfer records of the transfer
agent for Escrowed Shares (as defined below) (the "TRANSFER AGENT"). Any
capital shares or other securities that result from any share dividend,
reclassification, stock split, subdivision or combination of shares,
D-2
<PAGE>
recapitalization, merger, or conversion of Escrowed Shares into Microsoft
Common Shares as permitted by the Articles, or other events made with respect
to any Escrowed Shares or Microsoft Common Shares then held in escrow under
this Escrow Agreement ("ADDITIONAL SHARES") shall be delivered to the
Custodian and shall be held in the Escrow Account (and, as required under this
Escrow Agreement, shall be released from the Escrow Account). Unless otherwise
indicated, as used in this Escrow Agreement, the term "ESCROWED SHARES"
includes the Initial Escrowed Shares and any Additional Shares. The Escrowed
Shares, as well as the Cash Escrow (as defined below), are to be held by the
Custodian and released pursuant to the provisions of this Escrow Agreement.
The Custodian agrees to accept delivery of the Escrowed Shares and to hold
such Escrowed Shares in escrow in accordance with this Escrow Agreement and to
release the Escrowed Shares out of escrow as provided in this Escrow
Agreement.
1.2 Cash Escrow. Microsoft shall, immediately upon the date of this Escrow
Agreement, deposit with the Custodian cash in the amount of in the
respective names of the Securities Holders and in the relative amounts as set
forth on Exhibit 1.2 hereto. The cash deposited in connection with this Escrow
Agreement is referred to as the "CASH ESCROW," which along with the Escrowed
Shares are collectively referred to as the "TOTAL ESCROW."
1.3 Escrow Account. The Custodian shall maintain the Cash Escrow in a
separate, interest bearing money market account.
1.4 Dividends; Voting and Rights of Ownership. Any cash dividends, dividends
payable in property or other distributions of any kind (except for Additional
Shares) made in respect of the Escrowed Shares shall be distributed currently
by Microsoft or the Company, as the case may be, to the Securities Holders on
a pro rata basis with respect to the Escrowed Shares as to which such
dividends are paid. Each Securities Holder shall have the right to any voting
rights applicable to the Escrowed Shares held in escrow for the account of
such Securities Holder so long as such Escrowed Shares are held in escrow, and
Microsoft shall take all steps necessary to allow the exercise of such rights.
While the Escrowed Shares remain in the Custodian's possession pursuant to
this Escrow Agreement, the Securities Holder shall retain and shall be able to
exercise all other incidents of ownership of the Escrowed Shares that are not
inconsistent with the terms and conditions hereof.
1.5 No Encumbrance. None of the Total Escrow or any beneficial interest
therein may be pledged, sold, assigned or transferred, including by operation
of law, other than by will or by the laws of descent or distribution in the
event of the death of a Securities Holder, by a Securities Holder or may be
taken or reached by any legal or equitable process in satisfaction of any debt
or other liability of a Securities Holder, prior to the delivery of the
Escrowed Shares or the Cash Escrow by the Custodian to such Securities Holder
pursuant to this Escrow Agreement.
1.6 Power to Transfer Total Escrow. The Custodian is hereby granted the
power to effect any transfer of the Total Escrow provided for in this Escrow
Agreement.
2. RESOLUTION OF CLAIMS
2.1 Indemnification Obligations. Payment for any amount determined as
provided below to be owing for any Indemnifiable Amounts ("DAMAGES") and any
award of attorneys' fees and charges pursuant to Section 2.3.3.5 or 12.2 of
this Escrow Agreement (a "PREVAILING PARTY AWARD") shall be made by: (i) the
release of Escrowed Shares, and (ii) the release of any Cash Escrow
(collectively referred to as "ESCROW ADJUSTMENTS"). Any Escrow Adjustments
shall be made in proportion to each of the Securities Holders' interest in
Escrowed Shares and/or Cash Escrow as of the date or dates specified in and
the manner provided for in this Escrow Agreement for the resolution of Claims.
The value of the Escrowed Shares shall equal the average closing prices of
Microsoft Common Shares for the respective periods as provided for in this
Escrow Agreement and shall not be subject to any reduction, discount or other
adjustment. Provided, however, if the applicable conversion rate for the Class
A Common Shares, set forth in the Company Amended and Restated Articles, is
different than 1.0, an appropriate adjustment to the value shall be made;
provided further that each reference to the "average closing prices of
Microsoft Common Shares" hereafter shall take into account any then required
adjustment.
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2.2 Notice of Claims. Promptly after the receipt by Microsoft of notice or
discovery of any claim, damage, or legal action or proceeding giving rise to
indemnification rights under the Recapitalization Agreement (a "CLAIM"),
Microsoft shall give the Representative written notice of such Claim and shall
provide a copy of such notice to the Custodian. Each notice of a Claim by
Microsoft (the "NOTICE OF CLAIM") shall be in writing and shall be delivered
on or before the Release Date. The Notice of Claim shall also specify the
approximate, to the extent known, aggregate dollar amount of the Damages and
the proposed Escrow Adjustments to be made as a result of the Claim.
2.3 Resolution of Claims. Any Notice of Claim received by the Representative
and the Custodian pursuant to Section 2.2 above shall be resolved as follows:
2.3.1 Uncontested Claims. In the event that the Representative does not
contest a Notice of Claim in writing within twenty (20) calendar days, as
provided below in Section 2.3.2, Microsoft may deliver to the Custodian,
with a copy to the Representative, a written demand by Microsoft (a
"MICROSOFT DEMAND") stating that a Notice of Claim has been given as
required in this Escrow Agreement and that no notice of contest has been
received from the Representative during the period specified in this Escrow
Agreement and further setting forth the proposed Escrow Adjustments to be
made in accordance with this Section 2.3.1. In calculating the value of the
Escrowed Shares to be canceled, the value shall equal the Microsoft Closing
Price as determined pursuant to the Recapitalization Agreement (the
"MICROSOFT CLOSING PRICE"). It is provided, however, that within twenty
(20) calendar days after receipt of the Microsoft Demand, the
Representative may object to the proposed Escrow Adjustments whereupon
neither the Custodian nor Microsoft shall make any of the Escrow
Adjustments until either: (i) Microsoft and the Representative shall have
given the Custodian written notice setting forth agreed Escrow Adjustments,
or (ii) the matter is resolved as provided in Sections 2.3.2 and 2.3.3.
Upon satisfaction of the foregoing the Custodian and Microsoft shall
promptly take all steps to implement the final Escrow Adjustments.
2.3.2 Contested Claims. In the event that the Representative gives
written notice contesting all or a portion of a Notice of Claim to
Microsoft and the Custodian (a "CONTESTED CLAIM") within the 20-day period
provided above, matters that are subject to third party claims brought
against Microsoft or Company in a litigation or arbitration shall await the
final decision, award or settlement of such litigation or arbitration,
while matters that arise between Microsoft on the one hand and Company
and/or the Securities Holders on the other hand, including any disputes
regarding performance or nonperformance of a party's obligations under this
Escrow Agreement ("ARBITRABLE CLAIMS"), shall be settled in accordance with
Section 2.3.3 below. Any portion of a Notice of Claim that is covered by
Section 2.3.1 or subsequently settled shall be resolved as set forth above
in Section 2.3.1, provided that in the case of a settlement the value of
Escrowed Shares shall equal the Microsoft Closing Price, and provided
further that the Representative's signature shall be required on the
Microsoft Demand as evidence of the Representative's agreement to the
Escrow Adjustments. If notice is received by the Custodian that a Notice of
Claim is contested by the Representative, then the Custodian shall hold in
the Escrow Account, after what would otherwise be the Release Date (as
defined in Section 3.1 below), the Retained Escrow as provided in Section
3.1, until the earlier of: (i) receipt of a settlement agreement executed
by Microsoft and the Representative setting forth a resolution of the
Notice of Claim and the Escrow Adjustments; (ii) receipt of a written
notice from Microsoft (a "MICROSOFT DISTRIBUTION NOTICE") attaching a copy
of the final award or decision of the arbitrator and setting forth the
Escrow Adjustments (Microsoft shall at the same time provide a copy of the
Microsoft Distribution Notice to the Representative); or (iii) receipt of a
written notice from the Representative (a "REPRESENTATIVE DISTRIBUTION
NOTICE") attaching a copy of the final award or decision of the arbitrator
that no Escrow Adjustments are to be made as a result of such award
(Representative shall at the same time provide a copy of the Representative
Distribution Notice to Microsoft). If the earliest of the three events
described in the preceding sentence is (i) or (ii), the Custodian shall,
within ten (10) business days of receipt of the settlement agreement or
Microsoft Distribution Notice, as applicable, cancel the number of Escrowed
Shares and release to Microsoft an amount of Escrowed Cash specified in
such agreement or Microsoft Distribution Notice. If the earliest of the
three events described above is (iii), the Custodian shall, within ten (10)
business days of receipt of the Representative Distribution Notice, release
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to the Securities Holders the Retained Escrow, in accordance with the
Securities Holders' interests therein. If the award or decision of the
arbitrator concludes that Escrowed Shares are to be cancelled and Cash
Escrow are to be released to Microsoft either in satisfaction of Damages or
as Prevailing Party Awards, the arbitrator shall specify the number of
Escrowed Shares and the amount of Cash Escrow to be so released either in
the arbitrator's final award or decision or a supplementary report or
finding. The value of the Escrowed Shares released shall equal the
Microsoft Closing Price. In the event that the Custodian institutes an
action for interpleader in accordance with Section 4.6 of this Escrow
Agreement as a result of a dispute between the parties, the parties hereby
agree to jointly seek to stay such interpleader action pending the
resolution of any arbitration commenced by the parties.
2.3.3 Arbitration.
2.3.3.1 AAA Rules. Any Arbitrable Claim, and any dispute between the
Securities Holders and Microsoft under this Escrow Agreement, shall be
submitted to final and binding arbitration in King County, Seattle,
Washington, which arbitration shall, except as herein specifically
stated, be conducted in accordance with the commercial arbitration
rules of the American Arbitration Association (the "AAA") then in
effect; provided, however, that the parties agree first to try in good
faith to resolve any Arbitrable Claim that does not exceed Two Hundred
Thousand Dollars ($200,000) by mediation under the Commercial Mediation
Rules of the American Arbitration Association, before resorting to
arbitration; provided, further, that, in the event of an arbitration,
the arbitration provisions of this Escrow Agreement shall govern over
any conflicting rules which may now or hereafter be contained in the
AAA rules.
2.3.3.2 Binding Effect. The final decision of the arbitrator shall be
furnished in writing to the Custodian, the Representative, the
Securities Holders and Microsoft and will constitute a conclusive
determination of the issue in question, binding upon the Securities
Holders, the Representative and Microsoft. The arbitrator shall have
the authority to grant any equitable and legal remedies that would be
available in any judicial proceeding instituted to resolve an
Arbitrable Claim. Any judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction over the
subject matter thereof.
2.3.3.3 Compensation of Arbitrator. Any such arbitration shall be
conducted before a single arbitrator who will be compensated for his or
her services, as provided below in Section 2.3.3.5, at a rate to be
determined by the parties or by the AAA, but based upon reasonable
hourly or daily consulting rates for the arbitrator in the event
Microsoft and the Representative are not able to agree upon his or her
rate of compensation.
2.3.3.4 Selection of Arbitrator. The AAA shall have the authority to
select an arbitrator from a list of arbitrators who are partners in a
nationally recognized firm of independent certified public accountants
from the management advisory services department (or comparable
department or group) of such firm or who are partners in a major law
firm; provided, however, that such accounting firm or law firm cannot
be a firm that has rendered or is then rendering services to any party
hereto or, in the case of a law firm, appeared or is then appearing as
counsel of record in opposition in any legal proceeding to any party
hereto.
2.3.3.5 Payment of Costs. The prevailing party in any arbitration
shall be entitled to an award of attorneys' fees and costs, and all
costs of arbitration, including those provided for above, will be paid
by the losing party, subject in each case to a determination by the
arbitrator as to which party is the prevailing party and the amount of
such fees and costs to be allocated to such party. Any amounts
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payable to Microsoft by or on account of the Securities Holders under
this subsection will be reimbursed as if the amount of such awarded
fees and expenses were an Uncontested Claim.
2.3.3.6 Terms of Arbitration. The arbitrator chosen in accordance
with these provisions shall not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the
provisions of this Escrow Agreement, the Recapitalization Agreement or
any other documents that are executed in connection therewith.
2.3.3.7 Exclusive Remedy. Arbitration or mediation under this Section
2.3.3 shall be the sole and exclusive remedy of the parties for any
Arbitrable Claim arising out of this Escrow Agreement or the
Recapitalization Agreement.
3. RELEASE FROM ESCROW
3.1 Release of Total Escrow. The Total Escrow shall be released by the
Custodian as soon as practicable, but not later than twenty (20) days, to the
Securities Holders after , 199 (the "RELEASE DATE"), less: (i) any
Escrowed Shares cancelled and Cash Escrow delivered to or deliverable to
Microsoft in satisfaction of Uncontested Claims or Contested Claims which have
been settled, and (ii) any of the Total Escrow subject to cancellation or
delivery to Microsoft in accordance with Section 2.3.2 with respect to any
then pending Contested Claims. On or before the Release Date, Microsoft and
the Representative shall deliver to the Custodian a jointly approved written
notice (a "RELEASE NOTICE") setting forth the number of Escrowed Shares and
amount of Cash Escrow to be released by the Custodian to each Securities
Holder (the "RELEASED ESCROW") and the number of Escrowed Shares and amount of
Cash Escrow to be retained in Escrow as provided above (the "RETAINED
ESCROW"). The Released Escrow shall be released to the Securities Holders in
proportion to their respective interests in the Initial Escrowed Shares and
Cash Escrow, plus any interest earned thereon. In lieu of releasing any
fractional Escrowed Shares, any fraction of a released Escrowed Share that
would otherwise be released shall be rounded to the nearest whole Exchangeable
Share or Microsoft Common Share then distributable. Within ten (10) business
days after receipt of the Release Notice, the Custodian, acting as Microsoft's
transfer agent, shall deliver (by registered mail or overnight carrier) to
each Securities Holder the number of Escrowed Shares in the names of the
appropriate Securities Holders, and amount of Cash Escrow, plus any earned
interest, as specified in the Release Notice. The Custodian shall not be
required to deliver the Escrowed Shares and Cash Escrow to the Securities
Holders following satisfaction of release conditions until it has received the
Release Notice or, in the event Microsoft and the Representative fail to
deliver a Release Notice, a final award or decision which specifies the
distribution of the Escrow Shares and Cash Escrow.
3.2 Release of Retained Escrow. Upon the resolution of Contested Claims as
provided for in Section 2.3.2, the Retained Escrow shall be subject to release
by the Custodian to Microsoft and/or to the Securities Holders in accordance
with Section 2.3.2, this Section and as otherwise provided for in this Escrow
Agreement. The Custodian shall cause the transfer agent to cancel the number
of Escrowed Shares to be cancelled pursuant to Section 2.3.2 and to reissue
certificates for Escrowed Shares that are to be either distributed to the
Securities Holders pursuant to Section 3.1 or further retained by the
Custodian pending the resolution of Contested Claims, and Prevailing Party
Awards. In addition, the Custodian shall release to Microsoft the Cash Escrow
as provided for in Section 2.3.2 less that amount of Cash Escrow, including
any earned interest, that is either to be distributed to the Securities
Holders pursuant to Section 3.1 or further retained by the Custodian pending
the resolution of Contested Claims and Prevailing Party Awards.
3.3 Expenses of Representative. The Representative shall be entitled to be
reimbursed for his reasonable out-of-pocket expenses and the reasonable fees
and disbursements of counsel. Such reimbursements shall be made from the Total
Escrow, on a pro rata basis among the contributors to the Total Escrow, for
all services performed pursuant to the Recapitalization Agreement and the
Escrow Agreement. The Custodian shall be entitled to liquidate and sell
Escrowed Shares as may be necessary to reimburse the Representative.
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4. CUSTODIAN
4.1 Duties. The duties of the Custodian hereunder shall be entirely
administrative and not discretionary. The Custodian shall be obligated to act
only in accordance with written instructions received by it as provided in
this Escrow Agreement and is authorized hereby to comply with any orders,
judgments or decrees of any court with or without jurisdiction or arbitrator
(pursuant to Section 2.3.3) and shall not be liable as a result of its
compliance with the same.
4.2 Legal Opinions. As to any legal questions arising in connection with the
administration of this Escrow Agreement, the Custodian may rely absolutely
upon the joint instruction of Microsoft and the Representative or the opinions
given to the Custodian by its outside counsel and shall be free of liability
for acting in reliance on such joint instructions or opinions.
4.3 Signatures. The Custodian may rely absolutely upon the genuineness and
authorization of the signature and purported signature of any party upon any
instruction, notice, release, receipt or other document delivered to it
pursuant to this Escrow Agreement.
4.4 Receipts and Releases. The Custodian may, as a condition to the
disbursement of monies or disposition of securities as provided herein,
require from the payee or recipient a receipt therefor and, upon final payment
or disposition, a release of the Custodian from any liability arising out of
its execution or performance of this Escrow Agreement, such release to be in a
form reasonably satisfactory to the Custodian.
4.5 Refrain from Action. The Custodian shall be entitled to refrain from
taking any action contemplated by this Escrow Agreement in the event it
becomes aware of any dispute between Company, the Securities Holders and
Microsoft as to any material facts or as to the happening of any event
precedent to such action.
4.6 Interpleader. If any controversy arises between the parties hereto or
with any third person, the Custodian shall not be required to determine the
same or to take any action, but the Custodian in its discretion may institute
such interpleader or other proceedings in connection therewith as the
Custodian may deem proper, and in following either course, the Custodian shall
not be liable to any person.
4.7 Tax Forms. All entities entitled to receive interest from the Escrow
Account will provide Custodian with W-9 IRS tax forms or W-8 tax forms prior
to disbursement of interest. Interest earned in the account will be reported
as income to the party receiving such interest.
5. INDEMNIFICATION
5.1 Waiver and Indemnification. Microsoft, Company, the Representative, and
the Securities Holders agree to and hereby do waive any suit, claim, demand or
cause of action of any kind which they may have or may assert against the
Custodian arising out of or relating to the execution or performance by the
Custodian of this Escrow Agreement, unless such suit, claim, demand or cause
of action is based upon the willful neglect or gross negligence or bad faith
of the Custodian. They further agree to indemnify the Custodian against and
from any and all claims, demands, costs, liabilities and expenses, including
reasonable attorneys' fees, which may be asserted against it or to which it
may be exposed or which it may incur by reason of its execution or performance
of this Escrow Agreement, except to the extent attributable to its willful
neglect, gross negligence, or bad faith. Such agreement to indemnify shall
survive the termination of this Escrow Agreement until extinguished by any
applicable statute of limitations.
5.2 Conditions to Indemnification. In case any litigation is brought against
the Custodian in respect of which indemnification may be sought hereunder, the
Custodian shall give prompt notice of that litigation to the parties hereto,
and the parties upon receipt of that notice shall have the obligation and the
right to assume the defense of such litigation, provided that failure of the
Custodian to give that notice shall not relieve the parties hereto from any of
their obligations under this Section 5 unless that failure prejudices the
defense of such litigation by said parties. At its own expense, the Custodian
may employ separate counsel and participate in the defense. The parties hereto
shall not be liable for any settlement without their respective consents.
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6. ACKNOWLEDGMENTS BY THE CUSTODIAN
By execution and delivery of this Escrow Agreement, the Custodian
acknowledges that the terms and provisions of this Escrow Agreement are
acceptable and it agrees to carry out the provisions of this Escrow Agreement
on its part.
The Custodian further acknowledges receipt of a copy of the Recapitalization
Agreement.
7. RESIGNATION OR REMOVAL OF CUSTODIAN; SUCCESSOR
7.1 Resignation and Removal.
7.1.1 Notice. The Custodian may resign as such following the giving of
thirty (30) days' prior written notice to the other parties hereto.
Similarly, the Custodian may be removed and replaced following the giving
of thirty (30) days' prior written notice to be given to the Custodian
jointly by the Representative and Microsoft. In either event, the duties of
the Custodian shall terminate thirty (30) days after the date of such
notice (or as of such earlier date as may be mutually agreeable), and the
Custodian shall then deliver the balance of the Escrowed Shares and Cash
Escrow then in its possession to a successor Custodian as shall be
appointed by the other parties hereto as evidenced by a written notice
filed with the Custodian.
7.1.2 Successor Custodian Appointment. If Microsoft and the
Representative are unable to agree upon a successor or shall have failed to
appoint a successor prior to the expiration of thirty (30) days following
the date of the notice of resignation or removal, then the acting Custodian
may appoint a successor escrow holder authorized to do business as a trust
company in the State of California or may petition any court of competent
jurisdiction for the appointment of a successor Custodian or other
appropriate relief, any such resulting appointment shall be binding upon
all of the parties hereto.
7.2 Successors. Every successor appointed hereunder shall execute,
acknowledge and deliver to its predecessor, and also to the Representative and
Microsoft, an instrument in writing accepting such appointment hereunder, and
thereupon such successor, without any further act, shall become fully vested
with all the duties, responsibilities and obligations of its predecessor; but
such predecessor shall, nevertheless, on the written request of its successor
or any of the parties hereto, execute and deliver an instrument or instruments
transferring to such successor all the rights of such predecessor hereunder,
and shall duly assign, transfer and deliver all property, securities and
monies held by it pursuant to this Escrow Agreement to its successor. Should
any instrument be required by any successor for more fully vesting in such
successor the duties, responsibilities and obligations hereby vested or
intended to be vested in the predecessor, any and all such instruments in
writing shall, on the request of any of the other parties hereto, be executed,
acknowledged and delivered by the predecessor.
7.3 New Custodian. In the event of an appointment of a successor, the
predecessor shall cease to be custodian of any funds, securities or other
assets and records it may hold pursuant to this Escrow Agreement, and the
successor shall become such custodian.
7.4 Release. Upon acknowledgment by any successor Custodian of the receipt
of the then remaining balance of the Escrowed Shares and Cash Escrow, the then
acting Custodian shall be fully released and relieved of all duties,
responsibilities and obligations under this Escrow Agreement that may arise
and accrue thereafter.
7.5 Change of Transfer Agent. In the event ChaseMellon Shareholder Services,
L.L.C. ("CHASE") ceases to be Microsoft's transfer agent, Microsoft shall have
the right to substitute its successor transfer agent as the Custodian
(assuming such change is acceptable to the successor transfer agent). In the
event of such substitution Chase agrees to waive any transfer or other charges
other than regular charges for services rendered through such change.
8. FEE
The Custodian will be paid by Microsoft as billed for services hereunder in
accordance with the fee schedule attached hereto as Exhibit A and such fees
shall not be considered Damages or Indemnifiable Amounts for any
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purpose whatsoever. In the event that the Custodian is made a party to
litigation with respect to the property held hereunder, or brings an action in
interpleader, or in the event that the conditions to this Escrow are not
promptly fulfilled, or the Custodian is required to render any service not
provided for in this Escrow Agreement and fee schedule, or there is any
assignment of the interests of this Escrow or any modification hereof, the
Custodian shall be entitled to reasonable compensation for such extraordinary
services and reimbursement for all fees, costs, liability, and expenses,
including attorneys' fees.
9. SECURITIES HOLDERS' REPRESENTATIVE
For purposes of this Escrow Agreement, the Securities Holders have, by the
execution of this Escrow Agreement, consented to the appointment of the
Representative as representative of the Securities Holders and as the
attorney-in-fact for and on behalf of each Securities Holder, and, subject to
the express limitations set forth below, the taking by the Representative of
any and all actions and the making of any decisions required or permitted to
be taken by him under this Escrow Agreement, including but not limited to the
exercise of the power to: (i) authorize delivery to or cancellation by
Microsoft of the Escrowed Shares and Cash Escrow, or any portion thereof, in
satisfaction of Claims otherwise in connection with an Escrow Adjustment, (ii)
agree to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such Claims, (iii) resolve any Claims, and (iv) take all actions
necessary in the judgment of the Representative for the accomplishment of the
foregoing and all of the other terms, conditions and limitations of this
Escrow Agreement. The Representative shall have unlimited authority and power
to act on behalf of each Securities Holder with respect to this Escrow
Agreement and the disposition, settlement or other handling of all Claims,
rights or obligations arising under this Escrow Agreement so long as all
Securities Holders are treated in the same manner. The Securities Holders
shall be bound by all actions taken by the Representative in connection with
this Escrow Agreement, and the Custodian shall be entitled to rely on any
action or decision of the Representative. In performing his functions
hereunder, the Representative shall not be liable to the Securities Holders in
the absence of gross negligence or willful misconduct. In taking any action
whatsoever hereunder, the Representative shall be protected in relying upon
any notice, paper or other document reasonably believed by him to be genuine,
or upon any evidence reasonably deemed by him to be sufficient. The
Representative may consult with counsel in connection with his duties
hereunder and shall be fully protected in any act taken, suffered or permitted
by him in good faith in accordance with the advice of counsel. The
Representative shall not be responsible for determining or verifying the
authority of any person acting or purporting to act on behalf of any party to
this Escrow Agreement. The Representative may be replaced at any time by
affirmative vote or written consent of the holders of a majority-in-interest
of the Total Escrow (computed based on the dollar value of the total Escrow as
of the Closing Date, valuing the Escrowed Shares based on the Microsoft
Closing Price). The Representative shall not be entitled to receive any
compensation from Microsoft in connection with this Escrow Agreement.
10. TERMINATION
This Escrow Agreement and the Escrow created hereby shall terminate
following Custodian's delivery of all remaining Escrowed Shares and Cash
Escrow to either the Securities Holders and/or Microsoft pursuant to Sections
2 or 3.
11. INDEMNITY
The terms, conditions, covenants and provisions of Article 7 of the
Recapitalization Agreement regarding the indemnification obligations of the
Securities Holders are hereby incorporated in full by reference herein.
12. MISCELLANEOUS PROVISIONS
12.1 Parties in Interest. This Escrow Agreement is not intended, nor shall
it be construed, to confer any enforceable rights on any person not a party
hereto. All of the terms and provisions of this Escrow Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto.
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12.2 Attorneys' Fees. In the event of any action to enforce any provision of
this Escrow Agreement, or on account of any default under or breach of this
Escrow Agreement, the prevailing party in such action, if Microsoft, shall be
entitled to recover from the Securities Holders, in addition to all other
relief, all attorneys' fees incurred by Microsoft in connection with such
action (including, but not limited to, any appeal thereof). Such fees shall be
treated as an Uncontested Claim and shall be payable to Microsoft by the
submission of a Microsoft Demand pursuant to Section 2.3.1, and such payments
out of the Total Escrow shall be attributed, on a pro rata basis, among the
losing parties in such action. If the prevailing party is the Representative
or the Securities Holders, such parties shall be entitled to recover from
Microsoft, in addition to all other relief, all attorneys' fees incurred by
the Securities Holders and/or the Representative in connection with such
action (including, but not limited to, any appeal thereof).
12.3 Entire Agreement. This Escrow Agreement constitutes the final and
entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior arrangements or understandings.
12.4 Notices. All notices, requests, demands or other communications which
are required or may be given pursuant to the terms of this Agreement will be
in writing and will be deemed to have been duly given: (i) on the date of
delivery if personally delivered by hand, (ii) upon the third day after such
notice is (a) deposited in the United States mail, if mailed by registered or
certified mail, postage prepaid, return receipt requested, or (b) sent by a
nationally recognized overnight express courier, or (iii) by facsimile upon
written confirmation (other than the automatic confirmation that is received
from the recipient's facsimile machine) of receipt by the recipient of such
notice:
If to Microsoft or Sub:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attention: Robert A. Eshelman
Telephone No.: (425) 882-8080
Facsimile No.: (425) 869-1327
With a copy to:
Preston Gates & Ellis LLP
5000 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7078
Attention: Richard B. Dodd
Telephone No.: (206) 623-7580
Facsimile No.: (206) 623-7022
If to Company:
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, CA 94301
Attn: Stephen G. Perlman
Telephone No.: (415) 326-3240
Facsimile No.: (415) 614-1380
With a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Joshua Pickus
Telephone No.: (415) 854-4488
Facsimile No.: (415) 854-1121
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If to Securities Holders Representative:
Jeffrey D. Brody
c/o Brentwood Associates
3000 Sand Hill Road
Building 1, Suite 260
Menlo Park, CA 94025
Telephone No.: (415) 854-7691
Facsimile No.: (415) 854-9513
If to Custodian:
ChaseMellon Shareholder Services, L.L.C.
520 Pike Street, Suite 1220
Seattle, WA 98101
Attention: Dee Henderson
Facsimile: (206) 292-3196
12.5 Amendment. The terms of this Escrow Agreement may not be modified or
amended, or any provisions hereof waived, temporarily or permanently, except
pursuant to the written agreement of Microsoft, the Representative, and a
majority in interest in the Total Escrow.
12.6 Severability. If any term or provision of this Escrow Agreement or the
application thereof as to any person or circumstance shall to any extent be
invalid or unenforceable, the remaining terms and provisions of this Escrow
Agreement or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable
shall not be affected thereby and each term and provision of this Escrow
Agreement shall be valid and enforceable to the fullest extent permitted by
law.
12.7 Counterparts. This Escrow Agreement may be executed in two or more
partially or fully executed counterparts each of which shall be deemed an
original and shall bind the signatory, but all of which together shall
constitute but one and the same instrument. The execution and delivery, by
facsimile or otherwise, of an Escrow Agreement Signature Page in the form
annexed to this Escrow Agreement by any party hereto who shall has been
furnished the final form of this Escrow Agreement shall constitute the
execution and delivery of this Escrow Agreement by such party, provided
counterparts are executed by all other parties herero.
12.8 Headings. The headings of the various sections of this Escrow Agreement
have been inserted for convenience of reference only and shall not be deemed
to be a part of this Escrow Agreement.
12.9 Governing Law. This Escrow Agreement shall be construed and controlled
by the laws of the State of Washington without regard to the principles of
conflicts of laws.
12.10 Binding Effect. This Escrow Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, affiliates,
successors and assigns.
D-11
<PAGE>
ESCROW AGREEMENT SIGNATURE PAGE
In Witness Whereof, the parties have duly executed this Escrow Agreement as
of the day and year first above written.
Microsoft Corporation
WebTV Networks, Inc.
By __________________________________
By __________________________________
Its _________________________________ Its _________________________________
Securities Holders' Representative
_____________________________________
JEFFREY D. BRODY
ChaseMellon Shareholder Services,
L.L.C.
By __________________________________
AUTHORIZED SIGNATORY
Securities Holder(s)
_____________________________________
(SIGNATURE)
_____________________________________
(SIGNATURE)
Print Name(s) _______________________
Social Security Number(s) ___________
Address _____________________________
_____________________________________
_____________________________________
_____________________________________
D-12
<PAGE>
APPENDIX E
[PROPOSED]
CERTIFICATE
OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
WEBTV NETWORKS, INC.
The undersigned hereby certify that:
1. They are the President and Secretary, respectively, of WebTV Networks,
Inc., a California corporation (the "COMPANY").
2. Pursuant to Section 910 of the California General Corporation Law
("CGCL"), the Articles of Incorporation of the Company are amended and
restated in its entirety to read as follows:
ARTICLE I
Name
The name of this corporation is WebTV Networks, Inc.
ARTICLE II
Purpose
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the CGCL other than the banking
business, the trust company business or the practice or a profession permitted
to be incorporated by the CGCL.
ARTICLE III
Capital Shares
3.1 Authorized Shares. The total number of capital shares which the Company
shall have authority to issue is shares, which shall consist of shares
of Class A Shares, $.01 par value per share ("CLASS A SHARES") and shares
of Class B Shares, $.01 par value per share ("CLASS B SHARES").
3.2 Terms of Class A Shares and Class B Shares.
The Class A Shares and Class B Shares shall have the following rights,
privileges, restrictions and conditions.
3.2.1 Dividends.
(a) The Board of Directors may declare in its discretion from time to
time, and the Company shall pay, dividends out of the assets of the Company
properly available to the payment of dividends; provided that, so long as
any share of either class is outstanding, any dividend that shall be
declared and paid with respect to each share of Class A Shares and Class B
Shares shall be identical in amount and character.
(b) Such dividends shall have record and payment dates as may be
determined in the discretion of the Board of Directors, subject to
compliance with the requirements of Section 3.2.6.
E-1
<PAGE>
3.2.2 Liquidation
In the event of the liquidation, dissolution or winding-up of the Company
or other similar distribution of assets of the Company including the filing
of a petition for involuntary liquidation or other proceeding in
bankruptcy, of the Company (collectively, a "LIQUIDATION"), the Company
shall pay, or shall cause such other person to pay, to the holders of the
Class A Shares and the Class B Shares from the assets of the Company
available for distribution, for each Class A Share or Class B Share
outstanding on the effective date or record date ("LIQUIDATION DATE") of
such Liquidation, an amount that, with respect to each share of Class A
Shares and Class B Shares, is identical in amount and character. The
Company shall immediately give notice to Microsoft Corporation
("MICROSOFT") of any proposed Liquidation and shall also comply with the
notice to shareholders requirements of Section 3.2.6.
3.2.3 Company Voting Rights.
The holders of the Class A Shares and Class B Shares shall be entitled to
vote for directors and such other matters as may be submitted to the
shareholders. Except to the extent required by applicable law, each Class A
Share shall have one (1) vote per Class A Share. Each Class B Share shall
have ten (10) votes per Class B Share. Except to the extent required by
applicable law, the Class A Shares and Class B Shares shall vote as one
class. Each holder of Class A Shares and Class B Shares shall be entitled
to receive notice of, and to attend, any meetings of shareholders of the
Company.
3.2.4 Exchange Rights.
Subject to the exercise of the call right of Microsoft as provided for in
Section 3.2.5, holders of Class A Shares shall initially have the right to
exchange each Class A Share held into one share of fully paid and non-
assessable Microsoft Common Shares, par value $.000025 ("MICROSOFT COMMON
SHARES"). The right to exchange and the exchange ratio is subject to the
following rights, adjustments and limitations:
(a) Voluntary Exchange. Any share of Class A Shares may, at the
option of the holder, be exchanged at any time prior to the end of
fifty one months after the effective date of the filing of these
Amended and Restated Articles of Incorporation ("EFFECTIVE DATE"). Upon
satisfaction of the procedures identified in Section 3.2.4(f), the
Company shall, or shall cause some other person to, exchange each share
of Class A Shares for, at the Company's election, either (i) such
number of Microsoft Common Shares as are equal to the product obtained
by multiplying the Class A Exchange Rate (as defined herein) in effect
at the time the exchange procedure is initiated in accordance with
Section 3.2.4(f) by the number of shares of Class A Shares being
exchanged; or (ii) an amount in immediately available funds equal to
the Current Market Value of the Microsoft Common Shares issuable upon
exchange of the Class A Shares (taking into account the Class A
Exchange Rate then in effect) (the "Cash Equivalent Amount").
The "CURRENT MARKET VALUE" of Microsoft Common Shares shall be the
closing price as publicly reported by the Nasdaq Stock Market as of
4:00 p.m. (Eastern time) as of the date on which the Exchange Notice is
received by the Secretary as provided for in Section 3.2.4(f).
(b) Class A Exchange Rate. The exchange rate (the "CLASS A EXCHANGE
RATE") shall initially be 1.0 Microsoft Common Share for each Class A
Share and shall be subject to adjustment as provided in this Section
3.2.4.
(c) Adjustments to Class A Exchange Rate Upon Special Event. Upon the
happening of a Special Event (as defined below) after the Effective
Date, the Class A Exchange Rate shall, simultaneously with the
happening of such Special Event, be adjusted by multiplying the then
effective Class A Exchange Rate by a fraction, the numerator of which
shall be the number of Microsoft Common Shares outstanding immediately
after such Special Event and the denominator of which shall be the
number of Microsoft Common Shares outstanding immediately prior to such
Special Event, and the product so obtained shall thereafter be the
Class A Exchange Rate. The Class A Exchange Rate, as so adjusted, shall
be readjusted in the same manner upon the happening of any successive
Special Event or Events.
E-2
<PAGE>
"SPECIAL EVENT" shall mean (i) the issue of additional Microsoft
Common Shares as a dividend or other distribution on outstanding
Microsoft Common Shares, (ii) a subdivision or split of outstanding
Microsoft Common Shares into a greater number of Microsoft Common
Shares, or (iii) a combination of outstanding Microsoft Common Shares
into a smaller number of Microsoft Common Shares.
(d) Capital Reorganization or Reclassification. If the Microsoft
Common Shares issuable upon the exchange of Class A Shares shall be
changed into the same or a different number of shares of any class or
classes of shares, whether by capital reorganization, reclassification,
merger, consolidation or otherwise (other than a Special Event provided
for elsewhere herein) (collectively referred to as a "REORGANIZATION"),
then and in each such event the holder of each Class A Share shall have
the right thereafter to exchange each Class A Share into the kind and
amount of shares and other securities and property receivable upon such
Reorganization, as a holder of a Microsoft Common Share immediately
prior to such Reorganization.
(e) Company's Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Class A Exchange Rate after the
Effective Date the Company and Microsoft will furnish each holder of
Class A Shares with a certificate, prepared by the Company in
conjunction with Microsoft, showing such adjustment or readjustment,
and stating in detail the facts upon which such adjustment or
readjustment is based.
(f) Exercise of Exchange Right and Procedure for Exchange. To
exercise its exchange right, a holder of Class A Shares shall surrender
to the Secretary of the Company, or other person designated by the
Company, the certificate or certificates (each a "CERTIFICATE")
representing the Class A Shares being exchanged, duly endorsed, and
accompanied by a written notice (the "EXCHANGE NOTICE") that such
holder elects to exchange such shares. The exchange shall be deemed
effective on the day the Certificate and Exchange Notice are received
by the Secretary of the Company, or other person designated by the
Company. Thereafter, the rights of the holder in the Class A Shares
shall cease and the holder (or such other person or persons in whose
name or names the Cash Equivalent Amount or any certificate or
certificates for Microsoft Common Shares shall be issuable upon such
exchange) shall be deemed to have become the holder or holders of
record of the Microsoft Common Shares represented thereby (unless the
Company shall elect to pay the Cash Equivalent Amount in the exchange,
in which event the holder shall be deemed to have a claim against the
Company for the Cash Equivalent Amount).
(g) Payment in Absence of Microsoft Exercise of Call Rights. If
Microsoft does not exercise its rights under Section 3.2.5 within three
(3) business days after the Secretary receives the Exchange Notice, the
Company shall cause to be delivered to the holder of Class A Shares
being exchanged one or more certificates for Microsoft Common Shares
issuable upon the exchange of such Class A Shares or the payment of the
Cash Equivalent Amount in immediately available funds as provided for
in Section 3.2.4(a).
(h) Fractional Shares. No fractional Microsoft Common Shares shall be
issued upon the exchange of Class A Shares. In lieu of such issuance,
all Microsoft Common Shares issued to the holders of Class A Shares
pursuant to the terms of these Articles shall be rounded to the closest
whole Microsoft Common Share.
(i) Partial Exchange. In the event some but not all of the Class A
Shares represented by a Certificate or Certificates surrendered by a
holder are exchanged, the Company shall execute and deliver to the
holder a new certificate representing the number of Class A Shares that
were not exchanged.
3.2.5 Call Rights of Microsoft.
(a) Upon Delivery of Certificate and Exchange Notice. Microsoft shall
have the right to acquire any Class A Shares as to which the holder has
delivered to the Secretary one or more Certificates and an Exchange Notice
by delivering, at Microsoft's election, to the holder (i) such number of
Microsoft Common
E-3
<PAGE>
Shares as are equal to the product obtained by multiplying the Class A
Exchange Rate in effect at the time the exchange procedure is initiated by
the holder in accordance with Section 3.2.4(f) by the number of shares of
Class A Shares being exchanged; or (ii) an amount in immediately available
funds equal to the Cash Equivalent Amount.
(b) Class Call. Microsoft shall have the right to acquire all, but not
less than all, outstanding Class A Shares, solely for Microsoft Common
Shares, upon delivery of an irrevocable written notice by Microsoft to the
Company at any time during the period commencing five years and six months
after the Effective Date and ending six years after the Effective Date.
Microsoft's right to acquire the Class A Shares pursuant to this paragraph
may be effected without any further action by the holders of the Class A
Shares. Microsoft may, as a condition to payment (which condition Microsoft
may in its sole discretion waive), require holders of the Class A Shares to
surrender the Certificates representing the Class A Shares to the Company
or its Secretary. In settlement of its obligations under this Section
3.2.5, Microsoft shall deliver to each holder of Class A Shares such number
of Microsoft Common Shares as are equal to the product obtained by
multiplying the Class A Exchange Rate in effect at the time Microsoft shall
deliver its written notice to the Company of its election to exercise the
Class Call by the number of shares of Class A Shares then held by such
holder.
3.2.6 Notices to Shareholders. The Company or Microsoft, as the case may
be, shall provide each holder of Class A Shares written notice of (1)
adoption of a plan of Liquidation by the Company; (2) declaration of a
dividend record date by the Company; (3) exercise of call rights by
Microsoft pursuant to Section 3.2.5(b), in each case specifying a date for
the taking of the foregoing actions not more than sixty (60) and not less
than fifteen (15) days prior thereto. Any notice required by this Article
III shall be sent by first class mail to the address of each holder of
Class A Shares on the stock records of the Company as maintained by the
Secretary.
3.2.7 Payments to Shareholders.
Whenever required by this Article III, the Company shall pay or deliver,
or cause another person to pay or deliver, the dollar amounts or
certificates representing the Microsoft Common Shares specified by this
Article III (collectively, the "CONSIDERATION"). The Company's obligations
hereunder shall be satisfied by delivering, or causing another person to
deliver, to each holder, at the address of the holder recorded in the
securities register of the Company for the Class A Shares or Class B Shares
the Consideration. On and after receipt of an Exchange Notice or notice of
exercise of Microsoft's call rights under Section 3.2.5, the holders of the
Class A Shares shall cease to be holders of such Class A Shares and shall
not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive the Consideration payable to them.
In the event of any Liquidation or exercise of Microsoft's rights pursuant
to Section 3.2.5(b), the Company shall have the right to deposit or cause
to be deposited the Consideration payable in respect of the Class A Shares
represented by Certificates that have not at such date been surrendered by
the holders thereof in a custodial account with any national bank or trust
company. Upon such deposit being made, the rights of the holders of Class A
Shares after such deposit shall be limited to receiving their proportionate
part of the Consideration (less any tax required to be deducted and
withheld therefrom) for such Class A Shares so deposited, against
presentation and surrender of the said Certificates held by them,
respectively, in accordance with the foregoing provisions.
3.2.8 Rights Reserved to Class B Shares.
Except as specifically provided in this Article III, the holders of the
Series B Shares shall be entitled to all residual rights in the Company.
3.2.9 Amendment and Approval.
The rights, privileges, restrictions and conditions applicable to the
Class A Shares may be amended or modified only on the approval of the
holders of a majority of the Class A Shares of a resolution which is first
approved by the Board of Directors of the Company and submitted for
approval by the holders of Class A Shares at a duly called meeting or
pursuant to the solicitation of written consents either of which shall be
in accordance with applicable provisions of the CGCL.
E-4
<PAGE>
ARTICLE IV
Limitation of Liability
The liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law as the same
exists or may hereafter be amended.
ARTICLE V
Indemnification
The Company is authorized to provide indemnification of agents (as defined
in Section 317 of the CGCL) for breach of duty to the Company and its
stockholders through bylaw provisions or through agreements with the agents,
or both, in excess of the indemnification otherwise permitted by Section 317
of the CGCL, subject to the limits on such excess indemnification set forth in
Section 204 of the CGCL.
3. The foregoing Restated Articles of Incorporation of the Company have
been duly approved by the Board of Directors of the Company.
4. The foregoing Restated Articles of Incorporation have been duly
approved by the required vote of shareholders in accordance with Section
902 and 903 of the CGCL. The total number of outstanding shares of the
Company is Common Shares, 1,510,533 Series A Convertible Preferred
Shares (entitled to vote 1,661581 shares), 6,316,705 Series B Convertible
Preferred Shares, 6,316,705 Series C Convertible Preferred Shares, and
1,343,570 Series D Convertible Preferred Shares.
5. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required for the amendment
was: (i) more than fifty percent (50%) of the Series A, B, C, and D
Convertible Preferred Shares voting together as a single class; and (ii)
more than fifty percent (50%) of the Common Shares voting as a single
class.
_____________________________________
Stephen G. Perlman
President
_____________________________________
Bruce A. Leak
Secretary
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true and correct of our own knowledge.
Executed in Palo Alto, California on , 1997
_____________________________________
Stephen G. Perlman
_____________________________________
Bruce A. Leak
E-5
<PAGE>
SCHEDULE II
WEBTV NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSE WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Inception to March 31, 1996...... $-- $ -- $-- $ --
Year ended March 31, 1997........ -- 50,000 -- 50,000
</TABLE>
<PAGE>
PROXY
WEBTV NETWORKS, INC.
305 LYTTON AVENUE
PALO ALTO, CALIFORNIA 94301
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF WNI
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON , 1997.
The undersigned shareholder of WebTV Networks, Inc., a California
corporation ("WNI"), hereby appoints Stephen G. Perlman and Albert A.
Pimentel, and each of them, as proxies, each with the power of substitution,
to represent and vote, as designated on the reverse side of this proxy, all
the shares of common stock and preferred stock of WNI held of record by the
undersigned on , at the Special Meeting of Shareholders to be held at the
principal executive offices of WNI, 305 Lytton Avenue, Palo Alto, California,
on , 1997 at local time, and at any adjournments or postponements
thereof.
Said attorneys and proxies, and each of them, shall have all of the powers
which the undersigned would have if acting in person. The undersigned hereby
revokes any other proxy to vote at such meeting and hereby ratifies and
confirms all that said attorneys and proxies, and each of them, may lawfully
do by virtue hereof. Said proxies, without limiting their general authority,
are specifically authorized to vote in accordance with their best judgment
with respect to all matters incident to the conduct of the meeting and all
matters presented at the meeting but which are not known to the Board of
Directors at the time of the solicitation of this proxy.
PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE
[X]
1. PROPOSAL TO APPROVE an Agreement and Plan of Recapitalization dated as of
April 5, 1997 (the "Recapitalization Agreement"), among WNI, Microsoft
Corporation, a Washington corporation ("Microsoft"), and certain WNI
shareholders, pursuant to which WNI will undergo a reorganization of its
capital (the "Recapitalization") whereby (i) each WNI Common Share, other than
WNI Common Shares of holders who have perfected their dissenters' rights or
have elected to have their shares purchased by Microsoft in the manner
contemplated by item (iii) below, shall be converted into a number of Class A
Common Shares of WNI pursuant to an exchange ratio calculated by dividing
$12.841 by the Microsoft Closing Price (as defined in the Recapitalization
Agreement), which shares are exchangeable for Microsoft Common Shares, as
further described herein; (ii) each WNI Common Share subject to repurchase by
WNI (i.e., "unvested shares") pursuant to existing agreements in effect as of
the effective time of the Recapitalization shall be converted into Class A
Common Shares of WNI pursuant to such exchange ratio; (iii) each vested WNI
Common Share of holders who have returned a completed letter of transmittal
electing to receive cash in lieu of Class A Common Shares shall be purchased
by Microsoft for $12.841, less, with respect to the consideration to be
received by holders of WNI Common Shares in items (i), (ii) and (iii),
approximately 11.4%, which amount (the "Escrow Withholding Amount") will be
withheld and placed in an escrow fund more fully described in the Proxy
Statement/Prospectus under the heading "Proposal I--The Recapitalization and
Related Transactions--Related Agreements--Escrow Agreement" (for an effective
price per WNI Common Share of approximately $11.381 if none of the Escrow
Withholding Amount is ultimately paid out to the holders of WNI Common Shares)
(such lesser amount, the "Adjusted Common Shares Consideration"); (iv) each
WNI Preferred Share and WNI Warrant of holders who have returned a completed
letter of transmittal electing to have their share or warrant purchased by
Microsoft shall be purchased by Microsoft for $13.686 (determined on an as-if-
converted to WNI Common Shares basis and, in the case of warrants, on an as-
if-net-exercised basis) in cash, less the Escrow Withholding Amount (for an
effective price per underlying WNI Common Share of approximately $12.130 if
none of the Escrow Withholding Amount is ultimately paid out to the holders of
WNI Preferred Shares or WNI Warrants) (in the case of WNI Preferred Shares,
such lesser amount being the "Adjusted Preferred Shares Consideration" and, in
the case of a warrant, such lesser amount being the "Adjusted Warrant
Consideration"); (v) each WNI Preferred Share, other than shares of holders
who have perfected their dissenters' rights or have elected to have their
shares purchased by Microsoft, shall be converted into the right to receive
the Adjusted Preferred Shares Consideration; (vi) each WNI Warrant, other than
warrants of holders who have elected to have their warrants purchased by
Microsoft, shall be converted into the right to receive the Adjusted Warrant
Consideration; (vii) each option to purchase WNI Common Shares shall be
replaced by one or more nonqualified Microsoft stock options to purchase
Microsoft Common Shares on the terms and conditions described in the
accompanying Proxy Statement/Prospectus; and (viii) Microsoft shall be
entitled to receive all of the newly created Class B Common Shares of WNI at a
ratio of four Class B Common Shares for each Class A Common Share issued in
connection with the Recapitalization, which will represent not less than 80%
of the voting power of WNI, in exchange for the consideration described in the
Proxy Statement/Prospectus.
FOR [__] AGAINST [__] ABSTAIN [_]] ]
<PAGE>
2. PROPOSAL TO APPROVE certain employee and consultant compensation matters as
more fully described in the Proxy Statement/Prospectus under the heading
"Proposal II--Option Grants, Option Acceleration and Other Compensatory
Matters," including specifically: (i) approval of various option grants
previously made by WNI and grants to be made by Microsoft on a discounted
basis in connection with the Recapitalization; (ii) approval of rights of
certain employees to additional vesting of WNI options upon termination of
employment without cause following a change of majority ownership or control
of WNI; and (iii) for certain other WNI shareholders and advisors, approval of
various option grants and payments to be made to such individuals and entities
in connection with the Recapitalization.
FOR [_] AGAINST [_] ABSTAIN [_]
A vote "FOR" indicates approval of each of the option grants, option
acceleration and other compensatory matters set forth in Proposal II, except
that the undersigned objects to those individual option grants, accelerations
and other matters set forth in the space below (objections may be noted by
individual and/or by specific individual option grant, acceleration or other
matter):
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
3. In their discretion, each of the above-named proxies is authorized to vote
upon such other business incident to the conduct of the Special Meeting as may
properly come before the meeting or any postponements or adjournments thereof.
FOR [_] AGAINST [_] ABSTAIN [_]
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. IF NO INSTRUCTIONS TO THE CONTRARY ARE
INDICATED HEREON THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO VOTE
FOR PROPOSALS 1 AND 2 AND TO VOTE IN THE PROXIES' DISCRETION ON ANY OTHER
MATTERS TO BE VOTED UPON.
The undersigned acknowledges receipt of a copy of the Notice of Special
Meeting of Shareholders and Proxy Statement/Prospectus relating to the
meeting.
IMPORTANT: In signing this proxy please sign exactly as your name(s) is
(are) shown on the share certificate to which the proxy applies. When signing
as an attorney, executor, administrator, trustee or guardian, please give your
full title as such. If a corporation, please sign in full corporate name by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person. EACH JOINT TENANT OR COMMUNITY PROPERTY
HOLDER OF THE SHARES MUST SIGN.
SIGNATURE(S) ___________________________ DATE ____________________________
(Additional signature if held jointly) ___________________________________
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
WebTV Networks, Inc.
Article XII of the WNI Bylaws provides that it may indemnify each person who
is or was a director or officer of the Company to the full extent permitted by
California law. Such article also provides that WNI may, but is not required
to, indemnify its employees and agents (other than directors and officers) to
the extent and in the manner permitted by California law.
WNI has entered into an indemnification agreement with each of the directors
and officers and intends to maintain insurance for the benefit of its
directors and officers insuring such persons against certain liabilities,
including liabilities under the securities laws.
See also the undertakings set out in response to Item 22 herein.
Microsoft
Article XII of the Restated Articles of Incorporation of Microsoft
authorizes Microsoft to indemnify any present or former director or officer to
the fullest extent not prohibited by the WBCA, public policy or other
applicable law. Sections 23B.08.510 through .570 of the WBCA authorizes a
corporation to indemnify its directors, officers, employees, or agents in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including provisions permitting advances for
expenses incurred) arising under the Securities Act.
In addition, Microsoft maintains directors' and officers' liability
insurance under which its directors and officers are insured against loss (as
defined in the policy) as a result of claims brought against them for their
wrongful acts in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
WebTV Networks, Inc.
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Recapitalization (See Appendix
A)....................................................
2.2 Escrow Agreement (See Appendix D)......................
3.1(a) Articles of Incorporation of WNI as amended to date.... (1)
3.1(b) Articles of Incorporation of WNI to be filed in
connection with the consummation of the
Recapitalization (See Appendix E).....................
3.2 Bylaws of WNI as amended to date....................... (1)
4.1 Stock Purchase Agreement dated November 9, 1995,
between WNI and the purchaser of Series A Convertible
Preferred Stock....................................... (1)
4.2 Restated Series B Convertible Preferred Stock Purchase
Agreement between WNI and the purchasers of Series B
Convertible Preferred Stock........................... (1)
4.3 Series C Convertible Preferred Stock Purchase Agreement
dated September 13, 1996 between WNI and the
purchasers of Series C Convertible Preferred Stock.... (1)
4.4 Series D Convertible Preferred Stock Purchase Agreement
between WNI and the Purchaser of Series D Preferred
Stock................................................. (1)
4.5 Warrant Agreement dated January 6, 1997 between WNI and
Comdisco, Inc. ....................................... (1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<C> <S> <C>
4.6 Preferred Stock Purchase Warrant dated June 30, 1996
between WNI and Lighthouse Capital Partners II, L.P. .. (1)
4.7 Warrant to Purchase Series C Preferred Stock dated
February 7, 1997 between WNI and MMC/GATX Partnership
No. 1.................................................. (1)
4.8 1996 Stock Incentive Plan and forms of Incentive Stock
Option Agreements and Nonstatutory Stock Option
Agreements thereunder.................................. (1)
5.1 Opinion of Venture Law Group, A Professional
Corporation............................................
8.1 Form of Tax Opinion of Venture Law Group, A Professional
Corporation............................................
10.1 Form of Indemnification Agreement between WNI and its
directors and officers................................. (1)
10.2 Lease dated September 1, 1995 for facilities located at
275 Alma Street in Palo Alto, California............... (1)
10.3 Lease dated August 10, 1996 for facilities located at
325 Lytton Avenue in Palo Alto, California............. (1)
10.4 Sublease dated June 14, 1996 for facilities located at
305 Lytton Avenue and 335 Bryant Avenue in Palo Alto,
California............................................. (1)
10.5 Lease dated January 6, 1997 for facilities located at
151 Lytton Avenue in Palo Alto, California. ........... (1)
10.6 Sublease dated December 10, 1996 for facilities located
at 361 Lytton Avenue, Palo Alto, California............ (1)
11.1 Calculation of Net Loss Per Share.......................
23.1 Consent of Ernst & Young LLP, Independent Auditors......
23.2 Consent of Venture Law Group, A Professional Corporation
(contained in Exhibit 5.1).............................
23.3 Consent of Deutsche Morgan Grenfell Inc. (contained in
Appendix B) ...........................................
23.4 Consent of Gregory B. Maffei............................
23.5 Consent of Jean-Francois Heitz..........................
23.6 Consent of Robert A. Eshelman...........................
24.1 Power of Attorney....................................... (1)
</TABLE>
- --------
(1) Previously filed with WNI's Registration Statement on Form S-4 (Commission
File No. 333-26411)
Microsoft
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<C> <S> <C>
3.1 Restated Articles of Incorporation of Microsoft
Corporation............................................. (3)
3.2 Bylaws of Microsoft Corporation.......................... (1)
5.1 Opinion of Preston Gates & Ellis LLP.....................
8.1 Form of Tax Opinion of Preston Gates & Ellis.............
13.1 Quarterly and Market Information Incorporated by
Reference to Page 28 of 1996 Annual Report to
Shareholders ("1996 Annual Report")..................... (2)
13.2 (Intentionally Omitted)..................................
13.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations Incorporated by
Reference to Pages 16-19, 22, and 23 of 1996 Annual
Report.................................................. (2)
13.4 Financial Statements Incorporated by Reference to Pages
1, 15, 20, 21, 24-29, and 31 of 1996 Annual Report...... (2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<C> <S> <C>
23.1 Consent of Deloitte & Touche LLP........................
23.2 Consent of Preston Gates & Ellis LLP (contained in
Exhibit 5.1)...........................................
24.1 Power of Attorney....................................... (4)
</TABLE>
- --------
(1) Incorporated by reference to Microsoft's Form 10-K for the fiscal year
ended June 30, 1994.
(2) Incorporated by reference to Microsoft's Form 10-K for the fiscal year
ended June 30, 1996.
(3) Incorporated by reference to Microsoft's Regulation Statement on Form S-3
(Commission File No. 333-17143)
(4) Previously filed with Microsoft's Registration Statement on Form S-4
(Commission File No. 333-26411).
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
Each of the undersigned registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S) 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Each of the undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
Each of the undersigned registrants hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus,
to deliver, or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically incorporated
by reference in the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, each of the
registrants has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
Each of the undersigned registrants hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
Each of the undersigned registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF
CALIFORNIA ON JUNE 2, 1997.
WebTV Networks, Inc.
/s/ Albert A. Pimentel
By: _________________________________
ALBERT A. PIMENTEL
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATED
/s/ Albert A. Pimentel Chief Financial June 2, 1997
- ------------------------------------- Officer (Principal
ALBERT A. PIMENTEL Financial and
Accounting Officer)
* President and Chief
- ------------------------------------- Executive Officer;
STEPHEN G. PERLMAN Director (Principal
Executive Officer)
Director
*
- -------------------------------------
BRUCE A. LEAK
Director
*
- -------------------------------------
PHILLIP Y. GOLDMAN
Director
*
- -------------------------------------
JEFFREY D. BRODY
Director
*
- -------------------------------------
G. KEVIN DOREN
Director
*
- -------------------------------------
RANDY KOMISAR
/s/ Albert A. Pimentel June 2, 1997
* ___________________________________
ALBERT A. PIMENTEL
ATTORNEY-IN-FACT
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF REDMOND, STATE OF
WASHINGTON ON JUNE 2, 1997.
Microsoft Corporation
/s/ Michael W. Brown
By: _________________________________
MICHAEL W. BROWN VICE PRESIDENT,
FINANCE, CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
Vice President,
/s/ Michael W. Brown Finance; Chief June 2, 1997
- ------------------------------------- Financial Officer
MICHAEL W. BROWN (Principal
Financial and
Accounting Officer)
Chairman, Chief
/s/ William H. Gates Executive Officer, June 2, 1997
- ------------------------------------- Director (Principal
WILLIAM H. GATES Executive Officer)
Director
*
- -------------------------------------
PAUL G. ALLEN
* Director
- -------------------------------------
JILL E. BARAD
Director
*
- -------------------------------------
RICHARD A. HACKBORN
Director
*
- -------------------------------------
DAVID F. MARQUARDT
Director
*
- -------------------------------------
ROBERT D. O'BRIEN
Director
*
- -------------------------------------
WILLIAM G. REED, JR.
Director
*
- -------------------------------------
JON A. SHIRLEY
/s/ Michael W. Brown June 2, 1997
* ___________________________________
MICHAEL W. BROWN
ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
WebTV Networks, Inc.
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<C> <S> <C>
2.1 Agreement and Plan of Recapitalization (See Appendix
A)....................................................
2.2 Escrow Agreement (See Appendix D)......................
3.1(a) Articles of Incorporation of WNI as amended to date.... (1)
3.1(b) Articles of Incorporation of WNI to be filed in
connection with the consummation of the
Recapitalization (See Appendix E).....................
3.2 Bylaws of WNI as amended to date....................... (1)
4.1 Stock Purchase Agreement dated November 9, 1995,
between WNI and the purchaser of Series A Convertible
Preferred Stock....................................... (1)
4.2 Restated Series B Convertible Preferred Stock Purchase
Agreement between WNI and certain purchasers of Series
B Convertible Preferred Stock......................... (1)
4.3 Series C Convertible Preferred Stock Purchase Agreement
dated September 13, 1996 between WNI and certain
purchasers of Series C Convertible Preferred Stock.... (1)
4.4 Series D Convertible Preferred Stock Purchase Agreement
between WNI and the Purchaser of Series D Preferred
Stock................................................. (1)
4.5 Warrant Agreement dated January 6, 1997 between WNI and
Comdisco, Inc. ....................................... (1)
4.6 Preferred Stock Purchase Warrant dated June 30, 1996
between WNI and Lighthouse Capital Partners II, L.P. . (1)
4.7 Warrant to Purchase Series C Preferred Stock and
February 7, 1997 between WNI and MMC/GATX Partnership
No. 1................................................. (1)
4.8 1996 Stock Incentive Plan and forms of Incentive Stock
Option Agreements and Nonstatutory Stock Option
Agreements thereunder................................. (1)
5.1 Opinion of Venture Law Group, A Professional
Corporation...........................................
8.1 Form of Tax Opinion of Venture Law Group, A
Professional Corporation..............................
10.1 Form of Indemnification Agreement between WNI and its
directors and officers................................ (1)
10.2 Lease dated September 1, 1995 for facilities located at
275 Alma Street in Palo Alto, California.............. (1)
10.3 Lease dated August 10, 1996 for facilities located at
325 Lytton Avenue in Palo Alto, California............ (1)
10.4 Sublease dated June 14, 1996 for facilities located at
305 Lytton Avenue and 335 Bryant Avenue in Palo Alto,
California............................................ (1)
10.5 Lease dated January 6, 1997 for facilities located at
151 Lytton Avenue in Palo Alto, California. .......... (1)
10.6 Sublease dated December 10, 1996 for facilities located
at 361 Lytton Avenue, Palo Alto, California........... (1)
11.1 Calculation of Net Loss Per Share......................
23.1 Consent of Ernst & Young LLP, Independent Auditors.....
23.2 Consent of Venture Law Group, A Professional
Corporation (contained in Exhibit 5.1)................
23.3 Consent of Deutsche Morgan Grenfell Inc. (contained in
Appendix B) ..........................................
23.4 Consent of Gregory B. Maffei...........................
23.5 Consent of Jean-Francois Heitz.........................
23.6 Consent of Robert A. Eshelman..........................
24.1 Power of Attorney...................................... (1)
</TABLE>
- --------
(1) Previously filed with WNI's Registration Statement on Form S-4 (Commission
File No. 333-26411).
<PAGE>
EXHIBIT 5.1
[Venture Law Group Letterhead]
June 2, 1997
WebTV Networks, Inc.
305 Lytton Ave.
Palo Alto, CA 94301
REGISTRATION STATEMENT ON FORM S-4
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 filed by you and
Microsoft Corporation with the Securities and Exchange Commission (the
"Commission") on May 2, 1997, as amended by Amendment No. 1 thereto filed with
the Commission on or about June 2, 1997 (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of your Class A Common Shares (the "Shares") to be issued in the
recapitalization of WNI in cancellation of outstanding WNI Common Shares, as
described in the Registration Statement. As your legal counsel, we have examined
the proceedings taken in connection with the sale and issuance of the Shares and
are familiar with the proceedings proposed to be taken by you and Microsoft
Corporation in connection with the sale and issuance of the Shares under the
Registration Statement.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, the Shares when issued in the manner described in the Registration
Statement will be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to this Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the Prospectus/Proxy Statement constituting a
part thereof, and in any amendment thereto.
Very truly yours,
/s/ Venture Law Group
VENTURE LAW GROUP
<PAGE>
EXHIBIT 8.1
[VENTURE LAW GROUP LETTERHEAD]
June 2, 1997
WebTV Networks, Inc.
305 Lytton Avenue
Palo Alto, California 94301
Ladies and Gentlemen:
We have acted as counsel for WebTV Networks, Inc., a California corporation
(the "Company") in connection with the preparation and execution of the
Agreement and Plan of Recapitalization dated as of April 5, 1997 (the
"Agreement") by and between the Company and Microsoft Corporation, a Washington
corporation ("Microsoft"). In accordance with the Agreement, the Company will
undergo a reorganization of its capital (the "Recapitalization") pursuant to
which certain Company shareholders will exchange Company Common Shares for
Exchangeable Shares (the "Exchange"), certain Company shareholders will sell
their Company Common Shares or Preferred Shares to Microsoft or the Company for
cash, and Microsoft will contribute capital to the Company in exchange for
Company Class B Common Shares constituting (together with the purchased Company
Shares) a controlling interest in the Company. Unless otherwise defined,
capitalized terms referred to herein have the meanings set forth in the
Agreement. All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Recapitalization and Exchange. In delivering
this opinion, we have reviewed and relied upon (without any independent
investigation) the facts, statements, descriptions and representations set forth
in the Agreement (including Exhibits), registration statement on form S-4 filed
with the securities and exchange commission (which contains a prospectus and
joint proxy statement of Microsoft and the Company (the "Registration
Statement") and such other documents pertaining to the Recapitalization as we
have deemed necessary or appropriate. We have also relied upon (without any
independent investigation) certificates of officers of Microsoft and the
Company, respectively (the "Officers' Certificates").
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
<PAGE>
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof;
2. Any representation or statement referred to above made "to the
knowledge of," "to the best of the knowledge" or otherwise similarly qualified
is correct without such qualification. As to all matters in which a person or
entity making a representation referred to above has represented that such
person or entity either is not a party to, does not have, or is not aware of,
any plan, intention, understanding or agreement, there is in fact no such plan,
intention, understanding or agreement.
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Recapitalization and Exchange will be reported by Microsoft and
the Company on their respective federal income tax returns in a manner
consistent with the opinion set forth below; and
5. The Recapitalization and Exchange will be consummated in accordance
with the Agreement (and without any waiver, breach or amendment of any of the
provisions thereof) and will be effective under the applicable state law.
6. At the Effective Time of the Recapitalization, the fair market value
of the Exchangeable Shares received by a holder of Company Common Shares will be
approximately equal to the fair market value of the Company Common Shares
surrendered in exchange therefor, and the aggregate fair market value of
Exchangeable Shares received by holders of Company Common Shares will be
approximately equal to the aggregate fair market value of all of the outstanding
Company Common Shares surrendered in exchange therefor immediately prior to the
Recapitalization.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Recapitalization and Exchange are consummated in
accordance with the Agreement (and without any waiver, breach or amendment of
any of the provisions thereof) and the statements set forth in the Officers'
Certificates are true and correct as of the Effective Time, then for federal
income tax purposes it is more likely than not that the Exchange will constitute
a "reorganization" as defined in Section 368(a)(1)(E) of the Code.
The foregoing opinion is not free from doubt, and it is therefore possible
that the Exchange could fail to qualify as a reorganization under Section
368(a)(1)(E) of the Code. The Exchange and the Recapitalization of which it is
a part involve a unique transaction structure that has not been the subject of a
decision or ruling by the courts or the Internal Revenue Service.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no
<PAGE>
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
This opinion addresses only the classification of the Exchange as a
reorganization under Section 368(a)(1)(E) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result from the
Exchange, the Recapitalization, or any other transaction (including any
transaction undertaken in connection with the Recapitalization or the Exchange).
In particular, the opinion does not address the treatment of Company
shareholders who surrender their Company Shares or Warrants for cash in the
Recapitalization, the treatment of Company shareholders or Optionees who are
granted Microsoft Options in connection with the Recapitalization, or the
treatment of holders of Exchangeable Shares upon the disposition thereof
(including upon conversion of Exchangeable Shares into Microsoft Common Shares).
No opinion is expressed if all the transactions described in the Agreement
are not consummated in accordance with the terms of such Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, and assumptions upon which we relied are not true
and accurate at all relevant times. In the event any one of the
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
This opinion has been delivered to you for the purpose of satisfying the
requirements of Section 6.3.4 of the Agreement. It may not be relied upon for
any other purpose or by any other person or entity, and may not be made
available to any other person or entity without our prior written consent. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Certain U.S. Federal
Income Tax Matters." In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR
(JUNE 30, 1995) TO ENDED
MARCH 31, 1996 MARCH 31, 1997
--------------------- --------------
<S> <C> <C>
Net loss.................................. $(3,232,410) $(42,745,894)
=========== ============
Shares used in calculation of net loss per
share:
Weighted average common shares
outstanding............................ 13,462,963 17,934,964
----------- ------------
Shares used in computing net loss per
share.................................. 13,462,963 17,934,964
=========== ============
Net loss per share...................... $ (0.24) $ (2.38)
=========== ============
Calculation of shares outstanding for
computing proforma net loss per share:
Weighted average common shares
outstanding............................ 13,462,963 17,934,964
Adjusted to reflect effect of assumed
conversion of preferred stock from date
of issuance............................ 1,083,924 10,318,749
----------- ------------
Shares used in computing proforma net
loss per share......................... 14,546,887 28,253,713
=========== ============
Proforma net loss per share............. $ (0.22) $ (1.51)
=========== ============
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated May 2, 1997, with
respect to the financial statements and schedule of WebTV Networks, Inc.
included in Amendment No. 1 to the Registration Statement (Form S-4 No. 333-
26411).
Ernst & Young LLP
Palo Alto, California
May 31, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF GREGORY B. MAFFEI
The undersigned consents to reference to the undersigned under the caption
"Management of WNI--Executive Officers and Directors" in the Proxy
Statement/Prospectus (the "Proxy") that is a part of the Registration Statement
on Form S-4 (Commission File No. 333-26411) of Microsoft Corporation and WebTV
Networks, Inc. ("WNI"), with respect to the expected appointment of the
undersigned as a member of the Board of Directors of WNI following consummation
of the Recapitalization, as defined in the Proxy.
/s/ Gregory B. Maffei
Redmond, Washington
June 2, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF JEAN-FRANCOIS HEITZ
The undersigned consents to reference to the undersigned under the caption
"Management of WNI--Executive Officers and Directors" in the Proxy
Statement/Prospectus (the "Proxy") that is a part of the Registration Statement
on Form S-4 (Commission File No. 333-26411) of Microsoft Corporation and WebTV
Networks, Inc. ("WNI"), with respect to the expected appointment of the
undersigned as a member of the Board of Directors of WNI following consummation
of the Recapitalization, as defined in the Proxy.
/s/ Jean-Francois Heitz
Redmond, Washington
June 2, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF ROBERT A. ESHELMAN
The undersigned consents to reference to the undersigned under the caption
"Management of WNI--Executive Officers and Directors" in the Proxy
Statement/Prospectus (the "Proxy") that is a part of the Registration Statement
on Form S-4 (Commission File No. 333-26411) of Microsoft Corporation and WebTV
Networks, Inc. ("WNI"), with respect to the expected appointment of the
undersigned as a member of the Board of Directors of WNI following consummation
of the Recapitalization, as defined in the Proxy.
/s/ Robert A. Eshelman
Redmond, Washington
June 2, 1997
<PAGE>
Microsoft
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT NO. DESCRIPTION FOOTNOTE
----------- ----------- --------
<C> <S> <C>
3.1 Restated Articles of Incorporation of Microsoft
Corporation............................................. (3)
3.2 Bylaws of Microsoft Corporation.......................... (1)
5.1 Opinion of Preston Gates & Ellis LLP.....................
8.1 Form of Tax Opinion of Preston Gates & Ellis.............
13.1 Quarterly and Market Information Incorporated by
Reference to Page 28 of 1996 Annual Report to
Shareholders ("1996 Annual Report")..................... (2)
13.2 (Intentionally Omitted)..................................
13.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations Incorporated by
Reference to Pages 16-19, 22, and 23 of 1996 Annual
Report.................................................. (2)
13.4 Financial Statements Incorporated by Reference to Pages
1, 15, 20, 21, 24-29, and 31 of 1996 Annual Report...... (2)
23.1 Consent of Deloitte & Touche LLP.........................
23.2 Consent of Preston Gates & Ellis LLP (contained in
Exhibit 5.1)............................................
24.1 Power of Attorney........................................ (4)
</TABLE>
- --------
(1) Incorporated by reference to Microsoft's Form 10-K for the fiscal year
ended June 30, 1994.
(2) Incorporated by reference to Microsoft's Form 10-K for the fiscal year
ended June 30, 1996.
(3) Incorporated by reference to Microsoft's Regulation Statement on Form S-3
(Commission File No. 333-17143)
(4) Previously filed with Microsoft's Registration Statement on Form S-4
(Commission File No. 333-26411).
<PAGE>
EXHIBIT 5.1
[PRESTON GATES & ELLIS LLP LETTERHEAD]
June 2, 1997
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 filed by you and
WebTV Networks, Inc. ("WNI") with the Securities and Exchange Commission (the
"Commission") on May 2, 1997, as amended by Amendment No. 1 thereto filed with
the Commission on or about June 2, 1997 (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of Microsoft Common Shares (the "Shares") which may be issued upon the exercise
of the exchange rights of the Class A Common or Exchangeable Shares of WNI, as
described in the Registration Statement. As your legal counsel, we have examined
the proceedings taken in connection with the potential issuance of the Shares
and are familiar with the proceedings to be taken by you and WNI in connection
with the issuance of the Shares under the Registration Statement.
It is our opinion that upon satisfaction or waiver of the conditions
precedent to the Closing as set forth in the Recapitalization Agreement and
satisfaction of procedures and requirements required by the Amended and Restated
Articles of Incorporation of WNI in connection with the exercise of exchange
rights relating to the Class A Common Shares of WNI, the Shares when issued in
the manner described in the Registration Statement will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to this Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the Prospectus/Proxy Statement constituting a
part thereof, and in any amendment thereto.
Very truly yours,
Preston Gates & Ellis LP
By /s/ Richard B. Dodd
Richard B. Dodd
<PAGE>
EXHIBIT 8.1
[PRESTON GATES & ELLIS LETTERHEAD]
June 2, 1997
Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052
Re: Microsoft Corporation: Recapitalization of WebTV Networks, Inc.
----------------------------------------------------------------
Dear Sir or Madam:
This opinion is being delivered to you pursuant to the Agreement and Plan
of Recapitalization dated as of April 5, 1997 (the "Recapitalization Agreement")
among WebTV Networks, Inc., a California corporation ("WNI"), Microsoft
Corporation, a Washington corporation ("Microsoft"), and certain WNI
shareholders, in connection with the Registration Statement on Form S-4
(Commission File No. 333-26411), containing a prospectus and a joint proxy
statement of Microsoft and WNI (the "Registration Statement").
Except as otherwise provided, capitalized items referred to herein have the
same meaning as set forth in the Recapitalization Agreement and Registration
Statement. All Section references unless otherwise indicated are to the
Internal Revenue Code of 1986, as amended (the "Code").
Pursuant to the Recapitalization Agreement, WNI will undergo a
reorganization of its capital (the "Recapitalization") pursuant to which certain
WNI shareholders will exchange WNI Common Shares for Exchangeable Shares (the
"Exchange"), certain WNI security holders will sell their WNI Common Shares, WNI
Preferred Shares or WNI Warrants to Microsoft or WNI for cash, and Microsoft
will contribute capital to WNI in exchange for WNI Class B Common Shares
constituting, together with the purchased WNI Common Shares, a controlling
interest in WNI.
We have acted as legal counsel to Microsoft in connection with the
Recapitalization. As such, and for the purposes of rendering this opinion, we
have examined and are relying upon, without independent investigation or review
thereof, the truth and accuracy, at all times, of the statements, covenants,
representations and warranties contained in the following documents:
1. The Recapitalization Agreement.
2. The Registration Statement.
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June 2, 1997
Page 2
3. Certificates of officers of Microsoft and WNI, respectively (the
"Officers' Certificates").
4. Such other instruments and documents related to the formation,
organization and operation of Microsoft and WNI, the consummation of the
Recapitalization, and the transactions contemplated thereby as we deemed
necessary or appropriate.
We have assumed that original documents (including signatures) are
authentic, documents submitted to us as copies conform to the original documents
and there has been, or will be by the Effective Time, due execution and delivery
of all documents where execution and delivery are prerequisites to
effectiveness.
In connection with rendering this opinion, we have assumed that:
1. Any representation or statement referred to above made "to the
knowledge of," "to the best of the knowledge," or otherwise similarly qualified
is correct without such qualification. As to all matters in which a person or
entity making a representation referred to above has represented that such
person or entity either is not a party to, does not have, or is not aware of,
any plan, intention, understanding, or agreement, there is in fact no such plan,
intention, understanding, or agreement;
2. All statements, descriptions, and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been, or will be, taken which are
inconsistent with such representations;
3. The Recapitalization and Exchange will be reported by Microsoft and
WNI on their respective federal income tax returns in a manner consistent with
the opinion set forth below;
4. The Recapitalization and Exchange will be consummated in accordance
with the Recapitalization Agreement (and without any waiver, breach, or
amendment of any of the provisions thereof) and will be effective under
applicable state law.
5. At the Effective Time of the Recapitalization, the fair market value
of the Exchangeable Shares received by a holder of WNI Common Shares will be
approximately equal to the fair market value of the WNI Common Shares
surrendered in exchange therefor, and the aggregate fair market value of
Exchangeable Shares received by holders of WNI Common Shares will be
approximately equal to the aggregate fair market value of all of the outstanding
WNI Common Shares surrendered in exchange therefor immediately prior to the
Recapitalization.
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June 2, 1997
Page 3
Based upon our examination of the foregoing items and subject to the
assumptions and representations which have been made as set forth herein, we are
of the opinion that for federal income tax purposes, it is more likely than not
that the Exchange will constitute a "reorganization" within the meaning of
Section 368(a)(1)(E) of the Code and that WNI will be a party to the
reorganization. The foregoing opinion is not entirely free from doubt, and it is
possible that the Exchange could fail to qualify as a reorganization under
Section 368(a)(1)(E) of the Code. The Exchange and the Recapitalization of which
it is a part involve a unique transaction structure that has not been the
subject of a decision or ruling by the courts or the Internal Revenue Service.
In addition to the assumptions set forth above, this opinion is subject to
the exemptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding on the Internal Revenue Service or the
courts and there is no assurance that the Internal Revenue Service could not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislation, judicial or administrative changes, either on a
prospective or retroactive basis, would not adversely effect the accuracy of the
conclusion stated herein.
2. This opinion addresses only the classification of the Exchange as a
reorganization under Section 368(a)(1)(E) of the Code and does not address any
other federal, state, local or foreign tax consequence that may result from the
Exchange, the Recapitalization, or any other related transactions. In
particular, this opinion does not address the treatment of WNI shareholders who
surrender their WNI Shares or WNI Warrants for cash in connection with the
Recapitalization, the treatment of WNI shareholders or Optionees who are granted
Microsoft Options in connection with the Recapitalization, or the treatment of
holders of Exchangeable Shares upon the disposition thereof (including upon the
conversion of Exchangeable Shares to Microsoft Common Shares).
3. No opinion is expressed if all the transactions described in the
Recapitalization Agreement are not consummated in accordance with the terms of
such Recapitalization Agreement and without waiver or breach of any material
provision thereof or if all of the representations, warranties, and assumptions
on which we relied are not true and accurate at all relevant times. In the event
any one of the representations, warranties, or assumptions on which we have
relied to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
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June 2, 1997
Page 4
4. This opinion has been delivered to you for the purpose of satisfying
the conditions set forth in Section 6.2.12 of the Recapitalization Agreement and
is intended solely for your benefit; it may not be relied upon for any other
purpose or by any other person or entity and it may not be made available to any
other person or entity without our prior written consent.
Very truly yours,
CHP:llj
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Microsoft Corporation on Form S-4 of our report dated July 22, 1996,
appearing in and incorporated by reference in the Annual Report on Form 10-K
of Microsoft Corporation for the year ended June 30, 1996. We also consent to
the reference to us under the headings "Selected Financial Data of Microsoft"
and "Experts" in such Registration Statement.
Deloitte & Touche, LLP
Seattle, Washington
June 2, 1997
